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 / Summer 2003 / Issue 31(originally published by Booz & Company)


Irrational Exuberance: How the Telecom Industry Went Astray

The answer is probably that irrational exuberance has a temporarily disruptive but ultimately neutral impact on development. Deregulation did produce the widest benefits to consumers seen in decades — in the form of product availability and declining prices — allowing one to argue that irrational exuberance is an important development factor, the dramatic disruptions in labor and loss of shareholder value notwithstanding. Yet the current industry downturn and impending consolidation have considerably dampened enthusiasm in — and for — the industry. Regulators are endorsing consolidation and favoring balanced oligopolies. Investors are shying away from new ventures. Most financial transactions are focused on restructuring and asset sales. They soon will turn to acquisitions. This will likely retard growth, and certainly will hinder entrepreneurial development.

If cyclicality is one of the intrinsic features of the telecommunications industry, we can envision a medium-term scenario wherein some of the forces and variables mentioned in this article will reoccur. Consolidation and a return to price rationalization, combined with a Schumpeter-style technological shock (might it be broadband?) will result in higher prices and, consequently, intrinsically attractive opportunities, which will foster a renewed cycle of market entry.

Under this scenario, lessons from the past bubble and practices to be avoided will help temper volatility swings. Policy development processes that are subject to endless interest-group lobbying, filings, and compromise tend to blur objectives. It is critical for government policymakers to conduct a comprehensive assessment of regulatory frameworks under consideration, by first explicitly considering the objectives the new policy is supposed to meet, and then examining the tools and mechanisms to be relied upon. Similarly, policymakers in emerging countries will have to develop the capability to design regulatory frameworks that are based on their specific market and social realities, as opposed to recklessly imitating models put forward in industrialized or neighboring countries.

On the corporate side, it is imperative that decision makers introduce governance mechanisms that provide a safety net to irrationally exuberant behaviors. Best practices today argue for smaller executive boards, made up of the CEO, the CFO, and a couple of executives, that can provide the central point for both decision making and accountability. Another best practice is the use of “red teams,” reporting to the CEO and the board of directors, whose function is to conduct the due diligence on key investment decisions. Executives should also put renewed emphasis on independent risk analysis as the primary vehicle to understand what can go wrong, and how to manage it.

Some of these practices are not new. Learning from past experience should push both industry executives and policymakers to become more rigorous in their implementation.

Reprint No. 03206

Raul L. Katz, [email protected]
Raul L. Katz is a vice president with Booz Allen Hamilton's New York office. He had 18 years of experience specializing in business strategy, consumer and industrial marketing, and the management of international telecommunications companies.
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  1. Raul L. Katz, Maximilian Weise, and Daniel Yang, “The U.S. Wireless Industry: Consolidation Scenarios,” white paper, 2002; Click here.
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