Most Excellent Article from wsj.com (not directly LSI related):
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Manager's Journal
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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Shane (the bandwidth paradigm - be a part of it or be a CPU... :-} ) |
