Optical Illusions: Lucent and the Crash of Telecom

Endlich chronicles the story of Lucent's travels from AT & T spinoff in '96 to nearly bankrupt skeleton in '02. In two years its capitalization fell by $250 billion as a result of the stock dropping 99%. Despite having fabled Bell Labs as its research arm (developed transistor, laser, optical amplification, cellular transmilssion, UNIX computer operating system, C computer language, HDTV, and radar; "home" to 11 Nobel laureates), it also went from leader to laggard in a major new industry - optical switchgear. Henry Schacht, former Cummins Engine CEO and AT & T Board member, was the first Lucent CEO. He requested Carly Fiorina the position of president of the Consumer Products division and a mandate to overhaul its product line. Instead, in a preview of her actions at H-P, she merged with the Dutch conglomerate Phillips, giving Lucent a 40% interest of the $2.5 billion (sales) and 12,500 employee result. Unfortunately, the new entity started out losing money and never improved. Lucent sold its share after two years. At the time Lucent's spin-off it was 1/4 the size of AT & T long-lines - 19 months later it was larger thanks to the booming economy and new capital investment - especially in the optical communications and new phone lines (as a result of Internet usage) area. Early on Lucent decided to focus on new independent local carriers that were springing up across the country. Lucent's new CEO (post Schacht) also broke the firm into 11 units - each with P & L responsibility. Thirty-eight companies were acquired in the first five years - each at a substantial premium. To help "pay" for the acquisitions Lucent resorted to increasingly aggressive accounting - eg. stretching the estimated value of its pension fund, etc. Then the demand for 2nd and 3rd phones started falling (initial demand became satiated; cable became a desirable alternative), and the new phone companies began encountering problems with maintaining growth and paying bills. Lucent countered by increasingly funding equipment sales to increasingly credit-questionable firms, shifting sales from future periods forward, gaming the accounting for returns, etc. Meanwhile researchers became increasingly attracted to lucrative stock options offered elsewhere, and turnover amongst their ranks hit 20%. Corrective efforts involved bringing Schacht back as CEO, a new CFO, reducing from 11 units to 4 (had duplicated sales and other staff between them). However, the "really bad news" was that an estimated 97% of new fiber laid was never "lit" - part of this was due to the fact that fiber laid pre-'95 with a capacity of 25,000 1-page e-mails/minute by '02 could carry 25 million similar messages with little upgrading. Meanwhile Lucent's customers learned how to "game" Lucent by waiting until late in the month to place orders (getting substantial discounts as Lucent struggled to meet its financial goals), and manufacturing became increasingly stressed by the see-saw nature of orders caused by

I completely enjoyed this book. The factual accounting was wonderful and the book was an easy read. We had some dealings with Lucent back when I was the founder of a telecommunication equipment startup and it was interesting to see the street view of the inner workings of the company. The book goes through the history of Lucent from its spinout of AT & T through present day. The lessons associated with the management mis-steps are the most interesting part of the book. They made some fatal mistakes from the standpoint of technology investments (or not) and clearly jumped into the CLEC craze. They clearly made bad decisions about extending financee to customers that were not credit worthy; a general issue of the times. The WinStar story is particularly interesting. The view of acquistions is very interesting. Very few panned out and the back of the envelope is that something like ten to twenty billion dollars of cash/equity went out the door to fund the acquisition ferver. The acquisition of Chromatis cost about $4.5B and they shut them down after 10 months. hmmmmm.... There are some terrific management lessons to be learned by reading this book. Much cheaper than owning the stock during the decline. :-)

Excellent summary of the conventional business wisdom of Lucent, its genesis, its management, its boom and its bust. What is missing is the road not taken: why did Lucent choose to follow Cisco in making numerous acquisitions, when it had virtually no experience in successfully doing so? why did Lucent choose to break itself up to "achieve shareholder value" when IBM chose to stay in one piece to offer its customers one stop system solutions (and which has been more successful)? why didn't Lucent leverage its research activities at Bell Labs to leapfrog competitors? GE cites the time it spends developing managers as critical to its ongoing success: what does Lucent do in this regard? what about strategic planning activities at Lucent: how did they mesh with business unit actions and overall creation of shareholder value through rising profits (voice switching systems, network access equipment, optical transport, wireless, software, semiconductors, business premises phone systems, consumer phone systems (Carly Fiorina creating Philips JV), packet switches or routers, and on and on? what alternatives were explored to doing equipment leasing to undercapitalized startup carriers (maybe third parties might even do this?)?

The title tells it all, this book is more about the crash of Lucent than the telecom industry as a whole though understanding the fall of one of the largest enablers of that speculative period will illuminate what should have been the obvious weakness of rest of the industry. Probably the ultimate book surrounding the whole speculative bubble surrounding the drab telecommunications industry's day in the sun may never be written, so this book will on the rise and fall of Lucent and their place in it may well be it. If it is, it is well researched and decently explains a vital but little understood business. The author's observations on the key players and their relationships to each other are well placed especially where Carly Fiorina is concerned. There is no doubt that she was probably their most capable manager but not even she would have been able to dig them out of the hole created by Lucent's inexperienced CEO, Rich McGinn, dug them into; her exit to Hewlett-Packard couldn't have been better timed. Lucent's major failures are documented here with balance and fairness. About the right amount of ink is used in explaining the techno-babble surrounding the importance of the market for the OC192 optical switch, enough so the layman can understand it and complex enough so a telecom engineer won't get too bored. She also notes with great accuracy Lucent's inability to integrate acquired businesses and align their strategies with their own, a weakness inherited from parent AT & T. These and other failings ultimately tell a business horror story of what happens when companies ignore their core values and steadily growing a business but instead take direction instead from the stock analysts whose only concern was "meeting the whisper numbers" and quick profits. In addition to their private financing of nearly insolvent customers, the author probably could have gone a little further into the other messy misdeeds that were uncovered as Lucent's stock fell, such as the private golf course that Lucent was revealed to be building at the tine of the collapse. Perhaps their envelope pushing accounting tactics were not as extreme as Enron or Tyco but she well documents how their financial tactics jumped back and forth across that bright ethical line. Probably the only real flaw in the book is this failure to apply perspective to the excessive influence industry stock analysts exercised on the telecom industry during the period 1995 through 2002. For example she accepts the unanimous praise within the industry analyst community for the Agere spinoff as the hidden jewel within Lucent while stressing also how badly it needed to dump its Business Communications System unit now known as Avaya. There is a missed opportunity to note that this historically denigrated business unit which spent its much of its life within Lucent, and before than in AT & T, as the scapegoat and ugliest poster child of the "unsexy" telecom equipment business, is today one o

With apologies to Percy Bysshe Shelley, the near-collapse of this icon of American industry and innovation sorely needs to be explained. Overall this is a good if conventional business-analysis book. As with most such books, its focus is on the strengths and weaknesses of the personalities in top management (and to a lesser extent, their relationship with the company's board of directors, and the financial industry and press). In the author's opinion, Lucent might have survived in spite of its weaknesses had there not been a crash in the overall market for telecommunications equipment. The author's explanation for that crash is a story of overinvestment and market saturation- there simply wasn't (in the short run, at least) anywhere near enough end-user demand for all the capacity that the network operators were buying. While I agree with this analysis, a weakness of this book is the author's lack of explanation as to how the leaders of this industry could have failed to realize that a market in which the cost of equipment purchases by service providers was growing far more rapidly than service providers' own revenues had to be unsustainable, and must come to an abrupt end. Something that will annoy some readers is the author's use of, and failure to fully explain, industry acronyms and jargon (for example, explaining that "ATM" means "asynchronous transfer mode" doesn't exactly tell you what it means, should you not already know). There could also have been more explanation of the effect of the 1996 Telecom Act, particularly as it favored those new local-exchange competitors who chose to lease existing network elements from the Bell Operating Companies over those that invested in and build their own parallel/alternative networks. Overall this book presents a strong narrative, is well written, concise, and generally avoids the platitude-blather that infects all too many business books. It could, however, have done a better job of explaining just how the industry could have jammed the accelerator to the floor, apparently oblivious of the cliff waiting just around the bend.