The Company that Broke Canada

From Market Glory to Public Scorn John Roth radiates confidence as Nortel eclipses rivals and hurtles toward becoming the ninth most valuable company on earth. With 75% of North America’s backbone internet traffic running through its networks, he is crowned Canadian CEO of the Year. A later parody of Roth delights an audience furious over wiped‑out pensions. Nortel’s collapse shattered retirements and rattled Canada’s economy, leaving the question of why to be waved away as “ancient history.”

First to Market, Not First to Invent Canada’s claim to the telephone collapses under scrutiny: Bell formed ideas in Ontario, but the first working call occurred in Boston in 1876. Bell self‑identified as Scottish and sought American citizenship, while Antonio Meucci and Elisha Gray reached similar designs earlier. Bell’s working receiver suspiciously mirrored Gray’s after same‑day patent filings. The better lawyer won the most lucrative patent in history, launching a factory that grew into AT&T’s brutal monopoly.

Canada’s Identity in the Elephant’s Shadow Canada defines itself beside a larger, older United States with whom it shares colonial origins. Pierre Trudeau likened it to sleeping next to an elephant—every twitch is felt. With one‑tenth the population and economy, Canada exports raw resources and buys back finished goods and culture at a premium. Annexation fears faded after 1812, replaced by the subtler peril of economic subservience.

Tariffs Birth a Branch Plant Amid an 1878 depression, John A. MacDonald’s National Policy weaponized tariffs and anti‑American rhetoric. AT&T dodged duties by funding a former Confederate captain to buy Canada’s phone lines and establish a token Montreal plant. Assembling U.S. parts in Canada preserved patents and sidestepped tariffs. By 1895, the branch plant had a name: Northern Electric & Manufacturing.

War, Depression, and a Sleeping Subsidiary Northern made everything from kettles to radios, but phones were its core, built from Western Electric designs with minimal local R&D. Often the only change was the logo, a hallmark of branch‑plant dependence. The Great Depression axed 80% of staff before wartime contracts revived production. Postwar prosperity brought a 100,000‑phone backlog and rapid adoption, from 28,000 phones in 1895 to nearly one million by 1942.

The Boot That Kicked Canada Out the Door AT&T’s 1956 settlement barred it from computers and forced open patent licensing. Extending free patents to Bell Canada would entitle U.S. rivals to the same, so AT&T cut Canada loose. Northern’s leader called it “the boot that kicked us out the door,” lamenting Canada’s habit of imitation. Yet he predicted it would prove the best thing that ever happened, and independence began to take root.

Avro Arrow’s Cancellation and a Lost Future The Avro Arrow, a stealth interceptor, was among the world’s best and Canada’s costliest R&D project. With U.S. and U.K. buyers uninterested, Diefenbaker canceled it, destroyed prototypes, and threw 14,000 out of work. The real failure was refusing to convert the facility to civilian aviation, forfeiting a Boeing‑like future. The move exposed the recurring wave of anti‑Americanism and capitulation anxieties.

Americanization Exposed by the Gordon Commission A 1956–60s reckoning revealed cultural dependence: U.S. magazines dominated, film distribution was Hollywood’s, and civics education leaned American. By 1967, 58% of manufacturing was foreign‑owned—mostly American—with even higher shares in transport, electronics, and chemicals. Oil and gas were nearly two‑thirds U.S.-owned, and a pipeline debate turned so bitter that MPs were hospitalized and one died. Alarm over the branch‑plant model spanned labor and conservative camps alike.

Branch Plants and a Crippling R&D Gap The branch‑plant system kept extraction and assembly in Canada while centralizing finance, marketing, and R&D abroad. U.S. firms spent four times more per capita on private R&D, and 95% of Canadian‑registered patents were foreign‑held. Northern earned just 1% of revenue from its own designs, steeped in complacency. Bell considered selling or shuttering it before choosing to build a self‑sufficient Canadian innovator.

Bell‑Northern Research: Canada’s Bet on Brains Northern’s engineers, early to the transistor, became Canada’s largest microchip supplier by the late ’60s and built the Trans‑Canada Skyway and satellite‑tracking antennas. Yet only 6% of products were Canadian‑designed by 1969. In 1971, Bell‑Northern Research opened in Ottawa, mirroring Bell Labs with a $500 patent bounty and a campus ethos. Led by a Bell Labs veteran, BNR set out to leapfrog its mentor.

From Analog Exchanges to Digital Dreams Switching progressed from human operators to electromechanical rooms to electronic gear. Digitizing calls promised lower costs, higher reliability, multiplexed conversations, and features like call forwarding and busy‑line alerts. Codecs could bridge analog and digital, but costs kept them for long‑haul links; no local digital switch yet existed. Canada jumped into a seven‑country race from the back of the pack.

Monopoly Complacency Creates an Opening AT&T’s dominance skewed incentives, smothering threats to its infrastructure. Answering machines emerged in the 1940s but were delayed to the 1970s; wireless phones were demoed in the 1970s but stalled to the 1990s. Digital switching endangered the incumbent ecosystem, and even within Bell Canada some feared it would cannibalize new analog gear. John Roth’s answer was blunt: cannibalize yourself first.

SL‑1’s Breakthrough and a New Corporate Identity Northern’s SL‑1 launched at Disney’s “Digital World” in 1976, enjoying a two‑year head start as the only local digital switch. It became a global bestseller, scaling into the DMS family that handled 100,000 calls per switch. Homegrown designs leapt from 6% to 50% by 1975 and to 70% by 1977. The company rebranded to Northern Telecom, listed in Toronto and on Wall Street, and grew earnings from $5 million to $111 million with 33,000 employees.

Ma Bell’s Breakup, Nortel’s Big Break After a decade‑long legal war, the 1982 breakup shattered AT&T into 22 Baby Bells. Freed to choose suppliers, 21 embraced Northern after years of being taken for granted by Western Electric. Northern vaulted to #2 in North America, while its stock price tripled by 1984. For the first time, it made more in the U.S. than in Canada, breaking the branch‑plant curse.

A Southern Push Fueled by Spectacle Northern built major U.S. plants in California, Texas, Georgia, and North Carolina, hiring 13,000 Americans. It wooed elites with stunts from a Fortune 500 cruise to cutting a hole in a trade show roof. Backed by Bell Canada’s capital, expansion felt unstoppable.

Bell Canada’s Goldilocks Monopoly Bell Canada avoided an AT&T‑style breakup because its monopoly never covered the whole country. Sparse regions were costly, the Maritimes ousted Bell, Prairie provinces nationalized systems, and B.C. was never captured. Bell’s power clustered in the Windsor–Quebec City corridor—big enough to dominate, small enough to be ignored. Weak enforcement and political indulgence helped, as did the chance to let the U.S. giant implode first.

From FIRA to ‘Open for Business’ Relations with Washington soured—Cuba, Vietnam, sudden tariffs—prompting creation of FIRA to screen foreign investment. FIRA pleased no one as Trudeau battled national unity, regional anger over oil policy, and the harm of the Sixties Scoop and residential schools. With nationalism splintered, business pushed high tech, lower taxes, and access to U.S. markets. Brian Mulroney arrived with Reagan‑Thatcher economics, privatizing 23 Crown corporations and gutting FIRA into Investment Canada.

Free Trade Fights and a Nation Divided A history of U.S. protectionism made Canadians wary of bilateral free trade. John Turner argued for multilateralism and hammered the risks in 1988 with dramatic ads and a searing debate confrontation. Despite a surge, the Liberals lost and Mulroney’s pact passed with carve‑outs like lumber and dairy. The ring was cleared for a direct American contest.

An American Voice with a Canadian Passport Northern hired Edmund Fitzgerald, a Republican ex‑Marine, Brewers co‑owner, and heir to a Wisconsin shipping dynasty, to win Washington. He lobbied against hostile bills, and Northern replaced AT&T switches in the White House. Expansion went global—Europe, the Caribbean, the Pacific Rim—with a historic first in Japan. After a Tokyo‑area quake in 1987 broke mechanical systems, the fully digital DMS‑10 stayed up.

Fiber Optics and Peak Confidence Building on Bell Canada’s early fiber optics research, Nortel unveiled FiberWorld nodes pulsing lasers through glass at 2.5 Gbps. Its vertically integrated model—CPUs, OSes, boards, and metal—won a multi‑year head start. Customers expected decade‑long lifespans with backward‑compatible upgrades, and Nortel priced accordingly. Riding that wave, it entered the 1990s on top, momentum masking how quickly the telephone era was ending.

An Ego Ascends and Wields the Knife Edmund Fitzgerald elevated Paul Stern, a former IBM executive whose ego filled the roles of President, CEO, and Chair. He barnstormed on the corporate jet, shuttered factories, slashed budgets, and purged dissenting VPs. Northern Telecom had by then been shortened in practice to Nortel. By 1991, it matched AT&T with a 40% U.S. switching share.

Cuts Bite Back and Control Shifts By 1993, Stern’s cuts reached R&D, product updates lagged, and reliability issues emerged. Atlanta Bell dropped Nortel, and AT&T regained ground. Once hailed as a genius, Stern was recast as a tyrant. Bell Canada intervened.

1993: Leadership Upheaval at Company and Country 1993 brought a major leadership shakeup for both Nortel and Canada. The year before, Boris Yeltsin toured BNR’s Ottawa labs and jokingly tried to pocket a microchip. Bell Canada blocked the appointment of Stern’s close ally as President. In his place, it slotted one of its own: Jean —.

From Paul Stern’s Exit to Monty’s Challenge Furious at being undermined, Paul Stern resigned in disgrace and walked away with a $5.4 million golden parachute, cementing a culture of costly exits. Jean Monty stepped in as CEO amid a deep Canadian recession in 1993. Nortel’s stock sagged with the economy, leaving him a difficult turnaround to manage.

Chretien’s Deficit-Driven, Free-Trade Consensus After scandals and plummeting popularity, Brian Mulroney resigned, and the PCs suffered a historic wipeout. Jean Chrétien won power and focused relentlessly on cutting the deficit. Despite hints at renegotiating NAFTA, he let a largely finalized deal stand, reflecting an acceptance that foreign capital was necessary. The free‑trade debate was effectively closed as protectionism was deemed passé.

Deregulation Reshapes Telecom A sweeping deregulatory wave tore up the old order: Bell’s long‑distance monopoly ended and its Nortel supplier deal was scrapped. Phone and TV companies could enter each other’s markets, and wireless opened a new frontier. Survival meant diversifying far beyond traditional telephony. The U.S. mirrored this shift with the 1996 Telecom Act, which unleashed capital and seeded the dot‑com surge.

AT&T’s Spin-Off Creates Lucent, the New Giant Shunned by buyers who did not want to fund a rival, AT&T spun off Western Electric, reborn as Lucent Technologies. Lucent towered over Nortel in size and prestige, buoyed by Bell Labs’ Nobel pedigree. Its 1996 IPO raised a record $3 billion and made it a retail darling. Yet both companies were still telephone‑centric and unprepared for the coming internet upheaval.

The Web Upends the Old Guard The World Wide Web converged text, images, voice, and compressed video onto home PCs. Existing copper phone lines carried internet traffic, giving telcos a built‑in distribution advantage—if they could adapt. Cisco, nimble and Silicon Valley‑born, emerged as the archetype of the new model. An industry identity split was about to determine the future.

Bellheads’ ATM vs Netheads’ IP Bellheads favored ATM, echoing circuit‑switched calling with dedicated, high‑capacity links. Netheads backed decentralized IP packet switching, resilient to failures and hostile to granular billing. ATM aligned with the optical backbones of Nortel and Lucent, while IP empowered Ethernet and routers that propelled Cisco. By the mid‑90s IP had decisively won, as dial‑up era users tolerated latency for email and downloads.

Nortel’s Awakening and the Need to Pivot Users prized the open, resilient IP model over ATM’s elegant but mismatched promise. Nortel faced a strategic reckoning to move decisively into IP. The stage was set for leadership to redefine the company’s purpose.

The Right Angle Turn to the Internet Two months in, new CEO John Roth emailed 74,000 staff a manifesto—“The Right Angle Turn”—to pivot Nortel to the internet. A personal discovery via online shopping convinced him the web was the future. Management questioned internal IP readiness despite engineers’ existing work. A widening trust gap primed a radical restructuring of R&D.

Erasing BNR, Nortel’s Research Soul In 1996 Nortel dissolved BNR and absorbed its 17,000 employees, scrubbing the brand overnight. Possible motives included poor standalone profitability, a perceived culture of arrogance, and the need for tighter cost control. The company de‑emphasized hardware, recasting itself as a software‑driven networks firm. Future innovation would increasingly be sourced externally.

Merger Whispers and Strategic Deadlocks Speculation swirled that the Big Three—Nortel, Lucent, Cisco—might pair off, threatening to crush any outsider. Product overlap, regulatory alarms, and personal animosities handicapped a Lucent tie‑up. A Nortel‑Cisco match promised legacy plus IP prowess. Nortel ultimately chose a different path to acquire internet credibility.

Buying Bay Networks to Buy an IP Future In June 1998 Nortel bought Bay Networks for $9.1 billion in stock, rebranding to Nortel Networks and installing Bay’s Dave House as president. Markets derided the deal as overpriced and late, knocking the shares. Lucent, locked out, countered with a $20 billion Ascend buy, while Cisco accelerated acquisition bingeing. The arms race intensified, and Roth felt vindicated.

Acquisitions Without a Compass Between 1999 and 2000, Nortel averaged a deal a month, from niche R&D teams to major players. Alteon cost nearly $6 billion, Xros $3 billion for micro‑mirror optical switching, and Clarify $2.1 billion despite unclear fit. Some targets were snapped up simply to deny rivals. Headcount swelled to roughly 95,000 across key hubs like Richardson and Maidenhead.

Building for Speed in Web Years Internet R&D surged from 5% to over 60% by 1999, while optical speeds jumped from 2.5 to 10 Gbps. Multi‑year product cycles were compressed into quarterly “Web years.” Marketing and training reframed Nortel as hyperconnected and fast. Careers cycled quickly as teams and managers turned over at breakneck speed.

Silicon Valley North Takes Flight Nortel alumni seeded a sprawling Ottawa tech cluster of over 1,000 firms employing 75,000 by Y2K. The region grew faster than Silicon Valley and earned the “Silicon Valley North” nickname. Nortel directly employed one in five local tech workers. Canada’s capital city was recast as a global technology center.

A Magnet for Talent and Money Nortel spent $5.9 billion on R&D in 2000—more than all other Canadian companies combined. Campus recruiting rivaled sports scouting, hiring one in five engineering grads and up to one in three advanced‑degree holders. Strong pay, paid training, flexible culture, and lavish perks made it a coveted employer. Local economies thrived on Nortel’s prosperity.

Selling the Brand to Fuel the Boom Nortel’s “Come Together” campaign pitched a new identity centered on networking. Consumer‑facing ads aimed at investors more than switch buyers. The branding primed broader public participation in the stock story.

Speculation Outruns Fundamentals By 2000, Nortel equipment carried roughly 75% of North America’s backbone internet traffic, but stock values were driven by expectations. Market caps drifted from sales realities, as comparisons with Newbridge showed. Prices reflected speculation, not intrinsic worth. Information asymmetries and market mechanics widened the gap.

Home-Field Advantage on Bay Street Currency frictions and legal caps on foreign holdings pushed Canadians toward domestic equities. A shift from defined benefit to defined contribution pensions moved vast public workforces into the market. The Canada Pension Plan prepared to invest surpluses alongside major provincial funds. These forces primed a surge into Canadian stocks.

Tax Cuts, Online Trading, and the Feedback Loop Capital gains inclusion fell from 75% to 50% in 2000, luring retail investors. Online trading platforms made day‑trading ubiquitous. Rising Nortel prices generated media coverage that attracted more buyers. A positive feedback loop formed around a single national champion.

Index Gravity Pulls Everything Toward Nortel The TSE 300’s weighting magnified Nortel’s rise from under 5% in 1998 to 16% by early 2000. Stock splits and abundant options swelled the share count, even as dilution concerns grew. BCE still held 39%, distorting both firms’ valuations. A structural fix would soon expand Nortel’s float and autonomy.

The Butterfly Plan Unleashes Shares BCE distributed 0.78 Nortel shares per BCE share and doubled Nortel’s count, adding 502 million shares to the market. This separation granted autonomy while enabling BCE’s media ambitions. Nortel immediately became Canada’s most widely held stock and jumped to 26% of the TSE 300. Index trackers were forced buyers, pushing prices and weight higher.

Paying with Stock Supercharges the Spiral Nortel funded most acquisitions with shares, issuing 972 million new ones while escrow locked much of the float. Index formulas boosted Nortel’s weight even before those shares could trade, creating scarcity. Fund demand exceeded supply, lifting prices and weights in a tightening loop. By mid‑2000, Nortel dominated 38% of the entire Toronto exchange.

The Nortel Rule, Euphoria, and the Hidden Hole Ontario lifted the 10% single‑stock cap for index funds, turning the TSE 300 into a de facto “Nortel Index” embedded in pensions and portfolios. The Canada Pension Plan’s TSE 300 tracking put retirement savings squarely on Nortel’s roller coaster. FOMO and patriotism swelled participation as Nortel surpassed Lucent and peaked at $124.50 with a $400 billion valuation, ninth worldwide. Beneath the spectacle, Nortel had not posted a profit in four years. A century‑old enterprise had set the stage for a fall that would shake Canada.