Tel/Man was very successful, very rapidly. This story from The Intelligent Tsunami shows you how to ride your tsunami most brilliantly. Few in my career have done it better.
Jesus understood that existing institutions aren’t very good at dealing with transformative innovations, observing, “No one pours new wine into old wineskins. Otherwise, the new wine will burst the skins, the wine will run out, and the wineskins will be ruined. No, new wine must be poured into new wineskins.”
Harvard Business professor Clayton Christenson promoted a similar idea. Large, market-leading organizations need to form new startup business units to successfully commercialize transformative innovations. Stanford Business professor Steve Black is clear why, noting that “A startup is a temporary organization designed to search for a repeatable and scalable business model.”
Builder Marts of America (BMA), founded by Clarence Bauknight and Tom Rowe, was a fairly low-profit margin business distributing building materials to independent lumber yards across the United States.
In the early 1980s, a BMA executive, Richard Ingram, got frustrated when he discovered the huge gross profit margins that AT&T received on long-distance phone calls. He wrote an exasperated letter to the Chairman of AT&T complaining about what he perceived to be obscene prices. Richard got back a perfunctory letter basically explaining that AT&T was close to a monopoly and BMA had little choice.
Unfortunately for AT&T, Federal Judge Harold Greene decided it was time to break up AT&T’s monopoly into the Bell companies, some of which survive today. Richard realized he could buy long-distance phone service from AT&T at a wholesale price and resell it to end customers at a profit. This was very similar to the business that BMA was already in. The best part was that the judge’s order prohibited AT&T from lowering its retail rates to respond to the emerging competition. Maintaining high retail prices would cause AT&T to lose market share to competitors in the long-distance market, which was the point of the breakup.
Richard went to Clarence with the idea of selling long-distance phone service inside BMA to its independent lumber dealer base. Clarence didn’t think this was a good idea. Failure would damage BMA financially. Clarence consented when Richard suggested providing the new service through a new company, Telecommunications Management Inc., known as Tel/Man.
Whether through insight or good luck, Richard putting this business in a new entity outside of BMA’s mainstream business worked beautifully. There was a wholesale/retail dynamic in Tel/Man that was similar to BMA, but long-distance phone service wasn’t 2X4 lumber. Organizing Tel/Man as an independent company allowed it to develop its own systems and processes aligned with this emerging market. It also created a sense of urgency and focus in the management team because there was no going back. If Tel/Man employees were going to eat, they had to succeed.
Tel/Man was very successful, very rapidly. In 1984, the company attracted significant outside capital through an initial public offering. Three years later, Tel/Man was sold to SouthernNet, a company acquiring long-distance startups that sprang up after Judge Greene’s ruling. Richard, the Tel/Man management team, BMA, and BMA’s executives all did very well for themselves. For the longest time, Richard had the letter he sent to and the letter he received from AT&T framed on the wall in his office.
In addition to forming a new entity to develop a new market, a big lesson of Tel/Man is that its leadership accurately assessed how the long-distance market would evolve.
Tel/Man’s leadership intentionally focused on generating revenue and avoided expensive capital expenditures to the extent they could. This strategy would not result in economies of scale in the long term.
The leadership’s strong intuition was that the formation of many small long-distance companies would inevitably lead to industry consolidation. Therefore, intentionally positioning the company as a revenue-generating platform that a consolidator would pay a premium to buy was the right strategy.
That’s exactly what happened. That was brilliant. It likely wouldn’t have happened, at least not as cleanly, if Tel/Man had been commingled inside BMA.
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