re: QWST mentioned in today's WSJ op-ed page...
here's the complete piece:
Telecom Dinosaurs Try To Stave Off Extinction
By RICH KARLGAARD
The proposed merger between Ameritech and SBC Communications has spurred a predictable furor. Editorialists fear a telecom Godzilla. Consumer advocates are in midnight sweats over the vanishing of local telephone service suppliers ("and then there were only four!"). Reed Hundt, former chairman of the Federal Communications Commission, is sounding alarms, as is Sen. John McCain (R., Ariz.), who promises to get the 1996 Telecommunications Act back on the operating table for emergency surgery.
But in the long run, the political uproar hardly matters. The old telco giants are dying, and there's no better proof than their wild attempts to conceal this truth in merger-acquired growth.
Here's a revealing story: It's 1995, and an aide to the top dog of a large Regional Bell Operating Company in the Midwest has arranged a meeting between his boss and a Silicon Valley rising star, John Chambers, CEO of Cisco Systems. Here's how the aide describes the meeting, which progressed poorly: Mr. Chambers talks excitedly about the future of data communications and the Internet, growing tenfold every year. The RBOC head listens, sliding uncomfortably in his seat. The more enthusiastic Mr. Chambers gets, the more dour and agitated grows the telco man. Finally, Mr. Chambers leaves, and the RBOC chief turns a grim eye to his aide: "Why in God's name did you bring him here?
Like a Nail
To a hammer, everything looks like a nail. To an RBOC top dog, every customer looks like a telephone caller. Data transmission looks like a threat. Such poor vision will destroy the old telcos.
Mr. Chambers had it right: Data traffic on the Internet continued to grow tenfold every year--a thousandfold leap every three years. It's still going. A House Commerce Committee report published in March noted a doubling every 100 days, or about a 12-fold annual increase. And everyone is benefiting, it seems. Even the old analog telcos like AT&T and the RBOCs are increasing their data traffic--but at a relative snail's pace of 25% to 35% a year.
The exponential growth of the Internet is reminiscent of Moore's law, named for Gordon Moore, who way back in 1965 noted that his company, Fairchild Semiconductor, could double the number of transistors crammed onto a piece of silicon every 18 months. Mr. Moore sketched a curve and sent it in to Electronics magazine. When it was published, it drew hoots from readers, who asked the obvious question: When does it run out?
It hasn't run out yet. It took about 10 years for Moore's law to deliver the first personal computers, which were pretty toyish. "Who would want one in his home?" asked Ken Olsen, founder of Digital Equipment Corp., in 1982. DEC never committed to the PC market, introducing wildly unsuccessful models in 1982 and again in 1992.
Around the mid-1980s the laughter over Moore's law stopped and the panic and denial set in. At IBM, the PC's chief advocate, Don Estridge, died in a 1985 plane crash. The company replaced Estridge with a loyal corporate blue suit from Armonk; out of mercy, I will not name him. The new executive surveyed Intel's lineup of PC microprocessors and saw that they got better and faster every year. Nothing could stop this. He quickly figured out that if IBM began making PCs based on the new Intel 386 chip, they would begin to cannibalize IBM's pricey midrange computers, which enjoyed absurdly fat margins. Wait a minute, the blue suit mused. Slow down--think! He assured his employers that everything would be fine: The 286 would be the endpoint of IBM's PC line.
This left the door open for Compaq Computer, then a small Texas maker of sewing-machine-sized portable computers. Compaq raced to the market with 386-based PCs. IBM hardly knew what hit it. Within months IBM joined the pack, but it was too late. Since 1986, the PC division at IBM has been unable to string together consistent profitable years, though its computers remain among the best. IBM is still paying a mighty price for ignoring, however briefly, the stark truth of Moore's Law.
I believe the position of the old telephone companies today is much like IBM's and DEC's in the mid-1980s. Things look very good on the surface. Stock prices attain new highs every quarter. Profit margins are not only sky-high, but guaranteed. Growth is solidly double-digit. The only threat is an angry government. In the mid-1980s, IBM had just endured an antitrust ordeal lasting more than a decade; today, the government threatens to block the SBC-Ameritech merger.
But Moore's law proved to be a tornado that nearly leveled both IBM and DEC. IBM's market capitalization hit a high of $106 billion in 1987. By late 1992 the company was out of cash; its stock price had fallen 77%. For DEC, the trend line was even worse. Its market cap fell to $2.5 billion from $26.3 billion during the same period.
When it was all over, Intel and Microsoft had replaced the old giants. Microsoft went public in 1986 with a market value of $525 million; now it is worth $212 billion, second only to General Electric. Intel was fighting off the Japanese in 1986; now it is worth $138 billion. The Federal Trade Commission considers Intel a threat to free competition, and of course Microsoft's dust-up with the Department of Justice makes daily headlines.
The digital-bandwidth tornado is likely to remake the landscape far more quickly and mercilessly than Moore's law did. When it clobbers the old telcos, probably in about five years, the results will be devastating.
So why in the world is everybody worried about megamergers? The government, if anything, should be encouraging them, and so should consumer groups. The only hope for America's aging circuit-switched, copper-based telephone companies is to raise enough capital through mergers to fund a massive overhaul into high-capacity lines and Internet protocol switches.
Sporting Man
I say this as a sporting man. The old telcos don't have much of a chance anyway, so let's give them one. I think that when the tornado hits, the new Intels and Microsofts will have names like Worldcom, Qwest, Level 3, TCG, TCI, IXC, Williams, Windstar, Iridium and Teledesic. Born with a vision for data communications, these upstarts understand the exponential magic of today's technology. And like their counterparts in the PC industry, they see also the miraculous possibilities of elastic demand: The more you reduce prices, the more you spur demand.
Every rise in capacity and drop in price will unleash wild, creative new uses with robust demand. First it was e-mail. Then e-mail with pictures attached. Now Internet telephony. Soon Internet picture phones, video conferencing, Internet radio, television and movies. The desire to produce, send and receive bits will spiral upward with each new cycle of price drops, probably throughout our lifetimes.
It's bad enough that our old copper telcos don't see this, or do but content themselves with ruinously inadequate 25% to 35% growth of data traffic. Why should trustbusting lawyers add to a dying man's burden?
Mr. Karlgaard is editor of Forbes ASAP.
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