Co-Opetition - Adam M. Brandenburger [40]
To ensure itself a piece of the action, Norfolk Southern should have required a fee, perhaps based on Gainesville’s cost savings, in the event that the spur line didn’t get built. Then Norfolk Southern would have been in a no-lose position: if the line gets built, Norfolk Southern gets the business; if it doesn’t, Norfolk Southern shares in the cost savings it made possible.
Even though it wasn’t out-of-pocket, Norfolk Southern did incur some hidden costs. It used up some political capital in lobbying to get the spur approved. Its actions also imposed a $34-million cost on CSX—quite dangerous given CSX’s ability to retaliate. In the whole of the United States, only twenty or so power stations are served by more than one railroad. Just as CSX had the only tracks into Gainesville, there are many other places where Norfolk Southern is the monopoly supplier and CSX can play the spoiler.
Norfolk Southern should have known better. It had already been on the receiving end of this game twice before. Up until 1991, the Southern Company, an Atlanta-based utility, had been served exclusively by Norfolk Southern.9 That was until it built a seven-mile line from a plant near Birmingham, Alabama, to a track owned by CSX. This was the first time a utility had ever built a rail access line for the specific purpose of creating competition. Similarly, in Evansville, Indiana, PSI Energy threatened to build a ten-mile rail extension from its plant to a CSX main line. Once again, Norfolk Southern was the monopoly incumbent. It was forded to give CSX access to its tracks, thereby creating a competitor to itself, at which point PSI gauged it unnecessary to build the rail extension.
Perhaps what Norfolk Southern did in Gainesville was a case of tit-for-tat retaliation: after CSX spoiled Norfolk Southern’s monopoly with the Southern Company and PSI Energy, Norfolk Southern spoiled CSX’s game in Gainesville. But that’s unlikely to be the final chapter. There’s a real risk that CSX will retaliate. So Gainesville wasn’t no downside, only upside, for Norfolk Southern. Gainesville was really more like “Loseville.”
As the Holland Sweetener and Norfolk Southern stories illustrate, sometimes the most valuable service you can offer is creating competition, so don’t just give it away. That’s especially true when providing competition is costly: Holland had to build a multimillion-dollar plant, and Norfolk Southern’s bid risked provoking a tit-for-tat response. Competition is too valuable and too costly to give away. You need to get paid to play. This idea is well understood by players in the takeover game.
Answering the Call The cellular phone business was undergoing rapid consolidation when, in June 1989, thirty-nine-year-old Craig McCaw made a bid for LIN Broadcasting Corporation. Five years earlier, the Federal Communications Commission had divided the country up into 306 separate markets and allocated two cellular licenses to each one. One of those licenses had been earmarked for the local phone company, while the other had been awarded via lottery. McCaw had been going around and buying up licenses from the lottery winners. To date, McCaw’s licenses covered 50 million potential customers—or POPs in the industry jargon.
Already the industry leader, McCaw wanted to go national. The acquisition of LIN’s 18 million POPs was McCaw’s best, and possibly only, chance to gain major city franchises and thereby create a national cellular footprint. That meant he had to get LIN, which had cellular licenses for New York, Los Angeles, Philadelphia, Houston, and Dallas. McCaw already owned 9.4 percent of LIN. Now he wanted the rest.
McCaw had a vision and had already demonstrated his willingness to roll the dice. He had taken on a huge amount of debt in order to buy all the licenses. Yet, as of mid-1989, only 250,000 out of his 50 million POPs were actually paying customers—a penetration of one-half of 1 percent. McCaw saw the glass as nearly full as opposed to almost empty: the potential profits were enormous.
McCaw bid $120 a share in cash