The Company that Broke Canada
Big thank you to Nebula for sponsoring this video. This is John Roth. He’s the CEO of a company called Nortel. He’s about to be smug. Deservingly so. "Uh, let's move onto Lucent the big competitor south of the border. What do they do better than you?" "Uh, not much." *Laughs* "Pretty
good at marketing but if you look at the results we grew 43% in the carrier space in the US last ye-well this last quarter. I think that's double their numbers." At the time of this clip Nortel was the 2nd highest Canadian company on the Global Fortune 500 list, at rank 216. But he doesn’t plan on stopping there. Just one year from now Nortel will be the 9th most valuable company in the entire world. 75% of North America’s backbone internet traffic travels through his company’s networks. An achievement that will earn him the title of Canadian CEO of the year. This is also John Roth. Or rather it’s a comedian impersonating John Roth. Not particularly well, mind you. There’s no genuine attempt at his voice,
and the mannerisms are way too high energy. And yet the audience is eating it up. "Now final question Mr Roth, where will Nortel be say a year from now?" "Uh Linda Nortel is strong, I guarantee investors I will continue to generate profits for them. Now if you'll excuse me, I have to get back to work.....Spare some change?" *Audience Laughter* In this moment, however brief it was, John Roth was maybe the most hated man in Canada. Nortel had been the widely held stock in the country. And it had just cost them their pensions. Nortel had broken an entire country’s economy. How did it happen? Three words: It’s ancient history.
Here’s a statement: The telephone was invented in Canada. It’s a statement that could be true, so long as you don’t look that hard at the several footnotes that are necessary to justify it. But let’s go ahead and do that. Alexander Graham Bell was a Scottish immigrant who moved to Canada with his parents in 1870. Later on he got a job as a teacher, and began experimenting with sending
voices over metal wires as electrical signals. Over the years he would develop this idea with his partner Watson, and in 1876 Bell said his famous words “Watson, come here, I need you” over a working telephone prototype….in Boston. The Canadian claim to the telephone is frankly, very silly. Bell supposedly wrote about the underlying mechanism of a telephone at his parents home in Brantford Ontario, but he wouldn’t get a working prototype for another 2 years. You can’t even really argue it based on citizenship either, because Bell was never technically a Canadian, but a self-identified Scotsman who was actively applying to become an American. Of course, this isn’t even the biggest elephant in the room. Bell was beaten to the invention by
at least one person, maybe more. There’s Antonio Meucci whose telephone prototype predates Bell’s by almost a decade. His lawsuit against Bell was headed to the Supreme court until he died in 1889. Elisha Grey, famously, submitted a patent on the exact same day as Bell. There are disputes over the exact timeline here, but it’s a bit of a moot point because neither man had made a functioning prototype yet. Bell did get one working a week later, but the design of his receiver had been altered, becoming suspiciously similar to the one in Grey’s design, info he shouldn’t have known about unless he had somehow been shown Grey’s application.
Hmmmm. As you’re gonna see many times in this story, the history of industry is not about the first to invent, but the first to market. Bell got the patent for the telephone because he hired a better lawyer. Simple as that. The most lucrative patent in history led to a factory, the factory led to a company, and the company became a behemoth. Through decades of aggressive expansion,
brutal board room takeovers, underhanded back alley sabotage, and the limitless funding of J.P Morgan, that single patent evolved into the most ruthless corporation in American history. AT&T. A terrifying beast that gobbled up hundreds of independent phone companies. A monopoly that at its peak once controlled 82% of the America’s telephone lines. Footnotes or not, the history of the telephone is an American one. But why then, have I seen this statement,at least in part, claimed by multiple Canadian sources? Why is this a hill that some Canadians seem willing to die on? Because the Canadian identity, if there is such a thing, is one defined in opposition to the United States. If you want to be dramatic, and I do sometimes, Canada is just a slightly
more autonomous 51st state. Both countries descend from a combination of English and French colonies, built on territories stolen from its indigenous inhabitants. Land divided by a border so arbitrary most of it is literally just the 49th parallel. Why some of the colonies rebelled against the British and why others stayed loyal came down to language, religion, local economies, and proximity to the British empire. The settlers in these two colonies always had a lot in common, and due to their geographic proximity, there has always existed an uncommonly close relationship.
It just so happens that that relationship is more than a little lopsided. Pierre Trudeau, one our more outspoken prime ministers, summed up it like this. “Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.” America is simply a much older, and densely populated nation. America’s first colonists arrived almost two centuries earlier than the bulk of Canada’s, and the Americans had gone and finished their civil war before modern Canada was even created in the 1860s. Couple that with a colder climate and harsher terrain, for almost
the entire time the two countries have existed, Canada has had one tenth the population, and one tenth the economy of its Southern neighbor. Even just California, despite having roughly the same population, has an economy 50% larger. Ever since the war of 1812 ended in a stalemate, Canada has never had to worry about being militarily annexed by the United States. Instead, Canada has spent most of its existence fending off another more indirect form of control. Economic subservience. The company that owns the majority of our newspapers is 2/3rds owned by an American
hedgefund, most of the media we consume is American, and the basis of our economy is ripping natural resources out of the ground, shipping them off to America, and buying them back for twice the price in the form of fancy toys. We’re America’s biggest customer, but they’re not ours, and that’s a precarious position to be in. Canada’s first Prime minister, John A MacDonald, had just returned to power in the election of 1878. Canada was in the midst of a deep depression that was partially brought on by the Americans cancelling a trade agreement in the middle of their civil war. MacDonald was keenly aware of the public’s distrust of American business,
and although behind closed doors he was in favour of free trade with the Americans, he knew they would never sign a new agreement. And so he used Anti-american rhetoric to call the rival Liberal party “veiled traitors”, and managed to win both the 1878 and 1891 elections by stoking fears of American annexation. MacDonald’s platform was called the National Policy, the centerpiece of which was an aggressive import tax on allAmerican products. The tariff
was designed to keep cheap American products out of Canada to promote a strong home grown manufacturing industry. The National policy and anti-Americanism dominated Canada’s political agenda for decades, and a later attempt at a free trade agreement similarly defeated the government of Wilfrid Laurier in 1911, where it was once again painted as an act of treason. However, the National Policy, who stated goal was to keep Canada British, had arguably backfired. It had only made Canada more reliant on American industry. Take for example, AT&T. Having secured the Canadian patent for the telephone, their original plan was to simply make
telephones in America, and ship them up to Canada. The new tariffs made that a complete no-go. So, the company hatched a plan. They hired a former Confederate ship captain, sent him off to Canada with a boatload of money, where he proceeded to execute a series of business moves so rapid that in just a few months he owned almost all the telephone lines in the entire country. Alongside this purchase was a single telephone factory in Montreal, a necessary condition to retain the Canadian patent. Parts would be shipped up from the US, and assembled in Canada, completely negating the import tax. This was the birth of the Bell Telephone Company of Canada,
and how Canada became a branch plant economy. And as of 1895, that little Montreal branch plant was given a name: Northern Electric & Manufacturing Limited. We got about a century to go still, but the family resemblance between these two names is clear. Northern made a bunch
of stuff. Fire alarms, sleigh bells, gramophones, telegraphs, kettles, toasters, lighters, stoves, washing machines, radios. If it ran on electricity they could probably make it. But their bread and butter was always telephones. Although legally they were separate entities, AT&T was always in the background pulling the strings of Bell Canada. With its endless monopoly money, Western Electric was cranking out telephone tech like there was no tomorrow, and Northern Electric got access to technology that no one else did without having to actually do any R&D. They
just took the designs that Western gave them, made their tweaks, and sold them to Canadians. Sometimes the only thing that would change was the logo on the phone. Always the branch plant, never the brains. This symbiotic relationship was just a microcosm of the larger Canadian economy.
Even in the 1910s, when AT&T is forced to sell off its foreign holdings due to antitrust reasons, it’s allowed to keep its stake in Canada because the two countries were so interlinked. Canada had spent its first 50 years relying on its commonwealth parent of Great Britain, but by the 1920s Canada was now trading more with the US. As productivity began to rise as America modernized its factories, Canada’s were quick to follow. Then out of nowhere the markets crashed, ushering in the great depression across North America. The 1930s saw 80% of Northern’s employees laid off. World war 2 then breaks out yanking the country out of its depression, Northern becomes a dedicated supplier of military equipment for the government. Canada, like the US,
emerges from the war in a relatively prosperous position compared to Europe. Northern now had a backlog of nearly 100,000 telephones orders they had to full-fill. Dragged there by the US, Canada had achieved the 2nd highest adoption rate of phones per 100 people in the entire world, going from just 28,000 phones in 1895, to almost 1 million in 1942. And then suddenly the elephant rolled over. For years AT&T had been accused of running a vertical
monopoly by owning its manufacturer, Western Electric. Desperate to keep its prized possession, AT&T settles out of court, and makes a trade on two key conditions. The first, is to stay out of the computer business. Considering that Bell Labs had just invented the transistor, they were really going to regret this one in about 10 years. The second, is more relevant
to our story. AT&T now had to offer the same licensing deal for its patents to anyone who asked. But because AT&T owned Bell Canada and was sharing its patents with them for free, that meant that any other US company would be entitled to that same deal. So rather than be forced to give away its patents for free, AT&T said, you know what? Canada is on its own.The CEO of Northern at the time described it like this: “We are the child of wealthy parents…this is the boot that kicked us out the door. A Canadian subsidiary of a US company lives a very comfortable life. This is the tragedy of Canada: we’ve made a virtue of imitation.” But he also said this:
“I’m confident history will say this is the best thing that ever happened to us”. Would you believe me that in a little more than half a century, the mouse would be trying to eat the elephant? *To music* "North East South West everywhere you gooooo, Northern Electric is the name to knowwww, from coast to coast in Canadaaaa" In the 50s, the Canadian government contracted the company A.V. Roe to build a stealth interceptor jet called the Avro Arrow. It was widely considered to be one of, if not the best in
its class in the world. Costing around $2.2 billion Canadian dollars in today’s money, the Arrow had been the single most expensive R&D project in Canadian history, and it put Canada on the map in global aerospace industry. But there was no one to sell it to. The American and the British militaries wanted to produce their own jets, and in fact, America turned around and said, hey, why don't you buy our jets instead? In the most controversial move of his career, Prime minister John Diefenbaker fell in line with American defense policy. He cancelled the project, ordered all prototypes destroyed, and left 14,000 Canadians unemployed. Although you can argue over the merits of the Avro Arrow itself, the real failure here was that the government refused support a transition for the facility it had already spent millions on, a facility that could have been converted to civilian aircraft and given Canada its own equivalent to Boeing. It's ironic that Diefenbaker is remembered for capitulating to American influence. Justdays
before the election that made him Prime Minister, Diefenbaker had declared that if the Liberals were re-elected, “Canada will become a virtual forty-ninth economic state in the American union”. You see, Anti-Americanism never truly disappears in Canada, but rather it come in waves. The stretch of time bookended by the two world wars was a notable period of cooperation between the two nations. But now in the era of the cold war, Canadians were becoming uncomfortable with the idea that they were simply a sidekick to the US.
1956 saw the government release the results of the Gordon Commission, an economic panel which had spent the last year researching the rapid Americanization of Canada. First, there was culture. By the mid 1950s, 80% of magazine sales were from American brands. Canadian newspapers were still Canadian owned, but any international coverage was usually borrowed from American papers. The Canadian film industry was almost entirely non-existent, but even if we had films to show, film distribution was owned entirely by Hollywood and they had no interest in showing Canadian films. Even our education system tended to be biased towards America. There’s a particularly infamous textbook on Canadian Politics, that for some reason, had Abraham Lincoln on the cover. The real heart of the issue though, was economic.
In 1967, 58% of Canada’s manufacturing industry was owned by firms whose headquarters were outside of Canada. And 80% of that fraction was American. And the more specialized you got, the higher the fraction went. Transport, electronics, chemicals, extremely American. The worst by far was cars. Can you name a single Canadian car brand? You can’t, because there are none left. Natural resources, which had formed the bedrock of Canada’s economy for decades, were lining American pocketbooks. Pulp and paper, smelting, mining. And oil and gas, Alberta’s pride and joy, was as nearly 2/3rds owned by Americans. This was such a touchy subject that there was once
a debate in parliament over whether to allow an American company to build an interprovincial oil pipeline. The debate got so heated, three MPs were hospitalized, and one died of heart attack. Canada was a branch plant economy and that was scaring people all across the political spectrum, On the left wing you had labour organizers, who feared that the US would simply set up branch plants in Canada, extract natural resources, and then ship them back down South, where Americans would get to reap the benefits from any newly created manufacturing jobs. On the right wing the complaints tended to focus on how Canada should instead be reestablishing ties with Britain and the monarchy, and that a loss of economic power to the Americans could eventually lead to a loss of political independence. But between these differing sides there was one common shared concern. American technology was a crutch. Canada had a huge technological deficit. That’s one of the key features of a branch plant economy. Branch plants tend to supply jobs that
require less training, like resource extraction or assembly lines. Jobs that are easily moved elsewhere if the cost of labour gets too high. Jobs like finance, marketing, and critically, R&D, are best kept centralized in the home country. In 1959, if you looked at dollars per capita spent on R&D in the private sector, the US was spending almost 4 times as much as Canada. Here’s an even more shocking stat, a government commission in the mid 60s looked at every patent registered in Canada, 95% of them were held by someone outside of the country. And
2/3rds of that number was in the US. That meant that Canadian industry had to spend millions each year licensing out patents from Americans, or costly imports of high tech equipment. Case in point, Northern Electric. In 1956, the year that AT&T had to divest itself, Northern only made 1% of its revenue from its own designs. All the rest were American. For over 60 years Northern operated mostly on autopilot, assembling American parts using American blueprints. The company atmosphere was described as sleepy and complacent. The CEO at the time joked that you could only get
fired "for screwing the boss' daughter, and then only if it was on company premises". Bell Canada was so unsure of Northern that there were multiple times where they considered only two options: Sell it, or shut it down. But there was a 3rd option. Break the branch plant cycle. Make a Canadian company self-sufficient. And as we’ve just seen the political
climate at home had never been more supportive. It’s not that Northern lacked smart employees, they just hadn’t been in charge of the decision making until now. In fact, Northern’s engineers were likely some of the most capable in the country. Because of their
prior connections to AT&T, the engineers at Northern Electric some of the first outside America to be able to reverse-engineer and learn about the transistor. By the end of the 1960s they were the single largest microchip supplier in Canada. They helped build the world’s largest microwave comms system, the Trans Canada Skyway, and they managed to develop an antenna designed to track satellites. But the 60s were still a slow period for Northern. When they
began the decade only 1% of their products were Canadian designs. By 1969 they had only managed to increase that number to 6%. The switchover was going too slowly. The only way to get ahead would be to give Canada its own Bell Labs. B…N…R, Bell Northern Research. Founded in Ottawa in 1971, it mimicked Bell Labs in every way it could. There was a bounty of $500 for
every patent you filed, the atmosphere was like that of a University campus, and there was even a signature colour, purple, that the employees rallied behind. Even its first President, Donald Chisholm, had been poached from the real Bell Labs. Look, I’m going to be candid for a second here. BNR is the reason I live in the city I do. My grandfather was one of the founding engineers hired to work there, and he moved my dad’s family from Montreal all the way to Ottawa. BNR is not a name most of you would have heard of, and it sadly doesn’t have any Nobel Prizes. But so much of the
modern communications landscape, the technology that powers the video you’re watching right now, was invented in Ottawa. BNR was about to gamble everything to leapfrog Bell Labs. Telephone switches are the most basic building block of a telephone network. Back in the days of Graham Bell they were originally just sold in pairs, phone A and phone B, and you put them wherever you needed with a giant wire running in between. Obviously that’s not super scaleable, so people decided to designate one building in town as an exchange, where human operators would physically move wires around to connect different phone lines. This too was phased out in favour of electromechanical contraptions that were the size of entire rooms. This finally gave way to fully electronic switches, which had fewer moving parts, were much less noisy, and overall far more reliable. This was the state of telephone technology as the 60s turned into the 70s.
Telephone calls had been analog for as long as they had existed. An electronic wave with smooth curves. But since the advent of the transistor, electronic signals could now be sent in binary. Enough 1s and 0s could encode any analog signal with enough precision that barely information would be lost. That was how computers operated, through massive processors crunching thousands of bits and bytes. People realized fairly quickly that if you could combine phones with computers,
the possibilities would be endless. Costs would go down, reliability would go up. You could send multiple phone conversations over the same wire. Signal degradation and noise over long distances was far easier to correct. You could also expand into what we now consider basic features, like call forwarding, or busy line notifications. And maybe, in the far future, you could even use phone
lines to send data between two computers. Can you imagine that? Sending something other than voice over telephone lines? That’d be like some kind of inter…..network. I don't know maybe there's a better name for that. The problem is that digital signals can’t talk to analog signals, at least not
directly. You need to convert them using a codec. Bell Labs had figured out in 1963, but the process was so complicated and expensive, that it was only worthwhile to do it for giant long distance cables and the connections between huge central offices. There was still no fully digital switch at the local level. There was a full-on race between at least 7 countries to break this digital barrier. and Canada was way in last when it jumped in with BNR. So how did Canada come from behind the win it
all? It's because AT&T had become too complacent. Despite having a huge technological headstart, AT&T was telling customers that digital switching wouldn’t be available for several more years. See this is the inherent contradiction of monopolies. Their endless resources allow them develop the best technology and offer the best service. But because they have a such a stranglehold on the market, they sometimes stifle innovations that threatens their business model. Case in point, answering machines. Bell Labs invented the technology to record phone calls in the 1940s,
but AT&T suffocated it, worried that people would stop using phones for business if they knew they could be recorded. Answering machines wouldn’t catch on until the 1970s. It was the same with cells phones. Bell Labs first demonstrated a wireless phone in the 1970s, but again, AT&T refused to develop it. Why would they create a competing type of phone that didn’t use the billions of dollars worth of infrastructure that they had taken decades to establish. Cell phones wouldn’t catch on until the 1990s. It was the same thing with digital switching. AT&T would be required to update its entire technical ecosystem at a huge cost, not to mention they’d be making their older switches completely redundant. This was an attitude echoed by some executives
within Bell Canada, they were certain that a digital switch kill sales of their just released SP-1 model. But as future CEO John Roth would later say: “If you’re going to be cannibalized, it’s best to be cannibalized by yourself”. In 1976 Northern unveiled their new switch, the SL-1, at a trade show they called Digital World, which they hosted at none other than Disney World. The timing was everything. By committing when everyone else was too hesitant, they had caught the rest of the industry by surprise. Because it was the only one of its kind for nearly 2 years, the
SL-1 became the best selling switch in the world. After that the size of switches kept increasing, The SL-1 became the SL-10, then the DMS-10, then the DMS-100. Northern could handle up to 100,000 phone calls through just a single switch. Last time we checked in, Northern made just 6% of their own designs. By 1975 it was 50%, and by 1977 they were up to 70%. This was an
unrecognizable company from just two decades ago. In fact, this newfound success was worthy a name change. Northern Electric was far too generic. Everything was electric these days. How about…Northern Telecomm? This was a perfect time to go public. In 1973 they go live on the
Toronto Stock Exchange, and a couple years later they made it into the big leagues: Wallstreet. This was the major leagues, this was not just a branch plant. During the 70s Northern had gone from having earnings of $5 million to $111 million, and the workforce grew to 33,000 people. If Northern was an American company, it would have been ranked 160 on the Fortune 500. Northern’s CEO during this time was a man name John Lobb, and there’s a quote from him that has pretty much become company folklore. He would often go around asking employees what the company
made, hoping they’d take the bait. When they inevitably answered with switches, he’d hit them with the real answer: “We don't make switching goddamn it. We make money." Look I’m a sucker for unsubtle metaphors. Northern’s first president was a literal former sea captain. For almost a hundred years Northern was shielded from the perils of the open market. Northern was a ship only ever
sailing close to shore, enclosed in a protective bay created by its monopoly. By going public on the stock market this was Northern setting out to sea, taking a risk that it was a Canadian company that could go global. And lucky for them the hammer came crashing down at the perfect time. "Helping you stay on top of change today...and tomorrow. That's the power of networking." *static* "Buying a phone? Buy the one that phone companies have relied on for over 100 years. Northern Telecom. A voice you'll recognize from a name you know. *Bark bark!* Cool it Rex." The breakup of AT&T is the picture perfect definition of hubris. AT&T was *the* biggest
corporation in the world. It employed around 1 million Americans and provided the cheapest, and for many decades, the best phone service in the world. For many Americans they were the only company you get a telephone from. And it did so through absolutely crushing
business tactics. Although the days of literal sabotage were in the past, now it resorted to brutal board room takeovers, political lobbying and fighting tooth and nail to prevent 3rd party companies from tapping into its network. It had done all of this with the tacit approval of the US Government, which granted it the right to exist as a regulated monopoly, one that had an immense role in the US defense industry. The maternalistic image of Ma Bell however had been slowly deteriorating for decades. For some people, AT&T was brute, a bully whose arrogance had gone unchecked for far too long. Service quality had slipped in
recent years, and yet phone bills continued to go up. AT&T finally overstepped when it tried to crush a new rival, and later attempted to ram a bill through congress, a bill that would once and for all crown it the one telephone company to rule them all. This pissed off just the right people in the Justice Department, which initiated an excruciatingly slow and complex legal battle that played out over a decade and 4 different Presidents. Although it initially looked like AT&T would walk away with just another slap on the wrist, to the horror of the executives they gradually realized that their behemoth wasn’t nearly as invincible as they thought it was. The breakup agreement in January of 1982 is perhaps the single most impactful and controversial event in the history of American industry. Unlike the 1956 settlement, which saw AT&T make a few small
concessions, this new ruling was a devastating defeat, and it left a massive power vacuum. AT&T had been desperate to keep Western Electric under its control, but in exchange they had to watch the rest of their empire be smashed into 22 pieces. The local phone companies, the Baby Bells, as they were called, could now buy their equipment from anyone they wanted. And of those 22 Baby Bells, Northern snatched up 21 of them. Former Vice Chairman, David Vice once said:
"When the divestiture took place, we found that our customers embraced us in a bloody bear hug. They'd been with AT&T; and Western Electric all those years and had been taken for granted." In just a couple years, Northern rockets up to become the #2 telecomm equipment company in North America, right behind to Western, their much bigger, but now extremely depressed cousin.
Previously, Northern had negotiated an unspoken deal with AT&T that they stay out of their turf, they would only sell to the independents who despised AT&T. But now, the big bad mob boss had been whacked. The impact of this ruling is obvious on Northern's stock price. You can see in 82 when it becomes clear that AT&T is going to have to give in that Northern begins to slowly tick up. By the time the breakup becomes official in 84 Northern’s stock price is 3 times what it was. It had broken the curse of the branch plant. As of 82, Northern was officially making more money in the US market than in Canada. This was always bound to happen. The market in America
is 10 times as big. The real question was how much of it they could capture. The expansion was rapid. Nortel began setting up major plants in California, Texas, Georgia and North Carolina. Soon there were 13,000 Americans working for Northern. When it came to grand marketing gestures nothing was too expensive. Northern chartered a cruise ship, the SS. Rotterdam filled with members of the Fortune 500 community and wined and dined them for days. When an elaborate trade show in Europe was almost shut down due to concerns over poor ventilation, Northern paid to have an expensive hole cut into the roof. With the financial backing of Bell Canada behind
them, Northern was unstoppable. Which raises an interesting point. Why did AT&T get broken up, but Bell Canada was allowed to live on? Bell Canada, although it tried very hard, never quite maintained a true monopoly like AT&T had managed to down south. Although at the peak of its power in the early 1900s, it had steadily lost ground ever since. In terms of sheer land mass the US and Canada aren’t that far off, but the vast majority of Canada is extremely remote. Maintaining a presence in the less populated regions proved so costly that service was often unreliable, angering the locals. In the Maritimes Bell itself had been pushed out by some local rivals. In the prairies the locals were so fed up with the poor service that the provincial
governments bought Bell out and turned them into provincial utilities. Easily the 2nd coolest the prairies have done after giving us universal healthcare. And B.C was so far away Bell never even bothered to try and get a foothold on West Coast. If Bell Canada had a monopoly,
it was restricted to the Windsor-Quebec City corridor, the home of over half the population. Bell Canada had managed to achieve the ideal size. The Goldilocks zone. Big enough to dominate the market, but small enough that the politicians left it alone. The few attempts at cracking down on Bell’s monopoly fizzled out as Canada’s regulatory agencies were undermined and overruled by the government. And if I had to hazard a guess, I think Pierre Trudeau and his cabinet were happy to sit back and watch the American telephone company implode so Canada could pick up the scraps. The Canadian-American divide of the 50s continued to surge during the 60s and 70s.
JKF hated Dienfenbaker for his flip-flopping over the Cuban missile crisis, LBJ hated Pearson’s guts for not backing them in Vietnam, and then you had Nixon and Trudeau. Two men who could not have been more different in both personality and politics. Whether it was because of Trudeau’s open diplomacy with China and Cuba, or Nixon’s abruptly announcing a 10% import tariff with no warning, the Canadian-US relationship truly hit a low point in the 70s. It was in this climate that Trudeau’s government, with a push from the left wing NDP, created FIRA. The Foreign Investment Review Agency
was, on paper, a way to block foreign takeovers and screen foreign investment that didn’t bring “a significant benefit” to Canadians. FIRA was never very popular. The right wing called it overreaching, the left wing called it toothless, and the left wing of the left wing were over in the corner chanting the word “nationalization” over and over. Trudeau himself had not been much of an economic nationalist. He’d been pushed into creating FIRA by a minority parliament, and by the 80s the Liberals were desperately trying to woo back the private sector. Pierre Trudeau had served one of the longest tenures of a PM in the country’s history, and his later years had been dominated by issues of national unity, and an economic downturn. The East-West divide that had always existed continued to widen, Trudeau’s nationalization of the oil industry had made him a pariah out in the oil-rich West. Trudeau, a longtime opponent of
Quebec’s growing separatist movement, had become increasingly unpopular in the province after he pushed through a new constitution without their approval. And the practice known as the Sixties Scoop had continued into the 1980s, where indigenous children were forcibly taken from their parents and placed up for adoption with White families, and others placed in residential schools, where all semblance of indigenous languages, cultures and heritage were forcibly stamped out. This was not a united country. For a multitude of reasons there were and still are millions of people living within Canada’s borders who do not identify as Canadian, who do not identity with this flag. If there had been a strong nationalist movement in the 70s,
it had fractured into pieces by the 80s. Bell and Nortel were among the leading voices in Canadian capital that were demanding a changing of the guard. High tech, they said, was the industry that would yank Canada out of its recession. They wanted a government that would lower their taxes and reduce trade barriers for expanding into the newly vulnerable US market. They would get their wish in Brian Mulroney. Mulroney’s and his Tories delivered one of the
most lopsided electoral wins in Canadian history. He was cut from the same ideological cloth as Ronald Reagan and Margaret Thatcher. Deregulation, privatization, and the free market. 23 of Canada’s 61 Crown Corporations were privatized under Mulroney. FIRA, which was already a rubber stamp
machine at this point, was dismantled even further and renamed Investment Canada. It’s oversight over new investment was completely eliminated, and its ability to block foreign takeovers was scaled back so much, that the act has only been invoked a handful of times since. Mulroney declared that “Canada is open for business”. He didn’t see American money as a threat, and he openly
welcomed it. As public polling around free trade began to shift, he believed that by adopting it as his party’s key policy plank, it would carry them through the next election. Critically through, he would never have considered it if not for his extremely close friendship with Ronald Reagan. Reagan’s advisors feared phone calls from Canada because quote “he could get the President
to do anything he wanted.” Mulroney was the only foreigner to speak at Reagan’s funeral. Without this close relationship, free trade between the two countries may never have been adopted. We’ve seen only small glimpses of it, but the US has a long history of its own economic protectionism. Several times in the past century and a half, Americans tariffs have sent the Canadian economy spiralling. When it pulled out of the reciprocity clause in 1850, the Smoot-Hawly tariffs during the great depression, the Nixon shock of the 70s, and most recently, Ronald Reagan had been championing a Made in America policy that threatened to block companies like Northern from America altogether. Canadians weren’t necessarily afraid of free trade, what they were afraid was getting the short end of the stick in negotiations with a country that many perceived as a bully. This was the message being championed by Liberal leader John Turner. He considered himself
a proponent of free trade but not a bilateral agreement directly with the US. It’s one thing to negotiate in the context dozens of countries coming together, it’s another to try and negotiate 1 on 1 with a country 10 times your size. Thanks to TV ads like this one, free trade became the defining issue of the 1988 federal election. "Since we're talking about this free trade agreement, there's one line I'd like to change." "Which line is that?" "Well this one here. It's just getting in the way." "Just how much are we giving away in the Mulroney free trade deal?"
It also culminated in one of the most explosive moments ever to happen in a Canadian political debate. "I happen to believe you've sold us out. I happen to believe that once you-" "Mr. Turner you do not have a monopoly on patriotism" *overlapping arguments* "and I resent the fact the your implication that only you are a Canadian. I want to tell you I come from a Canadian family, and I love Canada,
and that's why I did it!" *static* "We a built a country east and west and north, we built it on an infrastructure that deliberately the continental pressure of the United States. For 120 we've done it. With one signature of a pen, you've reversed that thrown us into the North South influence of the United States, and will reduce us, reduce us I am sure to a colony of the United States. Because when the economic levers go, the political independence is sure to follow."
This moment resuscitated what many had been calling a dead campaign. There had been talks of replacing Turner as leader mid campaign, but the Liberals surged into first. Ultimately Turner’s past record weighed him down, and the Tories would clinch the election. The free trade
agreement would be enacted soon after. And that was that. With the exception of a few staples like lumber or dairy, the playing field had been wiped clean. It was time to get in the ring and start throwing some punches. Northern's success in the 80s was dependent on entering the hostile American market. After having a pair of Canadian CEOs at the helm, it became
clear Northern needed a CEO with connections in Washington. That’s how they landed on Edmund Fitzgerald. A former US marine, part owner of the Milwaukee Brewers baseball team, and the descent of a wealthy Wisconsin shipping family, Fitzgerald was perfect for the job. A Republican with
extensive lobbying experience, he rallied hard in Washington against new bills that threatened Northern's southward expansion. Although still Canadian, Nortel spoke with a fluent American accent when it needed to. The sales numbers spoke for themselves, but the symbolic victories also helped. The telephone switches in the White House, which had previously belonged to AT&T, were now made by Nortel. Although America was the main target of Nortel’s expansion, the 80s was the decade that Northern went global. They expanded into Europe, the Caribbean, the entire Pacific Rim. They truly made history in Japan, becoming the first ever non Japanese company to install a
telephone switch there. In 1987 Northern has an almost perfect marketing moment fall into their lap. An earthquake hits just outside of Tokyo. All the switches break as the mechanical parts are torn off. The only exception was Northern’s DMS-10, which was fully digital. The trend of American CEOs continued as Edmund Fitzgerald sought out a successor. He chose Paul Stern, a former IBM exec who he had met while serving on Reagan’s telecommunications committee. One
former VP said, Paul Stern “arguably has the most bloated ego of anyone I’ve ever met”. He insisted on being referred to as doctor Stern, which is one of those things he can technically do, but is also one of the most annoying things anyone can do. He also assumed the 3 top jobs of President, CEO and Chairman of the board at the same time, an embarked on a company-wide PR tour on the corporate jet, reminiscent of a political campaign, all the while he began hacking and slashing budgets, shutting down factories, and firing VPs who looked at him the wrong way. The 90s were a new decade. Northern Telecom had pretty much been shortened to Nortel by this point. By 1991 Nortel had pulled even with AT&T in the US switching market, with a 40% share. The new
Russian President Boris Yeltsin even found time to visit the BNR labs on a visit to Ottawa in 1992, where he jokingly tried to pocket a microchip. BNR meanwhile had spent the last few decades on a new way to send phone calls. The pipes that humans have used to send phones calls hadn’t really changed much since the 1800s. They started out using iron cables, which although functional were highly sensitive to noise and distortion. Early on many companies made the switch to copper cables,
and the world mostly stuck to those for over a century. But now they were hitting their upper limit, and something better was needed. Although they didn’t invent the concept, Bell Canada published one of the very first papers on fiber optics in 1966. Using ultra pure strands of glass, you could pulse lasers to send digital 1s and 0s as incredible rates. Unveiled under the name FiberWorld, Nortel showcased a line of fiber optics nodes could achieve transmission speeds of 2.5 Gigabits per second. Once again they had achieved
a multi-year head start over their rivals. As the 80s ended, Nortel was on top of the world. Here’s ex-Nortel employee Dave Roberts explaining how they did it: “The company built great phone systems. And when I say that they built them, they really did. They developed their own CPUs, wrote their own operating systems, manufactured all the boards and sheet metal and whatnot.” “These customers moved slowly. Products were installed and then expected to run for a decade or more,
with nothing but backward-compatible upgrades provided during that time. “You charged an arm and a leg for what you delivered, and it was very profitable.” When you’ve been at sea for this long riding the waves of the market, the previous highs and the lows begin to feel insignificant. What was
once the pinnacle of success is now just a small crest, the halfway point to a bigger and better wave. Nortel had built a 13,000 tonne tanker optimized to serve telephone companies, and the sheer momentum of that looked like it would carry them for the next decade. But that momentum would turn out to be a critical flaw. The age of the telephone company was coming to an abrupt end. "Our lives are..." "Busy!" "And now, from Northern Telecom, a solution!"
1993 saw a big shakeup in leadership for both Nortel and Canada. Paul Stern’s abrasive personality and budget blood lust was tolerated up until 1993 when Nortel’s biggest customer, Atlanta Bell, dropped Nortel following a string of reliability concerns. Paul Stern’s cuts had reached the R&D centers, and product lines weren’t being updated as much as before. Customers were noticing, and they began to lose ground to AT&T again. Previously heralded as a genius, now Paul
Stern’s tactics were seen as short sighted, and he was painted as a tyrant. Bell Canada intervened by blocking the appointment of Stern’s close friend as President, instead slotting in one of their own, Jean Monty. Furious at being undermined, Paul Stern resigned in protest. The Paul Stern years are not remember fondly at Nortel, and if he had any lasting legacy at Nortel, it was beginning the tradition lucrative golden parachutes. When he resigned he left the company with $5.4 million in compensation. Jean Monty, quickly promoted to CEO, had his work cut out for him. 1993 was the middle of a deep recession for Canada, and Nortel’s stock price reflected that.
Speaking of the recession, oh boy did people hate Brian Mulroney. Plagued by scandals and unpopular policies, Mulroney resigned from politics just months before his party suffered the worst election defeat in Canada’s history, forever dooming the PC’s to irrelevance. The pendulum finally swung back to the Liberals, seeing former cabinet minister Jean Chretien ascend to the PM’s office. If Mulroney was our Reagan, then Chretien was our Clinton. A Liberal, yes, but a Liberal who had been pushed to the right by a decade of Conservative rule. The
Chretien years would be defined by an obsession with cutting the deficit. Housing, healthcare, nothing was off limits as long as the number went down. Chretien had also partially campaigned on renegotiating NAFTA, a revised free trade agreement that would now include Mexico, but he didn’t try very hard. Negotiations had been pretty much finalized by Bush and Mulroney, and reopening the terms was just as likely to kill the deal altogether, which was a political no-go.
The asymmetry between the two countries meant there was very little weight Canada could throw around. Even then, on a personal level Chretien was not sympathetic to the Canadian nationalists. As finance minister Chretien had once been in charge of FIRA, but he had always felt that American money in Canada was a necessary pill to swallow. Years earlier he said that there were “a lot of places in Canada where people don’t give a damn who owns what. They want a job.” And years
later he said “protectionism is not left-wing or right wing, it is simply passe”. The free trade debate had effectively been settled. This new political paradigm was followed by radical changes in Canada’s Telecom Policy, and by that, I mean massive deregulation. It was a burning down of the entire playing field in the name of increased competition. Bell Canada’s
monopoly on long distance calls was broken. Their preferred supplier agreement with Nortel was torn up. Phone companies could be TV companies now. TV companies could be phone companies. Cell phones were a thing now too, and everyone was welcome to take a crack at those as well. To survive you could no longer be *just* a telephone company. You needed a thumb in every pie. The US underwent its own version of this with the Telecom Act of 96. The telecom act is mainly remember for flooding
the tech market with a bunch of new capital, and planting the seeds for the eventual dotcom bubble. But it also initiated a wakeup call at AT&T. The last decade had been brutal for them. More specifically, Western Electric was weighing them down. All the new Baby Bells and independent telephone companies refused to buy from them, because their money would still just be going to their biggest rival. And so AT&T said, fine, we get the message, we’ll just spin it off. Western Electric was no more, it underwent a complete makeover and adopted a new name. Longtime fans might recognize this one: Lucent Technologies. Nortel and Lucent mirrored each other in the same
way that Canada and the US mirrored each other, the difference was just in size and prestige. Lucent the industry’s 900 pound gorilla, over twice as big as Nortel. BNR was respected, sure, but Bell Labs had 6 Nobel prizes, and their latest hotshot physicist was bound to win them another. Nortel going public in the 70s was a success…by Canadian standards. Lucent’s IPO? It shattered
the world record for most money raised. $3 billion in 1996. Lucent would quickly become one of America’s most widely held stocks. If you were betting on either of these two companies, Lucent would be the logical choice. But both of them at their core, were telephone
companies. Neither was truly prepared for the technological upheaval that was going to define the 1990s. Something more radical, unrestricted and unpredictable than the telephone. You see there’s this new thing called the world wide web. A network that brought together text, images, voice, even video, albeit heavily compressed. All of it viewable on personal computers that were beginning to pop up in middle class houses. The telephone took 50 years to reach around half
the US population. The internet did it in 5. As it turns out, the copper wires most people had in their houses to receive phone calls worked just as well when it came to delivering internet traffic. Telephone companies, like Nortel, were remarkably well positioned to gobble up this new internet market. Or at least they would be, if they weren’t stuck in their old habits. If Lucent represented the old guard rival, the establishment, then Cisco represented the next generation. A relatively new company, it was an internet startup fresh out of Silicon valley. It
blazed a trail in the 80s as the brainchild of 4 Stanford professors and quickly ate up a huge share of the telecom market. Whereas Lucent had decades of AT&T’s legacy behind it and a massive scale, Cisco was small, maneuverable and adaptive. Its CEO was a cool guy. He raced speed boats. And most importantly, it had picked the correct side in a civil war being waged by a bunch of nerds. The two factions were called the Bell-heads and the Net-heads, and they each had a competing vision for how the internet should be transmitted. The Bell-heads were most often legacy telephones engineers who likely worked for giant companies like AT&T and Bell. They championed something
called ATM switching, asynchronous-transfer-mode. On the other hand you had the Net-heads, fans of IP, or internet packet switching. Net-heads were likely to be open-source nerds working out of Universities, or maverick tech entrepreneurs working out of Silicon valley start ups, desperate to try and disrupt the AT&Ts of the world. The Bell heads loved ATM because it built off the same principles of telephone switching. When you set up a telephone connection, you want a live, continuous conversation, no buffering. You set up one link between points A and B, and shut out all
other traffic. It’s fast, and high capacity. It’s not so great though not great if one point along the route breaks down. Now you have to reroute and set up an entirely new connection. That’s where packet switching excelled. Packet switching is like mailing someone a jigsaw puzzle, but each individual piece can get split up and all take different routes to get to their destination. It doesn’t matter because once they all reach their destination they just get assembled into say, an email. IP by its very nature is decentralized. Immune to single points of failure, and, notably,
very hard to track customer billing with, which frustrated the Bell heads to no end. ATM was ideal for the high capacity optical fiber networks that Nortel and Lucent specialized in, whereas IP was best used with ethernet cables and routers that Cisco had built its fortune off of. In the 80s it wasn’t super clear who was winning this civil war, but by the mid 90s it was. It was the Net-heads. IP was king, and by the end of the decade ATM was going to be just another forgotten technology, like Betamax was to VHS. If you wanted to use the internet you had to endure
this sound [dial-up sound] and hope that no one else at home was expecting a phone call. No one wanted on-demand, real-time video calls in this era, they were happy with emails, slow loading websites, and if they were feeling fancy, downloading software from the internet. Activities where buffering and latency didn’t matter. ATM was on paper the better technology, the market had committed to IP. Nortel needed to course correct as soon as possible. This is when we meet John Roth. He’s what you’d call a company man. A Canadian, he grew up in Lethbridge Alberta and joined Nortel in 1969. Although he went to school
for electrical engineering, his true talents were not in design. During his entire career at Nortel, he never made it onto a single patent. He was instead destined to climb the corporate ladder, and at just 35 years old he became a general manager, the youngest person ever in that role. He’d break that record again when he became a VP. Next he hopped on over to President of BNR, Nortel’s beloved crown jewel, and he later pushed for Nortel to get into the wireless market. But
his ascension up the corporate ladder was far from over, as by the end of the Paul Stern years he was President of Nortel North America. By 1995 with Jean Monty’s remodeling well under way Roth was made his heir apparent, taking on the role of COO for a two years before finally getting to wear the big boy pants in 1997, with Monty heading upstairs to become CEO of Bell Canada Enterprises. The model Canadian CEO is like a Canadian Supreme Court justice. The average Canadian probably doesn’t know your name. Certainly something that can’t be said for their American counterparts. John Roth no Bill Gates and he wasn't Steve Jobs. His first ever interview as CEO he seemed deeply uncomfortable with the attention. He was boring. The business press was
confounded by him. The Globe and Mail, unable to find anything interesting to say about him, instead described his body as lanky and weird. Some people compared him to nebulous Cigarette smoking man from the TV show the X-files. In other words, an enigma. He also had big shoes to fill. Monty had been named Canadian CEO of the year in 97, after he turned the company around following the disastrous Paul Stern years. As you know from the intro, John Roth will win the same award, but the road he takes to get there is a bit bumpier. Let us introduce the John Roth threshold. This is
the stock price on the day he assumed the title of CEO. If he leaves the company above this line, he was a success. Let’s see how he does. Just two months in, on December 3rd 1997 John Roth sent out a now iconic email to all 74,000 employees of Nortel. It was entitled: “The Right Angle Turn”. Nortel needed to pivot. If you asked him, John Roth could tell you the
exact moment he realized that the internet was the future. Like many millionaires, he’s an avid car collector. One day he was trying to find a replacement liner for the glove box of his 1966 Jaguar E-type, but couldn’t find one in Canada. But, as he says here: "I started poking around and within five minutes I'm in a little garage north of London, England - a four-man operation - and he's got my parts. How would I have ever have found this person if he wasn't on the Web?”
Truly a man ahead of his time, he quickly got addicted to online shopping, and bought a 1950s jukebox and a pool table. John Roth had made it clear. Nortel was an internet company now. How they were going to do that was a serious question. This is a point of contention, and I’ve heard two sides to this issue. John Roth supposedly went to his technical people and asked them how long it would take to get a foothold into IP. He was told around 2 years, which was too slow for him. On the other hand, I’ve heard first hand accounts from employees that Nortel’s engineers had a good grasp on IP, and had even published some papers on it in their in-house journal. One of those papers even described a device extremely similar to the iPhone
a whole decade ahead of time. There appears to be a disconnect, John Roth, and the executives he surrounded himself with, did not trust their own engineers, that they were dinosaurs who were stuck in their ways. This is perhaps the reason that Nortel made the controversial decision to shut down BNR. In 1996 BNR had been dissolved and absorbed into Nortel. The Bell Labs of Canada no longer existed. The name BNR, beloved by those who worked there, was erased unceremoniously. In the
span of just one weekend the “corporate logo cops” paid a visit to Ottawa and had removed every trace that the name BNR ever existed. The bulk of the nearly 17,000 employees were simply absorbed into Nortel’s other product lines. For longtime R&D folks, like, said it felt “like a dagger to the heart”. Why BNR was dissolved is a bit of mystery. It’s possible it wasn’t profitable on its own, viewed as a “multi billion dollar sinkhole” that couldn’t exist in this new era that saw Bell downgraded from its long distance monopoly. By some, BNR’s culture was viewed as arrogant. They saw themselves as better than the rest, even down to their insistence that they use Macs instead of PCs. They needed to be reigned in, brought into line with the same