During this time the practise of Policy by Press Release rose to prominence as ill-founded concepts like the “Bomber Gap“, “Missile Gap“, and “Submarine Gap” were leveraged to justify a massive expansion in military spending.  U.S. Doctrine from the end of the Vietnam era to the collapse of the Soviet Union in 1991 was to essentially outspend the Soviets while engaging them in proxy guerilla wars in weak communist ally states and financing developing countries through the World Bank.  It is thought by many (mostly Pro-Reagan) historians that it was indeed the US Military-Industrial Complex that won the Cold War and bankrupted the Soviet Union by simply outspending them.

Nowadays, we live under the spectre of far more benign [perceived] enemies.  Most of us in the technology industry fear Microsoft’s Goliath and align with Google’s David more meaningfully than any political discourse, though we only rarely cower under our desks in fear of a Vodka-soaked phone call between Steve Ballmer and Eric Schmidt (which I am positive has happened).

Google only stumbled its way into Microsoft’s crosshairs nine years ago, whereas Microsoft’s founder Bill Gates has long sought to get in on the action on the Internet and the Web in particular.  The two are presently in a pitched battle on a number of fronts, including Search (Microsoft recently launched Bing), Mobile (Google’s Android is a pattern-cut copy of MSFT’s Windows Mobile strategy), The Browser (Chrome versus the dreaded IE), Email (Google is making inroads into institutional and corporate email services), and Productivity Applications (Microsoft Office as an app and a hosted service versus a number of nascent Google Apps).

Most recently, Google responded to the Bing launch by going after MSFT’s supposed crown jewels with an announcement about Chrome OS.  Microsoft then parried with its own vapourware announcement about Web Office.  Engaging Microsoft on another front on an increasingly expansive battlefield might seem like the smart thing to do, but as Kevin wrote, Spite is not a business strategy. This is akin to pissing in your neighbour’s yard just because he took a whiz in yours.

The Soviets, like our more modern evil empire whose Kremlin sleeps in the dales just outside Seattle, were more cagey than we might have thought in those days.  They didn’t match the US and NATO move-for-move in force expansion, and rather than counter Reagan’s famous SDI initiative with a Star Wars system of its own, they simply rejiggered their ICBMs to penetrate airspace using different methods and geared fighters up to be able to shoot down satellites from within the mundane confines of our atmosphere.

No … the Soviets didn’t join in the arms race — instead they were quite content to watch their enemy blow its own brains out, expanding US debt in leaps and bounds (US debt doubled under Reagan in a single year, mostly on the back of military spending) while their own programs pursued less lofty goals, financing battlefield weaponry and troops on the ground in Afghanistan and elsewhere.

We didn’t know it at the time, thanks to a lot of propaganda from our own leaders, but the Commies were actually the underdog.  And like any underdog, the Soviets capitalized on American fear and loathing to nurture an inflated perception of its own militarism and level of armament, hoping that the US would collapse under its own weight trying to keep up — and it nearly worked.  Some would argue that it has — and that our current and previous economic hiccups, heaped atop rampant social problems in the US, are the reckoning for decades of rampant Cold War spending — and may not be remedied anytime soon.

Google is apparently trying to match Microsoft on every front in the technology industry — but it too is an underdog.  It’s attempting to do so with far fewer employees (Google has 20K employees – Microsoft has 90K), far fewer financial resources, and no apparent profit model associated with many of these businesses.  Microsoft has also had the benefit of nearly 30 years — all supported by revenue growth in the rising tide of the PC revolution — to expand its business aspirations from its core business of supplying Operating Systems.  Furthermore I would argue that the core of Microsoft is no longer Windows, and has instead long been its much more expensive product offering, Office.

If Google is attempting to parlay its underdog status into some sort of puffer fish role, in forcing Microsoft to compete on many more fronts than search, then the insincerity of these efforts is pretty transparent to most of us.  And it will fail.  I use MS Word and Apple’s Pages, but would not even consider using Google Docs.  As a web app, it delivers a far poorer user experience at the point of my absolute maximum requirement for efficiency and dexterity.  Google’s Chrome browser isn’t much better than Firefox, and as I’ve pointed out frequently, Android is a duplicate of Microsoft’s own floundering efforts in the mobile space with little improvement.

Microsoft is likely snickering (I know I am) as it watches Google’s many flailing attempts to strike it in different arenas.  Particularly so in Operating Systems.  Slapping a GUI onto Linux, particularly when said GUI developer is Google — a company apparently bereft of UX designers — is a cynical, me-too play that will alienate the Linux Community and pale in comparison to OSX.

According to Yahoo Finance! on MSFT and GOOG, Microsoft has 3x the revenue and 20% more cash reserves than Google.  That’s an amiable war chest and revenue stream that means it’s unlikely that Google can cause Microsoft to spend itself into oblivion.  Google, on the other hand, is moving in too many areas and executing poorly in most of them.

If Google truly wants to hurt Microsoft it needs to double-down on a sincere effort to unseat Microsoft Office and Exchange and thereby dominate the ways in which we communicate at work.   Otherwise, much as the Soviet Union really collapsed due to radical downward shifts in the price of oil and lack of access to credit, Google may suffer from a decline in CPC advertising and all of the air will spew out from its puffer fish act.

In May Day parades, the Soviets would invite Western leaders to the review stand, as bombers and missile launchers would run circles past the parade ground.  These Westerners would return to their peers wide-eyed with parables of impressive arrays of weaponry and massively inflated estimates of actual force sizes.  Unlike during the real Cold War, Google’s foe is not self-invested in grandiose estimates of its enemy’s fortitude and the rest of us are quite aware that in many cases, such as the ill-fated Orkut and other flailing products, Google’s emperor has no clothes.

And unlike our former evil empire’s round-faced leader, Ballmer is under no pressure for Perestroika.

Nortel hits the skids

Om has a piece today written by Venture Capitalist Allan Leinwand asking whether Canada should bail out Nortel.  He asks:  “But is preserving the country’s technological heritage reason enough to spend millions in taxpayers dollars?”

I think that the answer to the question is contained within the question.  There is no such thing as technological heritage … only a technology’s future.  Once a company has ceased to innovate with effectiveness, market forces must be allowed to run their course.

Nortel, whose turnaround CEO Mike Zafirovsky appears to be a bit of a jet-setter, was a global source of technical innovation for most of the last century, peaking in the 1980s.  Its DMS line of switches grew to become the dominant means by which incumbent local exchange carriers rolled out circuit-switched voice networks; and the means by which long-distance companies expanded their reach globally. 

This gave the company a lot of cash to throw around, chasing R&D with aplomb, but it wasn’t spent wisely and efforts to embrace IP were insincere and too little too late.  What Nortel failed to see coming was the enormous destruction of value that would occur when Voice became just another application on IP networks — and the opportunity to build massively expanded value by building new applications over that infrastructure.  Even as recently as a few years ago Nortel has been tremendously innovative, however their solutions have failed to reach into the marketplace as they were targeted at a single customer group — the incumbents — who themselves are flailing and sputtering.

They also have a broken corporate culture.  This happens when organizations get fat and lazy … and political.  I watched that culture attach itself, like a parasite, to Cisco in the late 1990s as we were hiring entire teams from Nortel and moving them to North Carolina and San Jose.

The issue of a bailout should be (but isn’t, since the Canadian taxpayer is already subsidizing the company’s operations to the tune of $30M) irrelevant:  Nortel has strong market and asset value still and should not need it.  The company suffers from the burden of expectations, both of the marketplace and of irrational shareholders; and from the criminal efforts of loathsome executives who tried to feed that beast rather than confront reality.

When AOL’s executives realized they had an overvalued asset with little-to-no real growth prospects, they limpet-mined themselves onto a depressed company with unrealized value.  That’s what Nortel could have / should have done several times in the past 15 years, but didn’t.

The chalice of innovation in telecommunications in Canada has passed on to RIM (neither of whose founders ever worked for Nortel — a rarity in the technology industry in Canada!).  Is the company wobbling simply as a casualty of the current economic cycle, or because of a deeper cancer and an endless stream of financial scandals?  Would $30M in investment be better spent on Nortel or on RIM, in the long term?

My guidance is: embrace the bankruptcy.  It’s an opportunity to restructure the business, re-orient the strategy, clear out the dead wood, and reset irrational expectations.  Nortel could yet again be an invigorating business, but shoring up the business that it is today is no way to get there.  In the meantime, Nortel has served its purpose in stimulating innovation in Canada and acting as an apprenticeship program for our country’s technology leaders.  Let it run its natural course.

Falling Apart?

This just in:  Vancouver has been ranked fourth on the world’s list of least affordable cities.  This is well ahead of cities like Manhattan, San Francisco, London, Paris, and Hong Kong.  As most rational people know, the city’s thundering real estate market has been bolstered by rampant speculation and constant construction of new condominiums.. but salaries, and the city’s economic development, have not kept pace.

The survey quoted in the article cites research indicating that the cost of housing in Vancouver is massively disproportionate to median salaries earned by its residents, specifically when compared to other cities around the world.  The median house price in Vancouver as of the time of the survey is 8.4 times the median income — 8.4 years’ average income to purchase a house, compared to the average median in Canada: 3.5.

What this tells you is that the fundamentals that support high real-estate prices are simply not there in Vancouver.  People just don’t earn enough income to sustain this market at such lofty prices whereas in cities like New York and San Francisco, where real estate prices are indeed higher, median incomes are substantially higher and thus can support high prices.

Vancouver is plagued by a number of problems that keep the salaries of its citizens low:

1. Affordable commerical real estate is hard to come by in the city — leading in some cases to a perverse reverse-commute where urbanites must schlep out to the suburbs to their workplaces — but more importantly this discourages companies from locating here.
2. Most large cities with expensive downtown cores operate as financial centres — the aforementioned London, Hong Kong, and New York spring to mind.  Vancouver does not, except for our storied love affair with ponzi schemes.  Without the sustaining flow of capital through our city there is highly limited opportunity for local investment.
3. We’re still a bunch of tree-cutting, pickaxe-wielding hicks.  And BC’s resource industries, the bread and butter of Vancouver for more than 150 years, are weak thanks to everything from the US softwood lumber tarriffs to Kyoto to a number of key mining company collapses.  Our province has failed to diversify its economic base substantially away from resource businesses.
4. The advanced industries like software and aerospace that keep California sizzlin’ have failed to grow in scale in this city.  Investment in this area is weak, with very little private investment and weak government support (nearly all of the Venture Capital in Vancouver is government-derived).  We did however blow >$500 million on a handful of useless fast ferries, though.  Two notable exceptions are alternative energy and biotech.  For now, at least, they are humming along.
5. The film industry, which we in BC have courted for decades, is a fickle bride.  Since productions are built for each project and torn down when completed with little long-term planning, unfavourable economic winds mean that producers can pull up stakes and shoot in South Carolina, Mexico, or wherever they can cost-optimize.  In any case, the profits are retained in New York and LA… like a Mumbai call centre, we’re just an outsourcer.
6. Drugs, and by “drugs” I mean the cultivation and distribution of marijuana, constitutes probably the largest industry in BC and it flies completely under the regulatory / taxation radar.  Conservative estimates peg this at between $5Bn and $7Bn per year.  These people have a hard time getting mortgages.  They also tend to be undesireable tenants, since they tend to get arrested/shot at/sent into hiding — that is if they don’t blow up their penthouse with a meth lab.
7. Our transportation infrastructure is pathetic, particularly when compared with major metropolitan areas (of which Vancouver is now one) such as Boston, Montreal, Toronto, New York, London, Tokyo, and others.  If we wish to become a center of commerce then we need to be able to move people around better.  Skytrain is a laughing stock and the West Coast Express, which goes to a handful of proximate suburbs from the downtown core twice a day each way, doesn’t even merit comparison with the British Urban Railway system.  Our highways (such as they are) subject people to multi-hour commutes to travel 20km.  We have failed, failed, FAILED to build infrastructure and it will continue to haunt the city for decades to come.

For those of us in the technology industry, certainly during this housing price spike, Vancouver seems an illogical place to locate our startups or ply our trades in information technology.  While the average condo price can be as high as 2x-2.5x the price of a comparable condo in Toronto or Montreal, our salary variance is just 103.5% the national average, versus 104.2% for Toronto and 103.9% for Montreal (this according to the 2009 Robert Half Salary Guide for Technology Professionals).  While we spend more to live here in Lotus Land, we sure don’t make up for it in income.

Comparing Income to Housing Prices

So how high is too high?  Right now we are finding out.

If you were blindsided by the Vancouver Real Estate crash then you were clearly in a profound state of self-delusion.  Evidently that list of deluded fools includes our civic leaders who played russian roulette with the city’s finances, underwriting the now disastrous Olympic Village project in which the taxpayers stand to lose as much as $750 Million.  Still, even amid the free-falling values, Realtors and Developers are outright lying to you… inviting you to join in their deathmatch with catch phrases like “don’t wait too long” and “strong fundamentals“.  Where have we heard that before?  Oh right, it was John McCain, about the US Economy in September – days before it collapsed.  Oops.

UPDATE: In a passionate article, former mayor Sam Sullivan says the Olympic Village is not a clusterf*ck.

Speculators and developers will beg to differ (they’re invested in fostering positive vibes) but remember:  they’re betting with your money, not their own.  Condos down the street from ours were forced into liquidation at 40% off, and there have been stories of other developers dumping their inventory at similar price cuts.  This is the beginning of a trend, not a sign of the bottom, so if you’re foolishly lining up to jump in at this point, you get what you deserve.

Not until a software engineer making $60K-$70K per year can buy a 1-Bedroom apartment in the city will the fundamentals be aligned and the market be stabilized.  This means mortgage + maintenance of less than $1500 per month using the 30% rule.  On a 25-year mortgage that probably means this 1BR apartment has to be less than $200K.  If the research that started this article can be believed, we should expect an adjustment of as much as 60% across the board to bring Vancouver back to the Canadian mean.

So in other words, wait ’til the bottom really drops out, Vancouverites..

And then we can start figuring out why no one in this city (not even the property developers, after 2007) makes any real money.

Case in point:  Recently, Microsoft announced they would build a research and development centre in Vancouver, and in turn use that operation to recruit and nurture smart people from around the world who were being prevented from entering the US due to immigration hassles.  Microsoft said it as plainly as they needed to:  they had effectively tapped out the supply of smart software people trickling out of U.S. universities, and thanks to increasing costs and constrains imposed by the U.S. INS,  it was just too difficult to fill that void with educated foreigners ; both  which circumstances put U.S. -based tech companies at a pretty significant disadvantage.

From the perspective of those seeking to put Vancouver on the map as far as software and product development is concerned, this served as a tremendous endorsement, and a opportunity which could be seized upon by the local tech community.

The conditions themselves, in turn, couldn’t really be better for any company big or small to operate a research and development centre in a Canadian city in general, when the strength of the dollar, the numerous government incentives such as SR&ED, and Canada’s liberal immigration policies regarding talented individuals such as Engineers.

These are conditions that Canada should capitalize on, specifically by relaxing further the immigration policies regarding software engineers and marketers, creating temporary work visas which can be turned around at the port-of-entry and can serve as a gateway to permanent residency (such as we have with NAFTA), and actively promoting the Canadian tech industry to workers abroad.

The benefits of these preconditions are obvious: diversity of talent equals an increasing wealth of ideas, knowledge, and research — which would ensure that tax credits like SR&ED pursue increasingly meritorious ideas and opportunities. It would also take advantage of a significant mis-step by our friends south of the border.

On my personal blog, I rarely restrain myself from criticism of the Bush government and US foreign policy. So my bias is well-known.. 🙂

As the US Economy is jerkily shifting from a decades-long manufacturing cycle, as the UK did through the 1980s, to a nation that generates the greater part of its wealth from intellectual labours, their leadership is ignoring the obvious: the country lacks enough talent to conceive and build this new intellectual, cultural economy.

It says something about Bush’s vision for America that while he posits an amnesty bill for the millions of illegal and largely unskilled immigrants coming from Mexico and Latin America, he imposes and reduces a cap on legal immigration visas for skilled workers, such as the H-1B.

They U.S. is turning away creative minds (including engineers) at the border, throwing millions of babies out with the bathwater, as they attempt to ebb the flow of “good” jobs being taken from America’s labour force and handed to foreigners. At the same time, those jobs are in turn being fully-outsourced to foreigners residing overseas, as companies attempt to cope with the fact that they can’t meet hiring goals for specialized positions.

In today’s market we compete equally for dollars and for workers on a global stage. When a company outsources its call centre, which uses largely unskilled labour, to India that should not be considered a problem for an advanced nation like the U.S. But when a U.S. company outsources R&D to India (or in this case, Canada) it should be considered a crisis. Microsoft’s move, from a U.S. perspective, is just exactly that. And it shows the grit which companies like Microsoft will go to route around the damage that is Bush’s immigration policy.

The Bush government, by limiting H-1 Visas and making it generally difficult to become a productive, creative resident of their country, has created a window which Canadians can and should exploit to bring talent to our nation: talent which will be trained and coached at the expense of U.S. companies, and will eventually spin out of these R&D centres and create their own new companies sparking new innovation.

This process can be exemplified by the number of Canada’s technology startups (meritorious or not) created by former Nortel executives throughout the last 10 years. That these have all represented a substantial increase in value for Canadian economic development, and the collective intelligence of our software community in general, would be tough to question.

With the quantity of resources available to technology entrepreneurs in cities such as Vancouver, the real challenge today is spending it effectively by hiring talented individuals.

So as our dollar approaches parity with the U.S. dollar making our salaries competitive, as our quality-of-life (particularly in Vancouver) far exceeds that of technology meccas like Seattle and Silicon Valley by all apparent measures, and as our government’s financial support for entrepreneurship continues to give a stage-to-orbit boost for many different ideas, the only pennies needing to drop really are a more sophisticated approach to valley-style Venture Capitalism and continuing expansion of immigration policies to support innovation.

With those two tweaks to our existing structure, a lot will change in the fortunes of Canada’s (specifically Vancouver’s) technology entrepreneurs.

In the meantime, bring more Microsoft’s to the suburbs of Vancouver. They will import some of Canada’s more brilliant Entrepreneurs and their co-workers at U.S. expense for our future benefit.

-Ian.

Wednesday, 27 November, 2002, 09:45 GMT Hi-tech workplace no better than factories

Staff in technology jobs work in the white collar equivalent of a 19th century factory. suffering from isolation, job insecurity and long hours, research has found.

Much needs to be done to ease the intense pressure, inequality and exclusion in technology jobs, said the study by Sean O’Riain, Professor of Sociology at the University of California.

He looked at the characteristics of hi-tech workplaces, which are seen as a potential model for the future of work.

He found that the individualistic, macho culture of tech jobs was putting women off applying for jobs, despite an often critical shortage of skills.

Lonely and insecure

In his study, Professor O’Riain found a fiercely competitive world, which one software engineer described as a white collar factory.

“Although hi-tech workers are relatively free from supervision, peer pressure and deadlines drive them to extreme labour,” said he said.

Workers like software programmers are often cited as living out the dream of modern flexible working, untied by geographical office boundaries, able to work on their own initiative and offered stock options in their firms.

The reality is somewhat more nightmarish, Professor O’Riain found.

“They face the lonely insecurity of the individual entrepreneur in a marketplace and culture that stresses, with macho imagery from war and sports, that they are ultimately alone,” he said.

“For many this may be the shape of work in the 21st century.”

The dot.com downturn has added job insecurity to the list of stresses for the workers in the technology industry.

“When the economic crisis hit, they found themselves with few collective guarantees, they were cast to their individual fates,” said Professor O’Riain.

Corporate dominance

The image of the socially excluded geek working long and frustrating hours seems to be a hard one to shake off, despite efforts to change perceptions of the technology sector.

Sys admin Hi-tech workers have much-sought after skills According to Professor O’Riain, the hi-tech worker has become a product to be bought and sold, despite having much-sought after skills.

They are under constant pressure to update skills. And social relationships among the technical communities are defined by common technical interests rather than a common employer.

“If security of income and long-term learning were strengthened, technical communities could emerge as an important alternative model of economic organisation to increasing corporate dominance of the workplace,” concluded Professor O’Riain.

The research is published in the American Sociological Associations’ Contexts magazine.

University of California American Sociological Association Contexts Magazine

The BBC is not responsible for the content of external internet sites

———–

Does Fast Internet Need a Push? High-Speed Access Seen as Economic Catalyst

By Jonathan Krim Washington Post Staff Writer Tuesday, January 15, 2002; Page A01

At a recent Washington dinner, four high-tech heavyweights compared notes about their home computer systems.

One is a top technologist at the Federal Communications Commission. One lobbies for high-speed Internet access on behalf of a Silicon Valley trade group. One is a senior legal adviser to the FCC, and one is a senior Commerce Department official for tech policy.

Yet only one of them has high-speed Internet access at home.

This drives Bruce Mehlman nuts. Mehlman, assistant secretary of commerce for technology policy, tells the story to illustrate the challenge of convincing Americans that broadband is the next big thing. (Mehlman has cable-modem service and a wireless network in his house.) If these people don’t want or need it, who will?

High-speed Internet access, otherwise known as broadband, has long been touted to consumers as an always-connected nirvana, eliminating the hassle of dial-up modems and allowing users to take full advantage of the Internet — downloading movies, perhaps even attending college classes remotely.

Now, broadband is a new battle cry in Washington, as the country struggles with the post-Internet-bubble, post-Sept. 11 recession.

More broadband is an economic priority for the Bush administration, said Mehlman, a former policy strategist for the networking company Cisco Systems Inc. Late last year, FCC Chairman Michael K. Powell began an intensive review of all regulations that affect broadband deployment. And just last week, Senate Majority Leader Thomas A. Daschle (D-S.D.) called for universal broadband access as one of his party’s recommendations for economic revival.

Today, the technology industry plans to launch a major lobbying effort to get the federal government to set national targets for broadband rollout and adoption. Often competitors in the marketplace, tech companies are united in their view that broadband could be a catalyst not just for recovery of their own battered sector but also for the next economic boom.

But whether, and how, the government should push broadband along will be fiercely debated. The broadband highway is littered with special interests and strewn with potholes. Like Mehlman’s dinner companions, most Americans so far are staying off the road.

To date, roughly 80 percent of the country’s homes have broadband service available to them — via cable lines, satellite or souped-up telephone lines (known as digital subscriber lines, or DSL). Yet only about 10 percent, or 10 million homes, have signed up.

The number of subscribers has risen steadily since broadband became widely available five years ago, but the rate of growth slowed last year. In the first quarter of 2001, the number of subscribers increased 27 percent from the previous quarter. It increased 17 percent in the second quarter and 13 percent in the third, according to Jupiter Media Metrix Inc.

In a recent test in LaGrange, Ga., 13,000 of the town’s homes were offered broadband, free of charge, for a year. Only half the town wanted it.

For those who decide they want broadband, it can take weeks for service to begin once it has been ordered. Self-installation kits can lead to hours of tech-support calls. Recently, hundreds of thousands of broadband subscribers were temporarily cut off from their cable-modem service after Internet access provider At Home Corp. declared bankruptcy.

“I’m really irritated with the whole thing,” said Angelene Hernandez, a licensed massage therapist in Phoenix who is a Cox Communications Inc. customer. Hernandez said that although her high-speed connection is helpful for linking with the college where she is taking classes, the months-long service problems she has encountered are beginning to outweigh the convenience.

Even without such problems, the general price tag for broadband, $40 to $50 a month, has kept away many consumers. Increasing numbers already have it at work and don’t see the need for another connection. For others, broadband has yet to deliver anything exciting beyond always-on connections and faster surfing and downloading speeds.

“There’s no broadband content yet that is especially compelling,” said Jeff Eisenach, president of the Progress & Freedom Foundation, a conservative think tank that supports widespread rollout of the technology.

One major obstacle is that current broadband technology is not fast enough to enable the kinds of whiz-bang, video-intensive applications that will help drive consumer use.

At current broadband speeds “it would take longer to download a movie than to go to a video store and rent it,” Rick Lane, vice president of government affairs for entertainment and media giant News Corp., said at a recent broadband summit.

Even if the speed were there, the major studios are not making their video entertainment available online until they are certain it cannot be pirated.

One of the biggest early drivers of broadband adoption was Napster Inc., the Internet service company that enabled users to download and swap music files. But the service was all but shut down by the recording industry, which won injunctions against what it claimed was theft of copyrighted works.

Some believe that unless copyright restrictions are adapted to enable individual file sharing, broadband adoption will be stunted.

Still, no one argues broadband’s potential. Large companies have benefited for years from networked high-speed access. Now, residential-level broadband service is essential to many small and home-based businesses, which rely on the Internet for conducting commerce.

Mehlman and other broadband evangelists argue that the current sign-up rate is not out of line with consumer adoption of new technologies in the past, including telephones and televisions.

For individuals, the benefits range far beyond entertainment, proponents say. Were broadband ubiquitous, startling advances would be possible in such areas as education and medical care via videoconferencing. Government services could be transformed, and telecommuting would become commonplace, saving energy, cutting road-maintenance costs and reducing pollution.

Michigan, for example, just created a virtual state court, where lawyers can file briefs online and put in their court appearances by teleconference.

For the technology industry, still clawing its way back from the depths of its implosion, broadband offers the best hope for a return to the days of robust growth. Higher-speed connections drive a continuing need for more powerful computers with faster chips, new forms of networking equipment and expanded software applications, generating sales throughout the technology food chain.

“You have to have broadband for the economy to really take the next big bite,” said Matthew Flanigan, president of the Telecommunications Industry Association, which represents equipment manufacturers. “It will create hundreds of thousands of jobs.”

In a study published last summer, Brookings Institution economist Robert Crandall estimated that if broadband use were universal, it could be worth as much as $300 billion a year to the U.S. economy.

Such projections have been widely touted by local phone companies such as Verizon Communications Inc., which paid for the study, to bolster their arguments that government should do everything in its power to promote broadband rollout.

But there is hardly consensus on the best way to increase rollout of high-speed connections, reduce prices and spur broadband demand.

Several bills in Congress offer various stimulative prescriptions, from investment tax credits to deregulation, that proponents claim will spur faster broadband deployment. Many of these have languished, however, polarized by what one lobbyist calls the “telecom food fights” between telephone and cable companies that are jockeying for maximum advantage in selling broadband service.

The phone companies continue to push legislation, sponsored by Reps. W.J. “Billy” Tauzin (R-La.) and John D. Dingell (D-Mich.), that would remove a number of regulations that govern how much the companies must open their lines for use by competitors. The bill also would allow the companies to enter the market for carrying long-distance data without opening their local markets to competition, as is currently required.

The phone companies argue that these restrictions dampen their incentive to invest in rolling out more broadband service.

Long-distance and cable companies such as AT&T Corp. strenuously object, as do competitors, who say that the regional phone giants are dragging their feet in sharing their lines with competitors.

Today, TechNet, a potent network of 300 senior executives from large and small technology firms, venture capitalists and investment bankers, plans to call on Washington to drop those battles. Instead, the group, whose members include Cisco, International Business Machines Corp., Microsoft Corp. and Intel Corp., will call not only for national targets for broadband adoption but also for commitment to an “advanced broadband” that is at least 100 times as fast as what exists today.

The group will not seek tax incentives for industry, nor will it seek legislation that benefits a particular technology.

“No one knows what the technological solution is going to be” to increase broadband speed, said Rick White, a former congressman who is the president and chief executive of TechNet. But the group will urge legislation to clear a path for higher-speed lines to be built, by overriding certain state and local land-use restrictions.

“What we’re seeing right now are interim technologies . . . makeshift adaptations,” White said. “We need to leap over that and set very ambitious goals by the end of the decade.”

Next week, the Computer Systems Policy Project, a smaller group of computer and chip manufacturing companies headed by Michael S. Dell, founder of Dell Computer Corp., plans to make a similar pitch and meet with congressional and administration officials.

Others argue that the way to ensure more broadband is for government to guarantee competition.

“Monopolists have been allowed to control the pace of rollout,” said Mark Cooper, research director of the Consumer Federation of America. Cooper said that subsidizing a small group of telecommunications giants, through tax credits or anti-competitive deregulation, is “the Soviet model for growth.”

Instead, he said, the government should focus on reducing prices and increasing choice, particularly when there is so much more broadband available than there are people who are signing up for it.

“The capitalist model is to squeeze out all the demand first,” Cooper said. That way, “the companies minimize their risk and maximize their return on their existing set of assets.”

Staff writer Christopher Stern contributed to this report.

© 2002 The Washington Post Company

🙂

-Ian.

——- http://www.latimes.com/business/20010506/t000038149.html Cisco’s Slump Kills Off Some High-Tech Myths

Technology: Unfinished buildings and a sagging stock price are symbols of the hardware giant’s stumble. Observers predict the firm will regain its footing, but few expect it to return to the glory days.

By CHARLES PILLER, Times Staff Writer

    SAN JOSE–George W. Bush came calling. So did British Prime Minister Tony Blair and China’s President, Jiang Zemin. All sought the counsel of John Chambers, chief executive of Cisco Systems, which a year ago reigned as the most valuable corporation on Earth.     Chambers’ lofty goal was to wire the world for the Internet. And for a decade Cisco surged to prominence by selling arcane hardware that directs the Internet’s trillions of messages and images each week like an army of electronic traffic cops. The company became the crowning achievement of the “new economy.”     Cisco’s sales shot up from $69 million in 1990 to nearly $19 billion in 2000–a phenomenal average annual rise of 75%. Unlike many Internet firms, Cisco sold real products and made real money–nearly $5 billion in profit last year.     But to understand the breadth of the technology industry’s meltdown, just look at the problems Cisco faces today.     A recent series of miscalculations has sent Cisco into a catastrophic tailspin. The company’s sales have nose dived 30%. It is laying off 8,500 workers, or 18% of total employment, and is paying college students “severance” to walk away from recent job offers. Cisco’s stock also has melted down by 76%, some $400 billion in total market value–or the current value of General Motors, Bank of America, Wal-Mart and Boeing combined.     As orders plummeted, Cisco wrote off a staggering $2.5 billion in unsold inventory. The company also halted a building binge and plans to install windows on empty shells to prevent the incomplete structures in San Jose from becoming eyesores.     Cisco’s unraveling has raised questions about the theory that technology-driven growth is inherently more efficient and manageable than in past eras.     This slowdown also debunks Chambers’ faith–shared by other tech executives–in the power of sophisticated software systems to closely monitor orders, manufacturing, accounting and inventory to precisely track sales growth and anticipate demand.     “The belief in the new era–that we have much higher levels of productivity because of information flow, and that we won’t make mistakes that past generations have [caused Cisco’s predicament],” said Fred Hickey, editor of the High-Tech Strategist newsletter.     “Chambers was going around telling world leaders that they don’t get it,” Hickey added. “He was lecturing Alan Greenspan . . . because his stock was the top stock in the bubble.”     Chambers described Cisco’s unforeseen drop in orders as greater than a 100-year flood. “We never built models to anticipate something of this magnitude,” he told financial analysts last month.     Yet for nearly a year, danger signs had piled up. The dot-com universe–including key customers for many of Cisco’s biggest customers–had imploded.     Chambers remained convinced that demand for Internet hardware would keep climbing. He spent heavily last year to buy almost two dozen computer networking firms and stockpiled inventory to satisfy frantic demand. But large corporate customers, including telephone giants Sprint Corp. and WorldCom Inc., cut spending in December and some smaller carriers went bust. Today, failed dot-coms are unloading barely used Cisco gear and thousands of its products are being sold on EBay at fire-sale prices.      Cisco declined to make top officials available for comment.      Despite its problems, though, Cisco clearly is no dot-com teetering on the edge of bankruptcy. The company had nearly $4 billion in cash at the end of the last quarter, and it still dominates key markets.      Still, the magnitude of Cisco’s sudden slowdown stands at odds with a decade of relentless growth.      The company’s founders invented the router–one of most important technologies of the Internet Age. Routers look at nearly every piece of data that crosses the Internet and direct information to the correct recipient.      Some of these bland boxes–ranging in size from laptop computers to 6-foot-tall consoles–are literally worth their weight in gold. Internet companies, telecom providers and enterprises that operate large computer networks pay a few thousand dollars to as much as $1.5 million per product.      Cisco dominates the market it invented–selling about 80% of all routers and half of all computer network switches. The company also provides software and other hardware tools that manage high-speed connections to the Internet. And Cisco has recently mounted a challenge in the new market for optical switches–devices that direct data over light beams traveling through fiber-optic cables.      During Cisco’s boom, the company’s stock became a license to print money, soaring from less than $1 a share in 1993 to $82 last year. In that period, Cisco gobbled up 71 competitors and promising start-ups.      For years the model worked. Technology originated by the company’s first acquisition–Crescendo Communications, purchased for only $89 million–has earned Cisco billions of dollars in switch sales. A few other purchases have proved nearly as prescient.      But critics say the strategy–buying untested companies and overpaying for their potential–was unsustainable. By issuing so many new shares to make those acquisitions, Cisco diluted the value of its stock dramatically.      The tech-stock crash derailed Cisco’s growth strategy. After acquiring 23 companies in 2000, Cisco has bought none this year.      And Cisco may now be choking on some of the costly purchases. In August 1999, Cisco paid $6.9 billion for Cerent Corp.–a 2-year-old money-losing start-up with 287 employees–at a jaw-dropping $24 million per employee. Cerent was supposed to jump-start Cisco in the optical network components market, but it has yet to gain a foothold.      Also in 1999, Cisco paid $500 million for another optical company, Monterey Networks. But Monterey’s $1-million-plus optical router flopped and Cisco was forced to kill the product last month.      Such episodes are familiar to Ian Bell, a middle manager who left Cisco in 1999 after a year with the company. Bell worked in a Cisco division that developed products to bring voice communications onto the Internet.      Cisco bought several voice companies, he said, but many of the new–and newly wealthy–employees knew that their products would be late to market or noncompetitive.      “From a customer’s perspective, Cisco was really good at making people pregnant, but not so good at [delivering] babies,” Bell said.      Viranjit Madan, a Cisco engineer for three years who left the company in November, said jealousy often erupted between established Cisco engineers and newcomers.      “People . . . came in far wealthier than you, just because they happened to be from a company with a product [Cisco wanted],” he said. In some cases, Cisco engineers resigned en masse when newcomers took over their operations, according to Madan.      Critics suggest that Cisco may have been blinded by crushing pressure to keep growing fast enough to justify its stock price.      A shareholder lawsuit filed by Milberg Weiss Bershad Hynes & Lerach against Cisco in April in federal court in San Francisco alleges that Cisco’s purchases were ill-advised and contributed to securities fraud.      According to the lawsuit, Cisco financed its own customers’ purchases in “loan amounts [that] frequently exceeded the cost of the equipment . . . by more than 100%.” Cisco “knew [that many customers] were not credit-worthy and would likely never repay the loan . . . in full,” the suit says. And it alleges that Cisco falsely inflated revenue figures because the company knew some customers probably would fail before they could repay the loans.      A Cisco spokesman called the suit “groundless.”      David Rogan, head of Cisco’s financing unit, said Cisco now has $800 million in outstanding loans to customers, and that loans for more than the purchase price of equipment are typical in the industry.      “The risk is rising, and we are doing the prudent thing . . . by increasing the reserves,” Rogan said. Cisco has set aside $700 million to cover the possibility of customer default, he said.      “Cisco always had supply problems,” said Bell. “You build a product that’s really exciting, then you can’t build enough of it and drive up demand. Some customers were double- and triple-ordering products just so they could get them on time. When those orders stopped, they stopped hard.”      Another reason for Cisco’s inventory troubles–and for those of other technology companies–dates from the Y2K fiasco, said Mike Moone, former vice president for Cisco’s consumer products. Like many companies, Cisco expected a drop-off in orders for network gear in late 1999 as customers prepared for disruptions from the 2000 software bug. But the Y2K bug proved a dud. Instead, demand grew and some customers had to wait months for certain products, so Cisco overcompensated.      “They started ignoring [the] just-in-time supply model and stocked up on inventory,” Madan said. “They deluded themselves into building [for an] . . . unsatisfiable demand.”      During the boom times, thousands of Cisco employees became paper millionaires via stock options and top executives received Hollywood-scale compensation packages. Chambers, 51, exercised more than $150 million in stock last year, and a trio of other Cisco executives exercised $138 million in options in the same period.      Now with many Cisco employees’ stock options worthless, the company may face an exodus of talent.      “It’s always been difficult for people to leave because of the golden handcuffs [of valuable stock options],” said Richard Lowenthal, a former Cisco vice president and general manager. “Loyalty was based on [stock] options. That’s a real problem for Cisco now. How do they keep people motivated?”      But to rebuild, Cisco may need to return to a philosophy credited to Chambers, an earnest, soft-spoken West Virginian: Avoid Silicon Valley’s swagger, listen carefully to customers and deliver what they need.      Despite his own staggering wealth, Chambers has enforced unusual frugality at his company.      A Cisco management meeting last summer was held at Chambers’ vacation home in Pebble Beach, Calif. Top executives carpooled from San Jose in their own cars–Cisco has no corporate fleet–and stayed at Chambers’ house.      “Here we are bunking in sleeping bags at John’s house,” and Chambers paid for dinner out of his own pocket, Moone said. “This is how a company should be run.”      Madan also praised the skill and integrity of Cisco’s management. He said Chambers held monthly breakfasts with employees who had birthdays that month. The events were no-holds-barred question-and-answer sessions.      Such modesty and receptiveness could prove pivotal to Cisco’s future.      Experts say that with economic recovery, the company will gradually regain its footing. But few now predict Cisco will recapture its past momentum. At its current stock price, Cisco’s shares would have to grow 20% a year for nearly eight years just to match the peak of a year ago.      “Remember Smith Corona? They owned the typewriters. Wang? Pan Am–worldwide icon? Gone,” Moone said. But he predicts Chambers will never allow Cisco to die–partly because Chambers was one of the Wang executives who presided over that once-towering tech company’s free fall in the late 1980s. He still feels the pain of the experience, Moone said.      But the glory days will be hard to recover. Said Moone: “It’ll be years and years before there’s another rush to the stars.”       * * *

     Cisco’s Stock Price Has Plunged…      Monthly closes and latest on Nasdaq      Friday close: $19.64, up $0.98      …And Acquisitions Have Stopped.      Number of companies acquired by Cisco      As of May 3: 0      Source: Cisco, Times research, Bloomberg News

Is the growth spurned by sizzling markets and a trigger-happy investment public coming to an end? The sell-off continues at an accelerated pace, apparently sparked by the convenient excuse of another judgement against Microsoft.

One way to track the health of the technology industry is to watch the Big 7 (below). Undeniably most of the churn has happened at the bottom of the food chain — this is where most Canadian companies, like Sierra Wireless and RIM, live.

The biggest slaughter I spotted in the US (not an exhaustive search) among well-known companies was Exodus, who dropped to $96/share from $180 a couple of weeks ago. Yikes! PALM is trending toward a close at $34 today. Pity those people who bought at $165! I sold a while ago in the upper 50s.

Anyway, the Big 7 have weathered the storm pretty well, overall. Cisco is still smelling like a peach (yay!) and AOL is barely hanging on. Overall, though, an 88% total Cap reduction among the Top 7 isn’t all that bad… it’s really Microsoft that’s dragging down the average. Notice the precarious position of Yahoo! (yikes).

Mar. 22 April 4 Percentage Company Market Cap Market Cap of Prev.