People love to rail about the evils of shareholder capitalism. Very few stop to consider the real source of that evil. It is rarely the shareholder side of the equation. It is almost invariably management.
The formal name for this particular evil is the principal–agent problem. It is THE key structural failure point for so much of our modern, spread-out, multi-actor economy and polity. But it is rarely discussed and poorly understood. Maybe that is by common, unspoken agreement? Don’t pay attention to the man behind the curtain!
Whatever the reason the subject brings us naturally to the idea of a wholesale/retail split of telecom companies. OK, not really. But stick with me here for a sec. A friend of mine, Susan Crawford, has written a (generally excellent) piece about Google Fiber’s potential to catalyze a new model for telecom. You Didn’t Notice It, But Google Fiber Just Began the Golden Age of High Speed Internet Access. It is definitely worth a read (quick summary below**). But one sentence stands out as a particularly glaring non-acknowledgment of the principal-agent problem.
“In New York City, for example, it would probably make economic sense for Verizon, which has been struggling to establish its FiOS network in the city, to turn itself into a wholesale dark fiber provider whose pricing is overseen by the city. Benefits to Verizon: no more servicing of individuals or buying overpriced television programming, so overhead goes way down.”
She is right. But… what is the “overhead” of which she speaks? More importantly, WHO is that “overhead?” Pretty much every executive, middle manager, and associated hanger-on that encrusts the telco cost structure. It is the consulting contracts. It is the FCC and state lobbyists. It is the lawyers. The thousands of middle managers keeping 20-30 years of legacy billing systems going. Billions of pixels of Powerpoints. All the way to the sports sponsorships and charities that know a telco is an easy touch…
So Susan is “right” that Verizon’s shareholders would make a massive amount of money from a wholesale/retail split. But the shareholders aren’t the decider here. Management decides. Asking them to “choose” this model is asking an entire ecosystem of useless-but-remunerative activity to suicide. They are going to work really hard to make sure shareholders never figure this out. Per Upton Sinclair “”It is difficult to get a man to understand something, when his salary depends upon his not understanding it” Shareholder value be damned! I’ve got kids in private school!
The underlying error is this quaint, but wholly wrong idea that a corporation exists to make money and serve its shareholders.
- A corporation’s first and primary goal is self-preservation.
- Its secondary goal is to aggrandize as much wealth to its senior management as it decently can. Arguably this is primary goal, self-preservation be damned…
- The needs of the shareholders are best understood as an impediment to goals 1 and 2.
Conjure up some version of Jane Austen’s England and/or Downton Abbey. Shareholders are the distant landlord with “an income” off in London. Management is the estate overseer out in Piddling-Upon-Trent or the like… The estate manager’s incentives are wildly un-aligned with that of his/her nominal boss.
- Extract as much as you can from the peasants…
- Send on a steady, lowballed rent.
- Never ever send any surplus – find ways to hide it and keep it for yourself.
- Focus most of your time and energy in vicious in-house politics to divide those spoils.
- Ensure the lord/lady never actually visits the fields and farms to judge potential vs actual productivity…
Believing corporations are run for shareholders is like believing that political parties are actually there to express the will of the voters [insert guffaws here]. Like voters, shareholders are a surprisingly powerless bunch. Even if you are one of the plutocrats who can “buy” a campaign. Politicians (and managers) just don’t stay bought…
If you don’t force the principal-agent problem into the dialogue, the debate goes nowhere. You need to acknowledge the underlying problem head on. In the telecom space, basically EVERY actor is somehow dependent on “not understanding” the value of a wholesale model. They like the gravy train as it is. They are not going to “understand” they are worthless overheads.
Most interesting is HOW the evils of shareholder capitalism might over-turn this cozy conspiracy of mediocrity. And here is where I agree with Susan’s enthusiasm and conclusions. Google Fiber does potentially open the door to a very different (and better) telecom model. But it does so through the medium of those evil financiers…
The key event is not Google fiber partnering with Huntsville. It is (hopefully) Google Fiber (and Huntsville et al) raising debt. Showing good, steady, stable numbers to a bunch of greedy Wall St. types. If we can get a documented track record of dull-but-profitable FTTH builds, then we can get the debt markets involved.
- Debt markets don’t “care” about management’s tuition bills. They don’t get paid to “not understand.” They just look at cash flows. And loan money up to around 70%-90% of their value. Just like a mortgage. As long as someone else is willing to take the risk on that last 10%-30% (the equity). The more stable the cash flows, the more they will lend. And telecom cash flows are VERY stable.
- Greedy Wall St. types are a herd like anyone else (see the movie “The Big Short” – it’s pretty accurate on that point). So the first few deals will be cautious and tentative. And then the floodgates will open.
- With all this fat, sexy debt coming out, shareholders will start to make murmuring noises in meetings. Like a bunch of feudal property owners noticing that other fellow’s properties are throwing off much bigger bucks. They start asking awkward questions next time their estate manager sends on the annual rent. Maybe the schedule a trip to actually look at their estates… And the whole edifice starts to slide downhill into a very dull, very profitable utility business. Which is what is once was.
I know this is sort’ve what Susan was driving at too, but the dialogue goes nowhere without a sharper point on the motives and effects. The facts aren’t in question. It is the willful, self-interested. indifferent blindness of those who shape the narrative. I’ll leave you to explore the obvious segue to the rise of Bernie Sanders and Donald Trump. Enough tangents in this post already. But I’ll leave you with this clip.
** Wholesale/Retail Split: One company owns the actual fibers – earning a steady rental income like a sewer or water utility. Another company lights those fibers and offers service over them, earning a (less steady) income as a TV/Internet provider.
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