When The Experts Get Things Wrong and How That Cost AT&T $12 Billion

In 1980, one of the best consulting firms in modern America was approached by AT&T. At the time, AT&T was an absolute powerhouse. In market speak, it was a blue chip. Or a FANG. The same way we think about Apple or Google today is what AT&T was back then. They were unstoppable in the eyes of the general public.

They approached this consulting firm and had a question. They wanted them to forecast the number of cell phone users by the year 2000. That question asked then is not easy. The best phone you could get was reminiscent of Gordon Gecko.

It’s easy to forget where we came from and how quickly it happened. When AT&T commissioned this question, landlines were the dominant way of connection. A landline was life and AT&T was the king you had to go to. The first sight of a phone with no wires was peculiar and possibly a tad worrisome to king AT&T and they had to take guard.

To defend against this, AT&T hired mercenaries. Arguably the best in town. They gave this consulting firm a simple yet this-could-make-us-or-break-us task. Nbd.

How many cell phone subscribers will there be in 20 years? And should AT&T be worried?

No one knows how long it took this consulting firm to find their answer. But the conclusion was presented. Probably in a giant boardroom.

It was nothing to worry about, they said. AT&T dominated the landline and the trend suggested this was the course to stay on. Landline after landline after landline. The number of wireless cell phone users by the year 2000 would be… around 900,000.

They said.

Data costs for a cell phone connection were enormous, cell phones were ridiculously heavy, and their battery life might get you one or two calls every charge. For the wireless phone to change everything it had to go through an immense cycle of change and affordability. There’s no way that will happen in such short time.

They said.

Today, it can be argued every adult human on Earth has a cell phone or at least a connection. In 2000, the number was 109 million. Not 900,000 predicted by the consulting firm. As the market boomed for cell phones and wireless connections, AT&T was forced to acquire McCaw Cellular. They paid a cool $12 billion. It is one of the most expensive mistakes in history. It was done by McKinsey & Company, which today is one of the most prestigious consulting firms in the world.

Deep in human nature is a sense of defensiveness. The desire to own something or the need to protect it until the end result. Perhaps it is a sense of being territorial even if it means to the downfall. It’s difficult to think differently or push further to open up to new lines of thought. Most want to claim something and make it their small victory.

For AT&T, it was being closed-minded to other competing devices. They heard what they wanted to hear and that was final. We own the landline and we will defend it!

The other day I was on Twitter when a friend sent me an interesting tweet about Western Union. Before the telephone had been invented, Western Union was the main source of communication by way of telegram. The telegram! When the leaders of Western Union were asked about this, and how new technology like the telephone could impact them, they responded fiercely:

“The idea is idiotic on the face of it. Furthermore, why would any person want to use this ungainly and impractical device when he can send a messenger to the telegraph office and have a clear written message sent to any large city in the United States?

The electricians of our company have developed all the significant improvements in the telegraph art to date, and we see no reason why a group of outsiders, with extravagant and impractical ideas, should be entertained, when they have not the slightest idea of the true problems involved.”

We know how that turned out.

A giant L.

Expensive mistakes happen all the time in business and markets. They come and go as more risk is taken or most investments are pushed forward. There’s no easy way to avoid these mistakes, but being receptive to change is an imparting first step. That means opening up to the possibilities, even the most absurd and futuristic. When you read about these huge corporate mistakes you often find an abundance of dogmatism. And the only way to avoid that, is to seek out the most extreme events that go against what you believe and start thinking they actually might be true.

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