[Telcos blasted]
As my kids would say, "Singe!!!"
<<<The Wall Street Journal Interactive Edition -- December 8, 1997
Digital Warriors Want Baby Bells' Blood
By RICH KARLGAARD
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 IQto 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.
'Stupid Jerks'
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 Vadaszto 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.
Smooth and Superb
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.>>> |
