kanta; Food for thought:
a) recent editorial WSJ on telcos ( and "swithes", and NN , gg ).
b) forhtcoming Asia scenario in Barrons, by ex-fed Governor Lawrence Lindsay, ( who ought to know what he is talking about.).
c) Also from Barons, what the market expects wed, 12/10/97 from Japan.If we don't get it,......
TA
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a) Manager's Journal:
Digital Warriors Want Baby Bells' Blood
* By Rich Karlgaard
12/08/97
The Wall Street Journal
Woody Allen has been overtaken by events. In the digital economy,
showing up isn't enough; speed and brains are 90% of success. Look no
further than mighty Microsoft, a company built on IQ and mental speed.
The company is remorseless about acquiring brains -- logical,
fast-twitch brains. Though the courts have virtually banned IQ tests in
the workplace, Microsoft scoots around this restriction, as any dazed
job applicant will tell you. I once spent a week on the road with CEO
Bill Gates; always at the top of his agenda were questions like: Who's
smart, who's not? Are our guys as smart and quick as Netscape's and
Sun's? How do we allocate IQ to the highest use?
And it's not just Microsoft. Talk to digital luminaries like Intel's
Andy Grove or Yahoo!'s Jerry Yang, or to any of the financiers who
kindled the personal-computer and Internet industries, like the venture
capitalist John Doerr. These rich brainiacs may closet it a bit more
diplomatically than Mr. Gates does. But to the grandees of the digital
aristocracy, if you want to be taken seriously, let it be known that you
scored an 800 on your math SAT way back when.
Speed and brains. Do not forget them as you handicap the coming
Armageddon between the PC-Internet industries and America's local phone
companies.
Armageddon? Oh, it's coming all right. The digital crowd hates the
telcos. Hates them like ball bearings hate sand, like sailors hate the
doldrums. "They're stupid jerks, and they must be destroyed," says
Robert Metcalfe, the man who invented Ethernet and founded 3Com. Mr.
Metcalfe now is looking into legal measures to break up the local-loop
telephone-company monopoly. He wants the local telcos to compete on one
another's turf. "I want to expose their laziness, their stupidity, and
their fraudulent price structure," Mr. Metcalfe says. He is sure that
rivalry in the local loop will drive down the price of high-speed
Internet connections by 90% within a year.
The digital crowd's withering view of the phone companies is shaped
by the rapid changes of their own industry. The first microprocessor,
the Intel 4004, could crunch about 400 instructions a second when it
made its debut, in a calculator made by Busicom, in 1971. The fabled IBM
Personal Computer of 1981 could zip through 330,000 instructions a
second. Today's run-of-the-mill $1,500 PC can handle 200 million
instructions a second. Digital's Alpha processor can tick off some one
billion instructions per second. Computer power on silicon has increased
a million-fold or so in just over a quarter-century.
Contrast that to the telcos. The telegraph wire that transported
Samuel F.B. Morse's first message -- "What hath God wrought?" -- did so
at four bits per second. It's now 153 years later, and the average PC
user is lucky if his phone line can support 28,800 bits per second.
That's a 7,000-fold increase in bandwidth in 153 years. Piddling, say
the digital crowd -- hardly any improvement at all!
On this point, the telco industry will protest vehemently, boasting
about its trillion-bit-per-second laboratory demonstrations over short
lengths of optical fiber, or its proven billion-bit-per-second
long-distance backbones, or its many schemes for digital subscriber
lines (known as xDSL), which promise someday to unleash cheap
million-bit-per-second torrents into the home. Counters the digital
crowd: Someday? Precisely the point! Your underlying technology is
improving at the rate of 40% to 60% a year, but the consumer isn't
seeing any of it. You flat-footed monopolists are afraid to roll it out!
"Our industry is driven by Moore's Law," says the Silicon Valley
investor Roger McNamee. "Theirs is driven by Moron's Law -- the morons
who run and regulate American's telcos." In the harsh view of Mr.
McNamee, Mr. Metcalfe and others, the telco chieftains, terrified of
rapid change, refuse to expose their protected T1 line price structure
to their own vastly cheaper (and available) alternatives like xDSL.
Their paralysis is holding up the future of the digital industries, the
fastest-growing part of the American economy. MIT's Charles Ferguson
claims telco foot-dragging accounts for a full percentage point loss to
America's gross domestic product.
Silicon Valley financier Andy Kessler says the root of the problem is
the telcos' zero-sum mentality. "They don't believe that demand for
digital bandwidth will grow with supply. We from the PC industry know it
will. . . . The more people have, the more they will use it. You can
safely cannibalize; the PC industry does it all the time."
Indeed, those in the digital crowd have learned to thrive on rapid
change, elastic demand and product cannibalization. They are accustomed
to 20% to 75% annual growth, producing a virtuous cycle of high market
valuations and risk-loving millionaires. Moore's Law dictates
exponential gains in processing power. Increases in supply create their
own demand; the growth goes on and on.
Microsoft and Intel, for example, have market capitalizations in
excess of $170 billion and $120 billion, respectively. Microsoft's
market cap is twice IBM's, and more than the big three automakers'
combined. At those empyrean numbers, George Gilder estimates, the market
is betting on Microsoft and Intel to grow 25% a year indefinitely. Ask
Bill Gates or Andy Grove what keeps them up at night. Thinking about
growth! Growth drives the nosebleed market caps . . . the stock-option
incentive programs . . . the immense personal fortunes. Anything that
gets in the way of these good things must be destroyed. What is the
chief obstacle? Puny bandwidth, supplied by the local phone companies.
If customers can't get a high-speed Internet connection, they might not
upgrade their PCs. These telco morons aren't keeping up! They must be
destroyed!
The digital crowd isn't waiting around. Mr. Metcalfe is out on the
conference trail, behind every microphone, whooping it up for a
class-action suit to break the local phone-company monopoly. Intel,
Microsoft and others are taking a two-pronged approach. The first prong
is to pressure the Federal Communications Commission to drop its
universal service requirement for any new digital services, such as xDSL
switches. Carps one Washington lobbyist for a PC company: "The RBOCs
[regional Bell operating companies] cry poor about the burden of
providing universal service. Fact is, they like it. It's an excuse for
not putting their money at risk on new services. Last year, they asked
FCC to apply universal service to the Internet." Who will prevail before
the FCC? The lobbyist laughs. "I have six people in my office. Bell
Atlantic has 60 lawyers in theirs."
That frustration explains the digital crowd's second prong: Finance
the telcos' competition. Microsoft recently invested $1 billion in
Comcast, a cable company, which can provide up to six million bits per
second to the home via cable modem. Venture capitalists John Doerr and
William Randolph Hearst III were behind another cable-Internet scheme,
At Home, with help from TCI's John Malone. Intel's Mr. Grove, famous for
his dictum "Only the paranoid survive," ordered his fellow board member
Les Vadasz to dig deep into Intel's purse and spend up to $1 billion a
year, if need be, on any credible scheme that spurs PC demand. Topping
the list are several nontelco high-speed connections to the Internet.
If you are running a regional Bell operating company or a local
exchange carrier right now, sheer terror is an appropriate response. The
head of one Bell company, sensing the coming battle, recently asked me
how he could "make friends" with the digital crowd. I felt for him. He
is a Bell system lifer, having joined his company in 1962 and piled up
enough telephone merit badges to reach the top. The genial sentiment,
the desire to "make friends," is built into the psyche of career
telephone executives. Friends with the FCC and the state public utility
commissions, friends with long-distance carriers, unions, activists,
environmentalists, diversity hustlers . . . it matters not. Shake hands
and lift a glass. Nobody's survival is at stake. So relax. We're a
monopoly! We can pass on our costs.
The affable local telco chief is smooth and superb at this game. But
the digital crowd couldn't care less about being friends. Theirs is a
blood sport.
To be in the digital crowd's cross hairs is a horrible thing. Arrayed
against you is the greatest collection of brains and money in the
history of business. Your opponents in this battle, up and down the
management ladder, have 10 or 20 IQ points on you and your people. Your
opponent is quicker to execute a business plan by orders of magnitude.
And your opponent harbors a far greater motivation than you do -- for he
owns piles of shares in his company, and you do not.
It's a new era. This one favors IQ and speed and a supply-side
mentality -- not exactly your long suits. Barbarians, extremely rich
ones, are at the gate. God help you.
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b) Monday, December 8, 1997
A Visitor Returns
With Scary Tales From the Orient
By Jim McTague
Lawrence Lindsey, a former Federal Reserve governor, returned recently from a fact-finding trip to Tokyo and Seoul, where he pored over the tea leaves with top government officials. It was an eye-opener for Lindsey, who currently scrapes for a living as a managing director for Economic Strategies Inc., an investment-advisory outfit with headquarters in Manhattan.
The coming weeks promise massive bankruptcies in both countries, Lindsey says. In Korea alone, business failures of every kind could amount to a staggering 25% of that country's gross domestic product. This gory estimate comes not from Lindsey's graphing calculator but from a highly placed Korean official.
Though the cataclysmic events are healthy long-term for those economies -- they transfer capital from weak hands to strong ones -- a consequence is sizable short-term risks for investors. "All the good news already is out for at least the next five weeks," Lindsey warns.
He has been prescient on developments in Asia, advising clients to bail out of Japanese investments last June and to ditch their Hong Kong stocks in September. He likens events in Japan to the severe credit crunch that enveloped the U.S. in 1992 and '93. The Japanese constriction, however, is considerably more severe, he states. And though the government seems to be prescribing the correct laxative, it waited far too long, in Lindsey's view, to treat the patient, making matters worse by raising taxes and publicly eschewing the use of taxpayer funds to close weak financial institutions when government intervention was required as a confidence-builder.
Lindsey also lays some blame on the Clinton Administration for jawboning the Japanese against reducing the value of the yen and for allowing the Federal Maritime Commission to instigate a trade war last October over shipping fees. Regardless of the merits of the case, the timing was awful, says Lindsey, who holds down a second job as a scholar at the American Enterprise Institute.
The credit crunch in Japan, like the one here, was engendered by a collapse in commercial real-estate prices, Lindsey observes. Loans made by the banks, using office buildings and stores as collateral, suddenly were questionable at best, requiring the banks to ante up more capital to be in compliance with international standards of safety and soundness. Then the Japanese stock market plunged. Because the banks in Japan have so much of their capital tied up in stocks, this event further eroded their financial condition.
There are two obvious ways for the banks to rebuild capital, Lindsey says. The first is to stop making commercial loans, which are among the riskiest types of lending and require banks to set aside more capital as a backstop than they would for other kinds of loans. Banks have done this, starving the private sector for credit as a consequence, which causes more borrowers to default on loans and further weakens the banks. "Clearly this has led to a downward spiral," says Lindsey.
Another way for banks to raise capital is to use deposits to buy government securities, which require little capital in reserve. But depositors, spooked by the failures of several large banks and securities firms, are withdrawing their money and stuffing it under their futons.
Lindsey says the Japanese government will inject cash into the banking system come January in an attempt to end the credit crunch. But until depositors regain confidence in banks, the inflow through the back door may be offset by savings going out the front.
Confidence-building is no easy task, Lindsey observes, adding: "Certainly there is a problem of veracity in the Japanese system." He says the current crisis is similar to the one the U.S. faced in 1932: "They have nothing to fear but fear itself. A loss of confidence that is quite advanced is their biggest problem." Lindsey advises that investors await three key events before committing money. The first is this Friday, when a committee appointed by the Liberal Democratic Party will release recommendations for a government response to the banking crisis. Lindsey says the odds are 50-50 that the public will find the proposals acceptable. Then, at the end of December, annual lines of credit for Japan's construction industry and many other private-sector companies come up for renewal. "They won't be renewed in this environment and the wave of bankruptcies will be impressive. It will be a very tough time for their equities markets." And finally, on January 10, the government will unveil a supplementary budget with a rescue package. Until then, all the risks are on the downside in Japan, he says. As for Korea, he says, watch out-period!
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c) Monday, December 8, 1997
Great Expectations in Tokyo; A Strategist's Case for Latin Bolsas
By Peter C. Du Bois
Amid great expectations for a detailed Japanese government plan, expected Wednesday, to aid the nation's ailing financial sector, investors of all stripes last week in effect told Tokyo officials to stop promising remedies down the line and come up with a specific package now.
Just imagine what could occur if Japan once again fails to please Mr. Market, the ultimate arbiter of public actions.
What does this powerful force want? First and foremost, massive amounts of government money (read: the Japanese public's) to beef up a fund that bails out depositors in failed financial institutions. Second, a firm policy of rescuing depositors while letting managements and shareholders sink. Third, immediate disclosure of the naked truth about each institution's financial condition. This would allow an orderly transfer of deposits from zombies to well-managed institutions. Last but not least, ongoing injections of liquidity into the banking system.
The ball clearly is in Tokyo's court. May the match end with applause, not tears.
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