Samuel Morse gazed toward the sun setting over the Atlantic. He was returning from Europe on the steamship Sully in 1832. That evening, after a day of deck quoits and beef bullion and itchy woollen blankets on chaise-longues, Morse found himself chatting with a stranger. The stranger seemed to know a lot about electromagnetism. "If the presence of electricity can be made visible in any part of the circuit, I see no reason why intelligence may not be transmitted by electricity," said Morse. He retired to his cabin to work feverishly on drawings which would result in the invention of the telegraph.

Years of poverty and disappointment followed, but Morse persevered. Finally, in May of 1844, after Congress had authorized $30,000 to lay a cable from Washington all the way to Baltimore, Morse's first words were tapped out: "What hath God wrought?"

What he did not know was that, on the other end of the line, the stranger he'd met that fateful night was doing his best to confuse the meaning of those words. "That isn't what he said," insisted the man, whose name was Peter Marconi, and whose grandson would be none other than Guglielmo Marconi, inventor of the radio. "No," said Peter, "the message is: 'What hath God bought?' and have I got a stock for you!"

Not only did he have a stock for them, but he peered into what seemed to be a crystal ball. There was a commotion in the room, and messengers were dispatched on horseback from our nation's capital up toward Baltimore, in order to ascertain what, precisely, Morse had said, and what his relationship with this mysterious man might be.

"In the future," Peter continued, I see an invention called... the Fellatone, I think because a fella can hear a tone on it. Or is it telephone? (The crystal ball is a bit hazy here.) Anyhow, I have been authorized to sell you stock in a company that will re-sell minutes from this very cable or ones quite like it."

He took a deep breath. "Cheep Talk [Nasdaq: CHIRP] is an up-and-coming new company that sells minutes on this amazing technology. Because it is new, it is nimble. It doesn't have the burden of owning and maintaining the cable -- so those costs don't weigh it down. It is currently trading at 40 times earnings, and is ready for explosive growth. It's well positioned to take massive market share from some lumbering giants called AT&T, and MCI, and Sprint, because it is able to exploit their weaknesses."

The onlookers at the historic event, aghast at his presentation and at their good fortune, took out their fob-watches and money purses and lined up at the chance to make their great-great-great grandchildren into billionaires. But the rat-tat-tat of the world's first working telegraph began to chatter away at them again.

B-E N-O-T f-O-O-L-E-D, it said,

B-U-T I-N-S-T-E-A-D B-E F-O-O-L-I-S-H.

Whatever did the message mean? The investment pitch was a bad idea because:

1) Facilities-based telephone service providers, such as Cheep Talk, are in a cutthroat, low-margin business

2) Non-facilities-based providers, such as Cheep Talk, are in a cutthroat, low- margin business

3) AT&T, being much larger than the upstart company, will easily be able to muscle it out of the business

4) All of the above

And the answer is:

The answer is 2. Non-facilities-based providers, such as Cheep Talk, are in a cutthroat, low-margin business

The original cold-call Pete, cozying up to the technology that would years later become his umbilical cord, has distorted some fundamental facts of the telecommunications industry. MCI, Sprint, AT&T, and Worldcom are "facilities-based" providers, meaning that they own the telephone network that carries the phone calls. While a reseller like Cheep Talk may compete with AT&T for end customers, Cheep Talk itself (if it were real) would be a customer of AT&T, as it buys long-distance minutes in bulk from AT&T and then resells them to these customers. Thus, AT&T stands to make some money from Cheep Talk even if the nimble little upstart does take some consumer market share. In fact, because AT&T makes a profit even on the discount time it sells to Cheep Talk, when it sells the time itself it makes much larger profit margins than Cheep Talk.

The non-facilities-based providers have extremely low profit margins. This is because they are just reselling something they bought at a discount, something that any company could do. Because there is no barrier to entry into the reselling business, the fighting for market share is pretty fierce and there is a lot of price competition. Owning the infrastructure is far from being a liability -- it is actually an advantage as it gives the owner the ability to control costs and have larger profit margins.

Fortunately, the Fool tapped out his message just in time, managing to elbow aside the startled Morse before disappearing through an open skylight. Peter Marconi (if indeed that was his real name) vanished into thin air; law enforcement officials eventually gave up hope of finding him, and not until 1876, when a second bizarre event occurred, would that that file be reopened.

© Copyright 1995-2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us