Mon, Jul 30, 2001 page19

• What's coming after the fall in technology

  The US information technology industry is in a recession and there is no sign yet of an upturn. Even areas with a high concentration of such businesses -- renowned for their problem-solving inventiveness -- can only sit back and hope that the bad times run their course quickly. `The New York Times' sat down four of the industry's big wheels and asked them for their opinions on how they thought the current situation was going to pan out

  • NY TIMES NEWS SERVICE
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  The American economy may or may not be in a recession -- but the information technology industry surely is, with no sign of an upturn. Lately, Silicon Valley, fabled for its invention, its can-do mentality and its dotcom fever, is looking a lot less fabled.

  For two hours recently, four veterans of the valley -- Craig Barrett, the chief executive of Intel; Judith Estrin, a serial entrepreneur who is now chief executive of Packet Design Inc; Mitchell Kertzman, the chief executive of Liberate Technologies; and Eric Schmidt, chairman of Novell and Google, -- met at the Garden Court Hotel in Palo Alto to discuss the state of the high-tech world. Asking the questions of these executives, who sit on the boards of eight other companies, all told, were John Markoff, Matt Richtel and Judith Dobrzynski of The New York Times.

  

  Overcapacity -- and its probable longevity -- was on their minds.

  

  So were intellectual property issues, the lack of interest in technology among US students and the lack of interest in innovation in the valley, frustration with Wall Street analysts and pop-up ads on the Web, even their inability to get broadband in their homes.

  Judith H. Dobrzynski: What's the mood in Silicon Valley? When do you think you might get out of this downturn?

  

  Barrett: I'm more concerned about synchronous world recessions than I am in what's exactly happening in Silicon Valley or the US, even. The economy's relatively weak, obviously, in the US, in the high-tech sector. It's weak in Europe. It's actually pretty strong in Latin America. It's strong in the emerging Asian economies -- India, China, for example. Over all, we're all operating at one plateau level down from where we were six to nine months ago.

  

  Kertzman: Booms, big booms, are really followed by very small slowdowns. Many of us are taking out our old "what do you do in a down business cycle" chops and managing our businesses that way as opposed to, "Oh my God, this is the end of the world."

  Estrin: I think that the past five years was the anomaly, not now. A set of very real technology issues -- PCs, cellular, the Internet -- that should cause a boom, coupled with overreaction and kind of overexuberance, and then throw the Y2K buying on top of it. What we're seeing now is somewhat a normal overreaction to overreaction on the other side. The reason this is so hard is because the technology industry is such a young industry -- you have so many managers, technologists, analysts, spectators, press that have never seen anything else. Their careers started in that 10 years as technology became it. And so now everybody's like, "Oh my God," because they haven't seen anything else.

  Schmidt: Things may actually be worse than we're saying. You had this enormous overbuild that occurred in telecommunications, which was largely vendor-financed. You have all of the issues around PC market saturation in certain key markets. You have Windows XP as the next great white hope there. You have these incredible physicists who work at Intel who continue to build new processors, faster and faster. And the value proposition isn't necessarily there for the whole solution -- the next "killer app" has not yet evolved. On top of that you had the Internet, which is the world's biggest opportunity to hype something because everyone could see that it was transformative. So you have this enormous overbuilding, which will take a fairly long time to overcome. It's overbuilding at the software level, at the systems level, at the infrastructure level, at the fiber optic level. Meanwhile, the technology continues to get better. I think the slowdown could be quite a bit longer than all of us would like it to be.

  Barrett: We have this tremendous overbuild but none of us can get broadband to our home.

  Estrin: Typically, when you're in a time like we are now, what gets you out of it is some new technology, some real breakthrough that is not incremental. We have a lot of work to do on the Internet. If you look at the next three to five years, it is good incremental, but it is incremental progress. It's not the cell phone where the cell phone didn't exist. It's not PC's where PC's didn't exist.

  Schmidt: I know what it was. Unfortunately, it was Napster. Napster went from zero to 50 million users in six months. If that's not a killer app, I haven't seen one recently. Unfortunately, it happened to have this mild problem that it was illegal. So it shows you that there at least was a path, unfortunately an illegal path.

  Estrin: Too much was done over the last five years without thinking about business models and thinking about making money. And the problem with Napster is the same problem with too much of the initial push into the last mile. There was no business model for doing it.

  Q: If you're an entrepreneur today and you're thinking about business models in the content area, how do you think about intellectual property? Does your model presuppose that information is free?

  Kertzman: You'd have to assume that "free" does not equal "high quality" in a more Darwinian economic environment. And if you're thinking about a content-based business, you need to create great original content that people will pay for in some form or another, or if you're going to redistribute content it means you probably need to add value somewhere to the content's creator.

  Q. But could the advertising model still work?

  Kertzman: We are certainly seeing an overreaction to the damning of all advertising and the value of all advertising on the Internet. We're going through a particularly nasty little business of pop-up ads -- but are pop-up ads, being annoyed by them, any different from "ring around the collar" in Wisk commercials? Annoying advertising has its place in the pantheon of advertising. And, by the way, it seems to work.

  Estrin: Not everything can be paid for by advertising. So there have to be different models. And people have to be smarter about thinking about ads and what's effective where and how you pay for things, the same way they do in print or on TV.

  Q: What do you tell 40 million kids who know how to turn a product into data that they can trade freely?

  Estrin: You teach them some values. You can walk into any store and steal something, and kids don't do it. We've got to bring up a generation that understands that if you steal a movie over the Net, and it is Pearl Harbor, that is stealing.

  Kertzman: You've got to make it easier to do something legally than it is to do it illegally.

  Barrett: I'd be aghast if we assumed that recent college graduates took the attitude that they had during college and carried that through their full professional life, moral life, social life, any other life that they have. Values change; attitudes change. And this whole concept of intellectual-property creation and then being able to protect content or intellectual property is key. If you don't have the ability to protect that which you create, society falls apart.

  Q: Is this going to work itself out without the need for new laws?

  Schmidt: I think the laws are sufficient when enforced, at least in Western-world countries. There are issues around third-world countries. And people are lobbying in the right ways there. There needs to be some form of protocol or standard way in which one sells and markets technology. There is an enormous demand for all-you-can-eat subscription services for proprietary intellectual property. People are tired of having 500 accounts which charge them US$5 a month for this source and that source. There will be aggregators who will appear, whether it's the Lexis-Nexis type aggregator that we saw over the last 20 years or something new. You need a stronger notion of identity and you need these aggregators to put it all together. And you need an economic model which may be subscription, may be advertising or may be some third way that sort of funds everybody. The problem is, while what I've said is pretty obvious if you think about it, none of the actors are behaving in a systemic way. Industry is in collision because each company has a model that is under attack, either because there isn't a protocol or because of thievery. And my guess is we'll end up with lots of pressure on the intellectual-property producers to use some common system. In addition, we're going to see pressure on their business models. And then we're going to have a certain percentage of people who are illegally stealing. And that's what happened, if you look at the software industry 10 years ago. There was some percentage of people who would take the floppies and copy them. But most people didn't. And the model kind of worked. And that's a viable model for all of us.

  Estrin: Also, there is some technology needed here to allow the enforcement -- to make it easy enough to do the protection so that in the end you don't steal, or the business doesn't grow. We're not quite there yet. The technology industry and the entertainment industry have to engage together to solve this.

  Q: What about Washington? What is your biggest policy concern?

  Barrett: Education. We talk a lot about the whole concept of the Internet being free and protecting intellectual property and all that. It would probably help -- this may be a minority opinion here -- but the government's preoccupation with not putting taxes on Internet transactions kind of gives the wrong message in this whole direction as well. There are big regulatory efforts, problems associated with broadband for the last mile. Whether you talk cable or specially twisted copper DSL connectivity, I think the biggest deterrent happens to be government regulation and the lack of people wanting to take the chance to invest money in that space, if in fact they can have a reasonably high probability of return. And the regulatory things work in the wrong direction there. But I would have put education on a plateau three levels ahead of everything else.

  Estrin: We, as an industry, have to be very careful in immediately jumping to the conclusion that it's up to the government to solve these problems for us. But one of the things that really concerns me is the lack of Americans going into sustaining our industry. We have a problem of people who are growing up in America choosing not to go into technology and not being excited by technology. People often ask me, "Well, why aren't there more women in technology?" That's a problem, but there are not enough American men in technology, either. And to me, that goes back to our educational system and how we're bringing up our kids.

  Schmidt: The Bush budget, as currently proposed, significantly decreases on a per capita basis the spending for non-health-care-related research. And a tremendous amount of money has gone into medical and other. That's a problem because a number of us, certainly myself, got here because we were funded on, essentially, [government) grants. If you look at the number of computer science graduates that have been produced in the last five-ish years, the absolute number is not growing; in many cases it's declining. It's actually a huge crisis brewing. This could be relatively easily solved by a relatively small amount of money increased in basic research funding for nonmedical-related research.

  The second thing is that there's clearly going to be pressure around privacy legislation of some kind. A lot of people are worried that the privacy legislation will end up being written by a large number of lobbyists from all the different sides, and it will not end up looking like whatever outcome people really think it should. If you look, the last time we went through this was with the Digital Millennium Copyright Act, which was essentially a war between the intellectual-property people in the broadcast industry, media industries and high tech, and it sort of became this weird compromise that people are working on. So all of us, I think, have Mitchell's view, which is let's approach any legislation here very slowly.

  Q. Are there limits to growth in Silicon Valley? How close are we?

  Schmidt: I'm waiting for what I would call the mark to market. We've had this sort of price collapse in the stock market and commercial real estate has dropped very, very dramatically. However, salaries of key people have not fallen. A lot of data says the salaries are going up. And furthermore, housing prices, though not growing, have not fallen dramatically. There's a lot of discussion about people leaving the Bay Area, but certainly the key highways, 101 and 280, are still full of all those dot-commers, I guess looking for jobs. Because they haven't left. From a quality-of-life perspective, it's pretty clear to me that this area is going to remain a mecca. I don't see that this has somehow become a less desirable place in any fundamental way.

  Barrett: It's always fun to throw a little data into these discussions. The demographics of the valley are interesting. Most projections show that the job growth rate is probably going to be five times the single-housing-unit growth rate, which suggests that A, traffic is going to get worse and B, that long term the price of real estate is never going to come down; it's a supply-and-demand issue. That's just a fact of life in the valley and you have to live with it.

  Q: How do you feel about the role of Wall Street analysts in taking stocks to unsustainable heights?

  Kertzman: Everybody in the chain had a role. I don't think you can single out the analysts. Shareholders had a role. People who didn't know due diligence, people who only listened to the analysts on CNBC. But there's this thing that happened, which is relatively recent, of "price targets" being the analyst's job. When I started doing public companies, price targets were not what they did. They would do earnings estimates, but not price targets. And they would do primary diligence, meaning they would talk to customers, they would look at the market. That certainly went away.

  Barrett: I've never understood how 90 percent of the companies could do better than average. The other aspect is, quite frankly -- and probably Intel's no different than a lot of other big companies -- we've lost some of our investor relations people to go become industry experts overnight. These are people that have been there for two years and never been through a downturn, never been through a eal product cycle. All of a sudden they're out broadcasting to the industry as experts on the semiconductor, computer industry, what have you. They're not held accountable in the same fashion that they're holding management accountable. We make projections. We miss our projections, we get hung out to dry. They make projections and they revise them the next day. And no one goes back and tracks, really, the accuracy of their projections.

  Q: Analysts say that they don't put "sell" recommendations on stocks because companies then deny them access. Do you deny them access?

  Schmidt: The answer is no.

  Barrett: Dead no.

  Q: Do you deny them investment banking business if they put out a "sell" recommendation?

  Schmidt: The answer's also no.

  Barrett: These are fallacious.

  Schmidt: They're just false. And they're offensive. They are made in the industry and they need to be refuted. Companies are highly, highly regulated on how they operate for all sorts of good legal reasons. And the modern-day CEO is so highly constrained on what he or she can or cannot do precisely for that reason. It's a red herring. What I always worry about is when the business seems to be about marketing to its shareholders rather than to its customers. And having now gone through this a couple of times on a personal basis, and I've certainly borne my responsibility for talking about the Internet and its phenomena and so forth, so I share a responsibility as well, I hope we go back to a model where the product that we're selling is the product that the company makes, whatever it is, as opposed to the CEO, the brand, the executives, the shareholders, whatever. Because ultimately the stock price -- I learned this sort of the hard way -- the stock price is the tail of the dog.
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