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If something is too big to fail, all it can do is fail

A fascinating article in Ars Technica about Internet Service Providers got me going on the issue of “too big to fail”. In the article, they talk about how many people are unhappy with their ISPs. “If complaints aren’t about delivering the promised speeds, they’re about the crappy customer service, billing problems, frequent outages, and the impossibility of switching to another without being cut off from the Internet for months.” In order to answer the question of what a good ISP would look like, they look around the world, and actually find some!

For example, in France, the young company offers 20-30Mbps internet (100Mbps in some towns), free phone calls to 100 nations, HDTV including a DVR, free access to WiFi hotspots, and more. All for considerably less money than I pay for my Verizon internet access. does some radical things, including allowing customers to work on Free’s open-source products. Are their customers happy? Their churn rate is below 0.01% per month, which indicates that their biggest reason for losing customers is probably because they die.

In other countries, other amazing innovations are happening. For example, in some places ISPs are giving special routers to their customers, which create a public WiFi hotspot that runs separately from the customer’s local access, creating ubiquitous wireless access. Wouldn’t that be great to have here? Why aren’t our telecom companies doing this?

To conservatives who claim that government regulation is responsible for stifling business innovation, I point out that these innovations are happening in places like Britain, France, and Sweden — countries which those same conservatives decry as horribly socialist. So the problem doesn’t seem to be government regulation.

The answer is that most of these innovations seem to be coming from small or new companies. This is no big surprise. In the US, the big internet names are Google, Yahoo!, Amazon, and eBay, which didn’t even exist 20 years ago.

There are plenty of other examples of this phenomenon. When I was younger, the big retailers were companies like Montgomery Ward, Sears, JC Penney, and K-mart. How are they doing now? And their decline is not just because of the internet — Walmart and Costco (which of course are relatively young companies ) seem to be doing just fine in the bricks and mortar retail market.

The problem still could be government regulation, if that makes it difficult for new companies to get going in markets that are heavily regulated. But I don’t think so. Look at airlines, one of the most regulated industries of all, where the old established companies are facing savage competition from smaller upstarts. Or look at the “Big Three” automobile manufacturers, who had their lunch eaten by imports.

The real problem is that all of our major ISPs seem to be old telecom companies. They would love to just make lots of money off their ancient, outdated services. That’s what old companies do. And like the big car companies, older airlines, and ancient banks, they have almost no incentive to change since the government is all too willing to bail them out if they take any risks. While I am not in favor of socialism (where government runs businesses), I am far more concerned about fascism (where government does whatever big business wants).

Innovation doesn’t come from old companies. It never has. Neither can it be legislated by government. Innovation comes from free markets, which means markets that are open to new ideas and (especially) to new companies.

The job of government should be to create these markets where new ideas can thrive, and not to bail out dinosaurs that are too big to survive on their own. Let ’em die, but make it easier for new companies (like Google) to take their place. Because once a company gets too big or too old, all it can do is fail.

UPDATE: Here’s a news report from yesterday about how some Wall Street firms are not only too big to fail, they are too big to punish when the violate the law.



  1. Steel Hip wrote:

    Are you sure you meant this – “And like the big car companies, older airlines, and ancient banks, they have almost no incentive to change since the government is all too willing to bail them out if they take any risks.”

    It seems you’re saying that big companies don’t feel the need to innovate, since that requires risk-taking (which I agree with). Yet, you’re also saying that they have a safety-net that none of the smaller companies enjoy (which I also agree with).

    However, those two ideas are not as easily connected as I believe you’ve made them here. Big Business exists for really three reasons –
    1) To enrich the stockholders – this is capitalism after all.
    2) To enrich the corporate honchos – this is humanity after all.
    3) To innovate/ grow/ expand, so as to enable an easier path to the two items above.

    Big Business (Really Big) is often weighed down by tons of “baggage” that smaller, leaner, younger companies aren’t yet tied down to.

    For instance – GM/ Chrysler weren’t necessarily unprofitable because they were fiscally irresponsible. They were tied to decades of pension payments, health-care costs and other bad decisions (obligations) made in the past that the present-day management and rank-and-file had to grapple with. A younger and newer company wouldn’t be as saddled with that as the older one was.

    This same issue is seen over and over when new companies find an advantage that the older companies aren’t privvy to. SouthWest and JetBlue were offered *years* of rent-free use of the terminals at JFK, LGA and MacArthur airports, just to provide competition to the big guys. Would they have been profitable if not for those breaks? I don’t know, but they had an advantage the big guys didn’t.

    I’m certainly not an advocate for Big Business, but I do think that government intervention in business is almost always bad. I had a sign in my office I truly believed in – “Innovation – if you can think of a better way to do it, then do it.”

    Wednesday, December 9, 2009 at 11:42 pm | Permalink
  2. Iron Knee wrote:

    Can you cite a reference for your claim that smaller airlines were given advantages over bigger older airlines?

    I remember when Southwest airline was first getting started in Texas, and the other airlines were doing everything they could to kill off Southwest. So I find your claim hard to believe.

    And you say in one sentence that GM/Chrysler were not fiscally irresponsible, but in the next sentence you say they had too many obligations from bad decisions. That sounds like being fiscally irresponsible to me. Besides, if GM would make a decent car, I’m sure they would make plenty of money. And even if their problems really are from too many obligations, that doesn’t change my argument one bit.

    I will say it again, it is very difficult for any company, once they have figured out an easy way to make lots of money, to adapt as their markets evolve.

    I’ve seen this firsthand. When computers got started, IBM was the big fish making mainframes, but then like all dominant companies they spent more time protecting their turf than innovating. So then DEC took over as the mini-computer of choice. Then when workstations came into vogue, Sun Microsystems took over. Then when PCs became popular, IBM tried to make a comeback, but failed, and suddenly Microsoft was king. Microsoft managed to stay on top for a long time, but as soon as PCs became a commodity and the web started to really get going, even they are starting to decline.

    Thursday, December 10, 2009 at 12:50 am | Permalink