If we raise our sights from the narrow concerns of running a single company to the broader sweep of an entire industry, we do, however, start to learn some lessons from history. Back in 1932, the real price of copper (in constant 2007 dollars) was $1.97. By 1974 it was $7.26 (again in 2007 dollars), an almost four-fold increase. The main reason for this huge increase was the demand from the growing network of copper telephone wires that encircled the globe. But it was also because an industry cartel was controlling the supply.
Economists tell us that high profits are supposed to encourage additional capacity, with new facilities opening to increase production and meet rising demand. The people who run cartels, however, love their rising profits, so why would they reduce them? They work to defy economic principles and to maintain the status quo. That’s exactly what the copper cartel did, restricting the number of mines and factories to constrain supply and maximize the profits of the copper companies – pushing the price up even further.
But high profits attracted competition from outside the copper industry. From the 1950s onwards, scientists started exploring the possibilities of fiber optics. But the theoretical problems weren’t solved until 1970, when three scientists, Robert Maurer, Donald Keck and Peter Schultz found a way of using fused silica (a material of extreme purity with a high melting point and low refractive index) to transmit more than 65,000 times more information than copper wires – and with much better transmission quality.
Fiber optics transformed the telecoms industry and heralded the coming of the information age. Since the 1980s over 35 million kilometers of telecommunications lines have been installed worldwide and nearly all of them involved fused silica. Today, technical improvements mean that a single hair’s-breadth fiber is enough to carry tens of thousands of phone calls, transmitting more than 10 billion digital bits per second. That’s equivalent to 20,000 books the size of this one.
Poor old copper. In less than a decade, the vast superiority of fiber optics made copper wire virtually obsolete. Demand for the metal collapsed, most copper companies went bankrupt and employment in the industry fell by 70% in some countries. To save itself from liquidation, Anaconda, once the fourth largest company in the world, was sold to ARCO in 1977. Prices continued to fall, and ARCO ceased all copper-mining activities in 1983. C. Jay Parkinson, the former president of Anaconda, must have regretted what he said in 1968: “This company will still be going strong 100 and even 500 years from now.” Not that anyone can blame him. At that time, the copper cartel was controlling the market, and prices – not to mention profits – had been on the rise for over 35 years. Parkinson had underestimated the incredible power of the market to drive prices down (more about this soon) and thus wreak revenge on the few companies that previously controlled the market. It’s small consolation that plumbers still like to use copper.
The key to understanding this tragic tale of an industry that got its just desserts lies in the fact that Maurer, Keck and Schultz came from another world entirely. They worked for Corning Glass, a company that had no connections whatsoever with the telecommunications industry, let alone the copper business. It produced ordinary, everyday glass products. In other words, the threat to copper came from outside and, with absolutely no warning, took an entire industry down. Corning Glass didn’t care if the copper industry was destroyed. On the contrary: the faster the destruction, the bigger its own revenues and profits.
Parkinson and his peers in the industry should have known it would happen sooner or later. But they only cared for their short term profits, not to mention their huge salaries and hefty bonuses (which were increasing even faster than their companies’ revenues). Any economics undergraduate could have told them that competition to an industry all too often comes from outside. Over-inflated profits are very attractive, and outsiders don’t worry about oversupply reducing prices. Nor do they give a damn whether an industry collapses. As it happens, neither should we (though we should retain the nugget of economic wisdom that the story of copper offers). No doubt, shareholders and employees suffered, but society as a whole gained immensely. If we’d stuck with copper, there’d be no internet, no e-mail, no free calls from Skype, no Google. One industry collapsed, but others rose phoenix-like in its place, creating new jobs and profits for new shareholders – bringing people together across oceans and time zones at little or no extra cost. Technologically, the world is a better place for the demise of copper wires.
© Spyros Makridakis, Robin Hogarth and Anil Gaba, 2009