It's been a good year for the new economy. Last June we created the Wired Index to track 40 companies, ranging from network builders to steelmakers, that were leading the transformation of the economy. (See "The New Blue Chips," Wired 6.06, page 164.) In the 12 months since, the WIRX has rocketed 81 percent, far outperforming every other broad-based index. Like us, Wall Street seems to smell the future in the Index companies. And they like it.
Of course the WIRX would be no less powerful had it gone down instead of up - though that would deliver a very different message about the world its component companies are building. The point of indices is to tell stories - stories about change and growth, stories about stagnation and decline. Over the past year the WIRX has been telling some important tales about an economy in transition.
Some of these narratives are well known, like the rocket-ship potential of companies building information networks. Technology and communications stocks, including Lucent, Dell, Microsoft, and Cisco, make up about half of the WIRX, and accounted for more than half its rise last year. But whichever way share prices go, the technology itself shows little sign of slowing. Forty-six percent of the Web's population has been dialing in for less than a year. Next year, data and voice telecommunications traffic are expected to reach parity.
Technological revolution is only the most obvious of the new economy's tales. Equally important is the other half of the Index, the companies using new ideas to do old things better. The Organization for Economic Cooperation and Development, the rich nations' economics club, estimates that ecommerce will allow American companies to cut inventories by 20 percent, unleashing $250 billion for more productive uses.
In short, a new economic order is being built. It's happened before. About half of the Fortune 500 corporations were founded during 50 years of turbocharged growth between 1880 and 1930, when companies began to understand the rules of mass production and mass markets. Today's upheavals promise to be at least as dramatic.
Investors clearly expect WIRX companies to keep on exploding. The average price-to-earnings ratio of WIRX stocks is about 80 - the S&P trades at around 34. In other words, Wall Street is willing to pay more for each dollar of WIRX corporate profits than for those of other companies. That only makes sense if investors expect those profits to keep right on growing faster.
But numbers tell just part of the WIRX story. We wanted to hear these companies speak for themselves. So we approached the technology leaders - be they CIO, CTO, EVP, or CEO - of all 40 Index companies. Most shared the same themes: The imminent arrival of much more and much cheaper bandwidth. The use of the Net and IP for everything from tracking packages to making phone calls. Issues of scale, reliability, and security. Massive, unprecedented growth.
While we're happy Wall Street is putting its money where our vision is, the WIRX's component companies weren't selected because we thought they were going to outperform the broader market. The companies were chosen because we thought they had the qualities needed to prosper in the new economy. They're global. They're innovative. They're good at using information and nurturing knowledge. They're adept with technology. They hold steadily to strategic goals.
In keeping with the founding principles of the Index, we will change the WIRX's component companies only when a takeover, bankruptcy, or some other corporate transmutation takes a company off. Last year two of the 40 underwent such change: first with the finalization of the $37 billion deal between MCI and WorldCom in September, and then with the $42 billion merger of Daimler and Chrysler in November. In the interest of stability - for the WIRX drama to make sense, all the characters must have time to speak their lines - we changed nothing. But amid the turmoil of the new economy's creation, it won't be long before adjustments are needed. We've begun discussing possible changes, and three candidates - Amazon.com, Citigroup, and Corning - are reviewed here this year. Only by continually comparing the WIRX against contenders can we claim it truly represents a coherent look into the future.
When we launched the Index, we hoped our creation would "mirror the arc of the new economy as it emerges from the heart of the late industrial age." We still believe the WIRX might create "a new icon - a new, global, networked version of the Dow's torch song to 20th-century American industrialism." Icon or not, the Index is telling a story not told elsewhere - not by the Dow, not by the myriad other technology indices. We still don't know how the WIRX story will end. Follow it with us and watch the future unfold.
Acxiom continues to prove that data is power and that power is indeed money. In 1998, the nation's largest data miner saw its profits grow 29 percent to $35.6 million, its sixth consecutive year of earnings growth over 25 percent. The biggest increase came from credit card companies, who delve deep into Acxiom's 20-plus terabytes of consumer information to pinpoint folks likely to want their cards. Acxiom counts 17 of the largest 25 credit card issuers among its customers.
The mass market is next. Acxiom is phasing in IP-based access to its vast databases. By next April the company will offer, via the Internet, detailed information on the income level, marital status, and buying habits of 95 percent of the US population. Acxiom says access will be affordable for small businesses, even individuals. (The company does plan to screen requests for data, but it hasn't yet explained the criteria by which it will evaluate them.)
But don't think for a second that Acxiom is merely sitting down in Arkansas reselling information. Data is a commodity. The true weapon is knowing how to use it. Over the past year Acxiom has been expanding its consulting services through the purchase of other direct marketing consulting firms like Exchange Marketing Group, May & Speh, and Buckley Dement.
Crunch year for Affymetrix. In fiscal 1998 the maker of the GeneChip lost $23 million on $52 million in sales, its fifth straight year of large and accelerating losses. CEO Stephen Fodor hopes to reverse that nasty trend by increasing the amount of genomic data on his chips, and by pricing those chips based on the amount of information they contain.
It might seem perverse in the age of Moore's Law, but if Fodor can get the market to swallow this so-called information-based pricing, Affymetrix's margins might finally improve. After all, it costs the company the same to make a "high info" chip - with more DNA strands - as it does to make a "low info" one.
Fodor expects the next generation of GeneChips to be very high-info indeed - with as many as 40,000 "unzipped" strands of DNA per chip, compared with about 8,000 today. That many gene strands could lead to a greater individuality of medical diagnosis. Such chips might explain why that hot new antibiotic is working wonders on your neighbor but doing squat for you.
Another bright spot: litigation. Affymetrix has been aggressive in protecting its portfolio of 47 patents (with 190 more pending). Analysts are betting that Affymetrix will come out ahead in two active suits, against Incyte and Hyseq. Proof that in the new economy, intellectual property litigation is rapidly becoming a core competency.
As a US company with deep roots in Asia - its predecessor was founded in Shanghai in 1919, and AIG remains one of the region's largest insurers - one might have expected AIG to get pounded by the Asian economic crisis. Instead, in the midst of the chaos, AIG's Foreign General Insurance unit actually increased earnings by 17 percent. Worldwide, profits grew 13 percent to $3.8 billion, or $3.57 a share.
This is a company that thrives on risk and using information to manage it intelligently. In 1998 AIG was among the few selling Y2K insurance, offering corporations up to $100 million in direct coverage. (The firm stopped selling corporate Y2K policies last August, figuring that anyone still looking for Y2K insurance probably didn't have their networks up to snuff.)
Bets like these come naturally to AIG, which controls its downside through a combination of global heft and intense local knowledge garnered through branch offices in 130 countries.
A nuclear submarine officer and electrical engineer by background; joined MCI in 1983 after stints at AT&T and Mobil Chemical.
Wired: Describe today's high-fiber diet.
Briggs: Back in the mid-1980s, when we were rolling out our first fiber, the lines could take 6,000 calls. Today, the industry's on a standard called OC-192 that lets you put 128,000 calls on a line. With wave-division multiplexing, we can put the equivalent of 1.3 million voice calls on a fiber pair. Next year that will double again.
Unlimited bandwidth in our time?
One camp says that given the enormous growth, we are not going to have near enough capacity. The other side says there's going to be a glut. I'm not going to say Qwest and Level 3 are unnecessary, but technically we don't see any limits to what we can put through our fiber for the next five years.
Where do you go from here?
We are building a transpacific fiber with no underwater electronics. Today you need to amplify your laser every 250 kilometers, but we're working with technology that will soon raise the distance to 900. Transpacific is three or five years away.
DSL could change the complexion of telecommunications. We're rolling out a service that can do video, voice, and Internet over one line. In a couple of years it'll be up to 100 times faster than dialup.
After completing its $9.6 billion acquisition of Netscape in March, AOL now has all the eyeballs it could want. And that critical mass is translating into some pretty impressive financial results. In FY 98 AOL achieved its first full year of profitability since 1996, making about $90 million on $2.6 billion in sales. And in the first six months of FY 99 AOL's earnings accelerated to $229 million on $1.8 billion in sales.
But if America Online is to become a global media company, it needs to deliver its content reliably.
"No one has scaled like AOL," says technology president Ray Oglethorpe, "but we never, ever want to be on the front pages again because of technical problems."
Oglethorpe is working hard to replace the drone of busy signals with the buzz of corporate-improvement jargon. Phrases like "Six Sigma Reliability" now echo in the corridors of AOL HQ.
AMR certainly does a more profitable job of moving bits around the globe than it does ferrying passengers. Although in FY 98 American Airlines' gross sales ($14.7 billion) dwarfed revenues from AMR's 80 percent stake in the SABRE electronic reservations system ($2.3 billion), on a percentage basis SABRE was far more profitable. It's also growing faster. In FY 98 the SABRE group posted 29 percent growth; American saw revenues grow a mere 3 percent. And, at last report, not a single binary digit was stranded at the Toledo airport.
To keep the 35-year-old cash cow fat, AMR has been porting SABRE to the Web - it's the back end behind AA.com, Travelocity, and Yahoo! Travel.
The data SABRE collects online will fuel AMR's budding one-to-one marketing program. With a frequent-flier number, SABRE can correlate a remarkable range of info, starting with credit card use, flying habits, or hotels you like. And you thought those miles were free.
FY 98 was not good to Applied Materials. The semiconductor industry sank deeper into one of its periodic funks, fueled this time by the Asian crisis. Applied's revenues of $4 billion were lower than 1997 (and even 1996) levels. The company reduced its workforce by 25 percent and took a write-off of $285 million. Profits were at their lowest level since 1994.
But Applied president Dan Maydan doesn't seem very worried. As long as people use silicon chips, the company will bounce back, he says: "We are making the tools that make the chips that make the components that are responsible for the digital revolution."
Continuing its revolving-door tradition, Cable & Wireless abruptly lost its high-profile, deal-making American chair, Dick Brown, in January. Brown, who bulked up C&W through a two-year, $20 billion blitzkrieg of deals, now occupies the top spot at data giant EDS. His replacement, Graham Wallace, faces the unenviable task of tying together C&W's far-flung and disparate empire. At least Brown gave Wallace a little help. In September Brown spent $1.75 billion for MCI WorldCom's Internet businesses, including its Internet backbone and 1,300 ISP customers.
Eighteen months ago, Schwab's Web site was handling about 600,000 secure transactions a day - primarily the buying and selling of financial securities online. Today that number is well over 7 million.
"We have far surpassed all of our capacity-planning models," says CIO Dawn Lepore. "We are adding hardware as fast as we can. Overnight, our customers embraced the Internet and wanted dialtone quality."
In the face of that blistering growth, Schwab continues to retain its customers and improve margins. In FY 98 Schwab's revenues grew by about $400 million, and profits jumped nearly 30 percent to $350 million.
"The first Internet wave was driven by business-to-business commerce," says Cisco CEO John Chambers. The second one will be driven by the consumers."
Visualize Cisco telephones. Home networking appliances. Web browsers embedded in microwave ovens. In subway advertisements. More routers. More switches. More 40 percent revenue growth.
When Daimler and Chrysler announced their $42 billion merger in May 1998, merger mania hit the automotive industry. More recently, Renault announced it was taking a 37 percent stake in Nissan. Pundits now opine that the world's 40 carmakers could shrink to six.
DaimlerChrysler's brands and knowledge of its customers are its prime assets. Between Mercedes' European finesse in luxury cars and Chrysler's down-home grip on vans and SUVs, the combined firm has strengths in just about every sector of the market - both geographically and demographically. Now it needs to translate that into the ability to customize products to fit specific market niches. If DaimlerChrysler can pull it off, it will become the first truly global car company.
Want to really understand ecommerce? Look at Dell Computer. Amazon.com sold about $600 million worth of CDs, videos, and books online last year. Dell sold about $14 million worth of computers online - every day. That's a $5 billion-a-year run rate.
The cost savings from online sales make all the difference in the PC business. In its FY 99 (ended January) Dell chalked up $1.5 billion in profits - a 50 percent increase. Ignoring onetime charges, Compaq saw its pretax earnings drop 66 percent.
Also helping the bottom line: Dell's inventory-management system. By relying on proprietary software to manage parts ordering, Dell avoids wasting millions on store inventory that becomes obsolete in a matter of months. Dell carries only six days' worth of inventory; Gateway carries nine, and Compaq 23.
Assuming Dell pays suppliers in 30 days, five shipments of parts have come and gone before it pays the bill. In other words, Dell uses information to force its suppliers into providing its working capital. To the slow go the financing charges.
EMC is on a tear. In FY98 it tallied up $4 billion in sales, $800 million in profits, and a 35 percent market share.
EMC is also a helluva stock, returning 50,000 percent over the past decade (a $10,000 investment in 1989 would be worth $5 million today), making it the best long-term stock market performer on the WIRX.
In the future, says Don Swatik, vice president of product management, "there will be fewer but larger data centers. A company that had 10 centers will say, 'We need two for disaster recovery, maybe three.'"
But it'll never be just one. Says Swatik: "When you access across long distances, you have an issue that you have to deal with - the damn speed of light is too slow."
Which is great for EMC.
Having begun as a natural-gas pipeline operator, busing hydrocarbons around the southeastern US, Enron is now a global player in spot commodity markets ranging from water to telecom. Its secret? Enron realized early on that information about commodities was far more valuable than the products themselves.
This year's target is water. Having bought Britain's Wessex Water in July 1998 for $2.8 billion, it launched a subsidiary called Azurix to go after what it hopes will be a $300 billion-a-year market for water services.
Enron is also parlaying its abilities to manage information into big service contracts - including one for San Francisco's new, $300 million baseball stadium. And it is laying fiber alongside its existing pipeline network. Needless to say, Enron is primed for the growing bandwidth spot markets. From bits about atoms to bits about bits - what's a more natural progression?
FDX isn't just an ecommerce play. "Dell showed how the supply chain can be an enormous competitive weapon," says CIO Dennis Jones. "In five years, supply challenges will be every CEO's primary concern."
Jones wants to use FedEx's comprehensive coverage - the company can express to 211 countries - and info-tech savvy to midwife conversions to just-in-time shipping of parts and orders. Thanks to FedEx's tracking system, a company can buy its components in Asia, build the product in the US, and ship it to Europe, reliably and cost-effectively.
Depending on whom you ask, First Data's size and diversity is either a lack of focus or its greatest strength. The company plays both sides of the credit card game, authorizing charges and crediting merchants with one hand, approving and billing consumers with the other. That end-to-end service is helping First Data stake out new turf. Its ecommerce client list grew by 380 percent in 1998, and the company now handles about half of all Internet transactions.
Globalstar burned $240 million last September when it launched 12 satellites into the side of a Siberian mountain. For reasons of "cost-effectiveness" - the company is losing some $51 million a year and has no revenues - Globalstar has been scouring the former Soviet Union for cheap rocket technology to launch its low Earth orbit satellite network. The LEOs in question were fired skyward on top of a Ukrainian-made Zenit missile, from the Baikonur Cosmodrome in Kazakhstan.
Unsurprisingly, the rocket scientists in San Jose remain optimistic, noting that this spring the company successfully launched eight satellites from the same pad (this time using a Russian Soyuz-Ikar rocket). According to Globalstar, by year's end all 52 of its birds will be orbiting, fingers crossed.
Incyte, the human-genome researcher that finally broke through to profitability a couple years back, saw its bottom line sag in FY 98, with earnings plummeting more than 53 percent. CEO Roy Whitfield points to the future benefits of all the money Incyte is pouring into new facilities and technologies; last year its R&D spending amounted to nearly $100 million. Whitfield confidently expects the firm to continue its supersonic top-line growth, reaching $190 million in sales this year.
One area of expansion: microarray manufacturing, where Incyte has doubled its workforce. Microarrays are 1-centimeter-square silicon chips that hold up to 10,000 genes. "If you go to the doctor today, they might do your triglycerides and cholesterol," Whitfield says, "but how many things can they examine? Ten or fifteen. This technology lets them look at 10,000 different things."
Alex Hungate Helped launch Reuters NewMedia in 1994.
Wired: Years ago you built your own "Internet" for financial news and trading. What's the net on today's Net?
Hungate: At one point we had the largest private computer network in the world - but the costs limited the users we could reach profitably to a very small, high-end group.
How wired are your users now?
Our customers aren't comfortable yet trusting the Internet to carry half a trillion dollars a day in foreign exchange. With those kinds of numbers the cost savings don't matter to them. But over time, as the performance, security, and real-time capability increase, we hope to migrate all our customers into a purely wired world.
Any problems porting old news to new media?
No. Early on we made investments in then tiny companies like Yahoo! and Infoseek. We now have 150 Web sites using our news, including the very biggest: Lycos, CBS, AOL, NBC.
Sounds like lots of digital ink - is any of it black?
Reuters has a very high Internet component and invariably makes money from it - our new media subsidiary is extremely profitable.
What's the future of wire services?
Wireless. In the US we have a deal with Aether Technologies to provide Reuters MarketClip - real-time information direct to PalmPilots. In Geneva we just announced a similar distribution to smart phones.
The world's largest chipmaker isn't looking too robust. Sales growth is slowing, profit margins slipping. From 1993 to 1997, Intel's sales grew an average of 30.2 percent a year. In FY 98 sales grew only 4.8 percent to $26.3 billion, while the net margin fell to 23.2 percent from more than 27.7 percent in 1997. The reason: sub-$1,000 PCs, powered by cheaper microprocessors.
Cheap chips aren't that easy to make, or all that profitable - even for AMD - so Intel has its hopes pinned on selling a boatload of its premium Pentium III chips. And it's spending the marketing bucks - about $300 million in FY 99 - to do it.
Lucent's long-expected $20 billion purchase of networking equipment maker Ascend Communications will keep it in the IP race, though Lucent-Ascend does not a Cisco make. Nokia-Lucent-Ascend, however ...
Marriott continues to exploit its grasp of information technology to further segment the travel market. In FY 98 it launched the SpringHill Suites hotels, whose roomy, practical units target traveling businesswomen. (Industry wags compare the rooms to sport utility vehicles.)
But with 10 brands, ranging from the $45-a-night Fairfield Inn to the top-drawer Ritz-Carlton, Marriott has a problem most companies would kill for - too much information about its guests.
To avoid deadly brand blurring, Marriott thus far is being very selective about the facts it shares among its hotels. The Ritz's guest database, for instance, is kept private, thereby maintaining the air of exclusivity that customers pay top dollar for. The lesson: Information may want to be free, but sometimes information is more valuable when it's not shared. Even within the same company.
When MCI blew off British Telecom and GTE to get hitched to WorldCom last year, it had its eye firmly on the future. Unlike BT's and GTE's pastiche of circuit-switched and IP-based networks, WorldCom's network is 100 percent IP-based. The $37 billion marriage gets WorldCom one step closer to CEO Bernard Ebbers' dream of a global network that completely bypasses the access fees charged by national telcos. Another example of how technology is challenging national boundaries. (See "Bandwidth Broker," page 106.)
No matter how - or even if - Judge Jackson disciplines the despot of the desktop, it's not likely to make a huge amount of difference. As the new economy continues to mutate, the importance of the desktop itself is fading. A new generation of intelligent devices running non-Microsoft operating systems is appearing - smart phones running Psion's EPOC32, Palms using Palm OS, set-top boxes networking with Sony's software. It's not hard to visualize a world where PCs and Windows are the exception rather than the rule. Servers will continue to be important, but on the server side there are credible challengers to Windows NT.
In short, the big brains in Redmond have more important things to worry about than the Justice Department.
But Microsoft investors probably don't need to fret much about the antitrust case either. If breakups from Standard Oil to Ma Bell hold any lessons, the worst-case scenario for Microsoft - splitting up the company - would be a bonanza for shareholders.
Monsanto came close to being acquired last year by pharma-giant American Home Products. When the proposed $14.5 billion acquisition was called off in October, investors dealt Monsanto a 27 percent share price hit.
Part of Wall Street's angst focuses on the $8 billion debt that Monsanto took on in acquiring agricultural biotech companies. But Celebrex, Monsanto's new arthritis drug, looks set to chalk up $2 billion in sales this year. It started outselling Viagra after only seven weeks on the market. If Monsanto can keep coming up with innovations even half that good, there should be no problem financing further R&D.
Monsanto, of course, can continue to expect controversy from its ongoing genetic engineering program. It can also expect potentially huge profits - this is a technology that could create another green revolution. Eurocrats are considering a moratorium on genetically engineered crops; Monsanto needs to manage the politicians wisely.
Back in the labs, Monsanto engineers keep on working on amazing stuff: cotton that grows in color, even plants that can sprout amid garbage.
Rupert Murdoch made headlines early in 1999 with sharp remarks about overvalued new media companies. If anyone has the right to be unimpressed with new media, it's Murdoch. His News Corp. shows just how much life is left in the old. Worldwide sales for FY 98 were up 14 percent to $13 billion, and operating profits rose 21 percent to $1.1 billion.
Almost every arena held good news for News in '98. Titanic, coproduced by Murdoch's 20th Century Fox, was the year's highest-grossing film - and the top grosser in history. News Corp. opened an office in Beijing, HQ of the world's biggest market. In November, Murdoch sold 18.6 percent of Fox TV to the public for $2.8 billion, the third largest public offering ever.
And despite tough talk about the Net, Rupert's monster (TV Guide, HarperCollins, 120 newspapers, including the New York Post and the London Times, et cetera) is slowly slouching online. Led by Murdoch's son James, News Corp.'s digital wing spent 1998 revamping foxsports.com and inking deals with Yahoo!, @Home, and Road Runner. Like Reuters, News Corp. wants to repackage its content for easy delivery to multiple platforms (PC, smart phone, pager). As its annual report puts it: "Distribution for us is merely a means to an end - to ensure that we can distribute our real product - and that product is content."
1998 was a blue-ribbon year for Nokia. The Finnish wireless giant posted the second-best single-year results of any company on the Index, growing sales by 51 percent and profits by 66 percent. (Enron did better, thanks to an earnings stumble in FY 97.)
To keep kicking out those kinds of numbers, Nokia is gearing up for a near-future in which everything and everyone will be in constant communication. The betting is that by 2005 the world will have 1 billion fixed-line phones, a billion wireless phones, and another billion Internet subscribers.
Nokia is getting ready. Last year it joined Ericsson and Motorola in an alliance with British palmtop company Psion to establish a global standard for smart phones and other wireless devices. This partnership, the Symbian alliance, unites the makers of 60 percent of the world's mobile phones behind a non-Microsoft OS. Symbian quickly partnered with Sun - Jini is critical to get those devices working together - and in March linked with Tokyo's NTT Mobile Communications Network, positioning it at the center of the Japanese market. And Nokia's been acquiring other components of a wireless data future: Ipsilon (security), Vienna Systems (voice over IP), and Diamond Lane (high-speed access).
"Nucor is losing margins as prices drop and Asian steel is dumped in the US," says Leroy Prichard, Nucor's VP of steel technology. "We're in a holding pattern. With the downturn in the steel industry, we're just trying to keep our mills up and running."
While Prichard's candor is refreshing, it also comes with an agenda. In February, Nucor and four other US steel manufacturers complained to the Commerce Department that Brazil, Russia, Japan, and five other nations were dumping steel in the US below cost.
Imports of hot-rolled steel exploded 81 percent in the first seven months of 1998 because of price-slashing by foreign firms like Japan's Nippon Steel and Brazil's Usinmas/Cosipa. So, in a very industrial-age manner, Uncle Sam returned fire, threatening overseas steelmakers with gigantic punitive fines. In late March there was even serious talk about banning Russian steel imports altogether.
By steel industry standards, Nucor doesn't have that much to moan about, however. Its minimills use scrap metal as raw material, and the cost of scrap has fallen along with the price of steel. 1998 sales were about the same as 1997's record results, and profits fell by only 10 percent to $264 million.
The company had to shutter its state-of-the-art Trinidad plant, built to exploit a proprietary technology to produce iron carbide, an additive used when melting scrap. Too expensive. Ouch. But Nucor is doing promising work on a cost-saving technology to produce 2-inch plate in fewer steps - an innovation definitely worth watching.
Launched WordPerfect's consumer division at Novell in 1993; recruited to Yahoo! in 1995 by CEO Tim Koogle.
Wired: Are you concerned that your competition's gone from start-ups to megacorps like Disney and AT&T?
Mallett: It's been two years since we felt heated competition from mid-tier companies like Infoseek and Excite. Looking forward, our competition will come from globally well-established companies that are still standing in this space five years from now. Yahoo!, AOL, and Microsoft are the best positioned.
How worldwide is your web?
We have operations in 17 foreign countries, and we are the most-visited Web site in all those countries. A total of 25 percent of the activity on all of yahoo.com is outside the United States. That has remained relatively stable from the beginning.
What will fat pipe do to the Web?
Even if the most bullish numbers develop, by the end of 2001 broadband will represent less than 10 percent of the people accessing the Web. If you scrutinize beyond the press releases, there are only about 200,000 to 300,000 broadband homes out there - it's just not where our 50 million users are. @Home is definitely going to be a success. But the DSL and copper guys are going to do OK.
The future of computer-aided design, engineering, and manufacturing isn't software that designs. It's software that connects. That's a challenge for Parametric.
Take a company like Airbus, one of Parametric's big customers. Airbus is not a single company building planes from the ground up; it's a multinational consortium of manufacturers, each of which designs and assembles different parts of the airplanes. The software Airbus really needs is not an off-the-shelf app that lets designers create geometric objects, but rather an integrated network - email on steroids, as Hambrecht & Quist analyst Sheila Ennis puts it - that links all the design team members. That way, when a French Airbus engineer makes a change to a fuselage design, that information is instantaneously shared with the French marketing group and the wing designer in the United Kingdom.
Parametric is working hard to reinvent itself in this vein. The company has released a networking software package called Windchill, and it acquired Computervision, which makes collaborative design software. But others are much further along: Firms like Structural Dynamics Research and IBM-backed Dassault Systemes are designing networked CAD/CAM systems from scratch - often an advantage in the software game. Wall Street sure thinks it's too little, too late for PMTC. The share price fell off its June high by nearly 50 percent. That's probably an overreaction. After all, swift strategic adjustments are characteristic of any new economy company worth its DRAM.
Rumor has it that when PeopleSoft announced layoffs in January, one nervous human resources rep had to practice in front of a mirror: She had never fired anyone before. Such is the state of the once booming enterprise resource planning industry. PeopleSoft, legendary for its rapid growth and high employee satisfaction, has slammed into a wall, with growth slowing from a five-year average of 87 percent to under 3 percent in Q4. Heavy Y2K spending by corporate IT departments accounts for some of the damage, but PeopleSoft is also slugging it out in a price war with industry leader SAP.
"PeopleSoft was like a young Muhammad Ali," says AMR Research analyst Bruce Richardson, "and last quarter was like Ali getting knocked down for the first time."
PeopleSoft hopes to kick-start sales by beefing up its ecommerce offerings and pushing personalized terminals. A furniture company executive, for example, might open a personalized desktop to view not only financial data on his own company, but also prices on wood futures from the Web and information on how to change the company's real-time purchase orders to reflect those prices. In essence, it's a personal corporate info portal for executives. Nice thinking.
This month, Qwest will complete its promised 18,500-mile coast-to-coast fiber-optic network - with one caveat: "When the dust settles, we'll be closer to 20,000 route miles," says CEO Joseph Nacchio. It doesn't stop there. The company now has fiber crossing the Atlantic and the Pacific, is building an IP-based network connecting 40 European cities, and has opened five Web hosting centers in the US. If this sounds like a whirlwind, that's because it is: In just three years Qwest has rocketed from 100,000 customers to more than 4 million and shows no signs of slowing. This despite attempts by the established carriers to throw up regulatory hurdles at every turn. AT&T and MCI, for example, have asked the FCC to block Qwest's marketing deals with Ameritech and US West.
"The big incumbents' strategy for tomorrow is to control how slowly we get there," Nacchio says.
Nacchio does a convincing broadband rap (voice, video, data, IP, wireless), and indeed Qwest is counting on next-generation networks - but the company is already putting its fiber to work. Although Qwest is losing more than $2 million a day (laying all that fiber ain't cheap), it has substantial revenues and is throwing off $300 million in annual cash flow by providing telecommunications services.
Attention, all those Cassandras out there (ahem, Mr. Murdoch!) moaning that no one is making money selling content on the Net: Reuters now earns more of a profit selling its news and financial information across the Internet than it does by selling the same information to newspapers. The company's success in repackaging its content for the Web has led it to aggressively seek new platforms, like Palms and smart phones. (See "Info Wholesaler," page 109.)
Playing off Bill Gates' idea that the Net is the "digital nervous system," John Taysom, a venture capitalist with Reuters New Media, is thinking even further into the future. "News and information are the external stimuli for the digital nervous system. The old news model was men mediating between machines. The new model will be networked machines mediating between humans. That raises the question, What is news for a machine?"
CONTENDER:
Ed Horowitz
corporate executive vice president, Citigroup
Recruited from Viacom in 1997 to aid Citibank CEO John Reed - now co-CEO of Citigroup - with transition to ecommerce.
Wired: You face a different kind of convergence merging the diverse businesses - banking, insurance, brokerage - under the Citi umbrella. What's the hot ecommerce revenue stream?
Horowitz: The killer application on the Internet so far is not banking, it's discount brokerage. As part of the merger with Travelers we added Salomon Smith Barney. Electronic brokerage - which Citi has been doing for years - will be a big part of any new product we roll out.
Worried about the rumblings that Redmond's getting into ebanking?
Microsoft does not have a balance sheet that allows it to loan out $200 billion. We do. Around the world we have close to $670 billion in global assets. That allows Citigroup to assure merchants that the money is there and will be there. Is Microsoft a company that bets its balance sheet every day? It's a software company.
So, no fear of Windows 2000 - what about Y2K?
It will cost us close to $900 million to create a bulletproof system. We move something like $1.2 trillion around the world every day, and you know what? The books have to balance at the end of the day. That is the essence of banking, and that is what distinguishes us from the newcomers.
To some extent Schlumberger is a victim of its own success. The world burns 73 million barrels of oil every day, but thanks in part to new fields discovered by companies like Schlumberger, the world's proven oil reserves are 60 percent greater than they were 20 years ago.
The problem now is not finding new oil (which Schlumberger excels at) but extracting existing pools profitably. Late last year, West Texas Intermediate dipped to around $10 a barrel, about the same (in real terms) as in 1969. And with OPEC dead in all but name, the major oil companies are pondering a future with even cheaper oil.
While oil-related revenues accounted for nearly $9 billion (78 percent) of Schlumberger's revenues last year, that number is expected to shrink to $7.1 billion this year. So Schlumberger is using its technology smarts - searching for oil is remarkably information-intensive - to expand its smartcard business, which accounted for about $700 million, or 6 percent, of 1998 sales. Last year, the company teamed up with Swatch to embed smartcard technology in Finnish watches - the system lets bus riders pay fares with a swipe of the wrist. Other smartcard customers: the 2 million-strong People's Bank of China and mobile phone operators in Hong Kong.
To share or not to share? That is the question for SmithKline. The company has pulled to the forefront of genetic research. Now it has to decide how to play its hand. Should it keep its discoveries to itself? Or does it share its genetic database with others?
There is much to be said for an open approach. Genetic information does not create cures; it merely guides research. A company with an R&D department capable of quickly converting genetic hints into working drugs would do best with the largest possible pool of genetic information - that means sharing databases.
In practice, there are two snags. First, if it's not careful, SmithKline could watch millions of its R&D dollars enable a competitor to reach the market sooner. Second, sharing only works if everyone plays along, and many biotech start-ups are solving intellectual property issues the old-fashioned way - with litigation.
Still, if SmithKline succeeds in founding an open approach, it will affect the whole industry, likely forcing greater corporate specialization. In other words, sharing data would almost certainly make it more attractive to concentrate on areas competitors ignore. The big pharmas might increasingly try to "own" specific diseases - just like market niches - rather than trying to cover the entire ailment field.
"The specs on PlayStation 2 are absolutely insane," raves Chris Charla, editor of Next Generation, the Brisbane, California-based videogame mag. "It's almost science fiction. Assuming it ships as promised, it does things you could only do on a Cray five years ago."
Sony's newest time-sucker does sound pretty hardcore. The system, which won't be available until next spring (and then only in Japan), will be powered by a new 128-bit Toshiba processor, and Sony claims it will be able to render up to 66 million polygons per second (the fastest graphically accelerated PCs max out at around 8). The low-cost box will also be a DVD player and will undoubtedly sport fast Net connectivity.
Videogames are a huge business for Sony. Since 1994, more than 50 million people have plunked down an average of $150 each for PlayStation machines. The console accounted for 27 percent, or $640 million, of Sony's operating profits in the second half of 1998.
Games are just the beginning for PlayStation 2. If things go as Sony plans, a PlayStation running Sony's HAVi (Home Audio Video Interoperability) protocol will sit at the center of everyone's budding home network. HAVi, which was developed jointly by Sony and seven other consumer electronics giants, will use Sun's Jini to interconnect set-top boxes, VCRs, and home theater systems. It's not only a challenge to Microsoft, which is busy promoting its rival HAPI (Home Application Programming Interface) protocol, but it also could be the beginning of the end for the PC.
When State Street's CIO, John Fiore, lists his four key technological goals, he could be giving a network-economy tutorial for financial services companies everywhere: Real-time information and event monitoring. Complete scalability. One global interface. Only open systems.
It seems so simple, but it works: State Street is growing at an average of 21.3 percent a year by rigorously following these guideposts. Year after year, State Street spends 20 percent of operating expenses ($559 million in FY 98) on infotech. It has to - only that level of investment guarantees the security and industrial-strength transaction processing that keep the bank's institutional clientele happy, and it goes a long way toward explaining why 40 percent of the mutual fund industry continues to work with this one superregional.
This year, Sun is hoping to break out of the box - the Unix box, that is. Long a leader in Unix workstations, Sun is now making a serious play for a place in everybody's pocket - on mobile phones, electronic organizers - in the whole new range of "devices that think."
Leading the charge is Jini, an add-on to Java created by Sun's technology god, Bill Joy. Jini makes it easy for networked appliances to work together - to swap virtual business cards via infrared, or eventually to book, buy, and use an electronic airline ticket with your smart phone.
The good news about Jini is that it's open - built to publicly available standards so anybody can implement it - and flexible enough to work even on the smallest portable devices. The bad news is that it's up against Windows CE, which, though neither of the above, is backed by Microsoft marketing bucks.
Thermo Electron has been too successful. Its incubator model - which is now taught at Harvard Business School - has spawned 23 public companies over the last 15 years. The company's approach: Encourage its staff of thousands of in-house engineers to devise new products, explore their marketability, and develop business plans. If everything looks thumbs-up, Thermo Electron spins off the businesses. Successful entrepreneur-engineers are rewarded with generous stock options and can use Thermo's legal, tax, and investment services. Thermo is sorta like a publicly traded VC firm, albeit one with its own research staff.
But worries about corporate sprawl have kept TMO's share price on the skids. The current plan is to boil those 23 companies down to 15. Here, though, Thermo's famous model is a hindrance: Reorganizing public companies is not as simple as merging private ventures or subsidiaries. Perhaps a more radical approach is needed. Thermo could liquidate its holdings in all of its offspring and use the cash to start anew. With its brain trust and track record, it wouldn't be long until Thermo Electron spawned a whole new generation of start-ups.
With almost $140 billion in sales, Wal-Mart is far and away the largest retailer in the world and the second heftiest company - behind DaimlerChrysler - on the Index. The challenge for such a behemoth is to find ways to keep growing.
One opportunity: overseas markets, where giant retail warehouses are still a relative rarity. The company already has 700 stores outside the US, spread across eight countries, and is planning to open some 50 more this year. In FY 98, Wal-Mart's international profits grew by more than 47 percent.
Another big-boy advantage: Wal-Mart's inventory management system. A lot of Wal-Mart's profits ultimately derive from computer networks that closely track inventory levels and store-by-store sales data. Exploiting that information frees the company from warehousing reams of toilet paper and mountains of potato chips. Some of the cost savings boil down to ultra-low prices for shoppers. The rest Wal-Mart pockets.
All that experience managing information and product should come in handy if - as expected - Wal-Mart starts truly embracing e-tailing later this year. The company is very hush-hush about its ecommerce strategy, but it already has a promising Web site. Now the only problem is that Seattle company that's made its name synonymous with online shopping and has the $22 billion market cap to prove it.
Dominate the imagination and the profits will follow. With its network of world-class properties (from Mickey to ESPN to Miramax), Disney has long understood that intangibles like brand and image are golden in our entertainment-soaked economy.
But how effectively has Disney been leveraging its media empire lately? Not very. In mid-January, Disney launched its Go.com Network with more of a whimper than a bang. What might have been a leap forward looks more like a hasty lashing together of Disney's Web sites (ESPN.com, ABCnews.com, Mr. Showbiz) under the 43-percent-Disney-owned Infoseek umbrella.
At the macro level, FY 98 wasn't the best of times for the Magic Kingdom, either. After a solid year of earnings growth, Disney contracted in FY 98, with operating income from creative content off 39 percent. Overall, earnings were down 6 percent as reported.
Things will improve. Disney remains the best branding machine in the known universe. And as the company has proved over and over, synergy is more than just a buzzword.
Since its inception in 1981, Wind River has followed the same MO - sell a couple of standard OSes for embedded systems and leave it up to clients to adapt them to their purposes. In other words, the software handling your car's fuel-injection system might also run your digital camera.
That is starting to change. Reacting to demand for more-specialized operating systems and to stem competition from Redmond, Wind River is reinventing itself. The company is working to create a graphical interface for its embedded systems OSes. It is also busy adding personnel to focus exclusively on different products, like autos, printers, and cell phones. Chair Jerry Fiddler puts it this way: "Instead of giving them the menu, we're giving them the meal."
Last year was pretty much a nonstop party for Yahoo!'s shareholders - the most popular portal returned more than 720 percent to investors, far and away more than any other company on the WIRX (AOL came in second with a 12-month total return of 550 percent). It's not only Yahoo! shareholders who are smiling. CEO Tim Koogle has been using his superheated stock to make smart acquisitions, like snapping up broadband player broadcast.com for $5.7 billion in early April. All signs point to TV/Web convergence, so look for Yahoo! to continue making fat pipe deals this coming year. (See "Portal Powerhouse," page 113.)
CONTENDER:
Roger Ackerman
CEO, Corning Inc.
Career Corning engineer assumed top spot in 1996, and began divesting the company of its medical testing and housewares interests to focus on fiber optics and advanced materials.
Wired: How traumatic was the shift from kitchen-safe Pyrex to fiber?
Ackerman: Emotionally wrenching, but only because Corning Ware was a tradition. We have focused down to 60 to 70 percent telecommunications technology and 30 to 40 percent advanced materials. It wasn't rocket science to concentrate on areas where we can grow.
Any fear you've put all your eggs in the photonics basket?
No. Look at some factoids. Over 70 percent of the world's population has yet to hear its first phone call. China has more than a billion people and only five telephones per hundred - by 2010, it could be the same size as the North American market. We're heading for the realm of trillions upon trillions of bits per second. I don't see any real slowdown in the buildout of the network for at least a decade.
What else is on your plate?
Molecular biology. We have some technologies that speed up interaction between DNA fragments and drugs. In a simplistic way, it's a plate that has thousands of almost microscopic holes in it - you can accurately put DNA strands in those tiny surface dots and watch them interact with various drugs.
AIG, Cable & Wireless, Citigroup, Dell Computer, Yahoo!: Dick Satran (satranova@aol.com)
AMR, Marriott International: Paul Boutin (paul@hotbot.com)
Acxiom, EMC, News Corp., Parametric, Thermo Electron: Noah Hawley (noah@26keys.com)
Affymetrix, Nokia: Brad Wieners (bwieners@wiredmag.com)
Amazon.com, America Online: Chip Bayers (chip@wiredmag.com)
Enron, Monsanto, Nucor, Wind River: Michael Behar (michaelb@wiredmag.com)
Applied Materials, Charles Schwab, Corning, Microsoft: Michael Noer (noer@wired.com)
Cisco, Qwest: Jessie Scanlon (jessie@wiredmag.com)
DaimlerChrysler: Rick Overton (riverton@pacbell.net)
FDX, First Data, Intel, MCI WorldCom: Steve Bodow (sbodow@csi.com)
Globalstar, Schlumberger: Jeff Schultz (jschulz@hyperformer.net)
Incyte, Lucent, Sony: Amy Johns (ajohns@wiredmag.com)
PeopleSoft: Evan Ratliff (evan_ratliff@wired.com)
Reuters, Walt Disney: Jennifer Hillner (hillner@wiredmag.com)
SmithKline Beecham: John Browning (jb@poplar.com)
State Street: J. Everett Lynch (ev820@backroads.net)
Sun: India Leval (india_leval@wired.com)
Wal-Mart: Patricia Krueger (patricia@wired.com)
Financial data: Bloomberg; SEC filings
Because the Wired Index is just that - an index, not an actively managed mutual fund - changes will be infrequent. That said, the WIRX tracks the emerging, turbulent information economy, so we will obviously be more aggressive about making changes than, say, Dow Jones, which didn't scrape a rusted Bethlehem Steel off its Industrials until 1997.
Looking ahead, we do foresee inevitable changes. And in this spirit, we present three WIRX contenders. All might end up on the Index - or not a one - but each represents an important facet of the new economy: Citigroup's world-spanning reach and ultrasecure network; Amazon.com's mindshare; and Corning's strategic vision in selling its houseware and medical testing interests to focus on fiber.
With 100 million customers in 100 countries, Citigroup - the world's largest financial services corporation, with assets of $670 billion - is not your corner bank. Formed by last year's merger of Citicorp and Travelers Group, the combined company offers everything from mutual funds to private banking and offshore services.
Citi has been slow to embrace the Net, but it's not technodumb. Its secure network flings more than $1.2 trillion around the globe every day. The Net is next. According to Ed Horowitz (see "C-Plus-Plus Banking," page 122), who joined before the merger to serve as Citicorp's technology guru, "Citi is going to be a dot.com." Horowitz has completed a top-to-bottom assessment of ecommerce readiness, dividing the multinational into "green fields," which will be totally revamped for Net connectivity, and "brown fields," where legacy systems will linger.
With annual sales expected to top $1 billion this year and an aggressive acquisition strategy, Amazon.com has moved beyond books to become the bellwether of retail ecommerce (see "The Inner Bezos," Wired 7.03, page 114). In February, Amazon further consolidated its position as a major Internet shopping hub by snapping up 46 percent of drugstore.com, the online drugstore created by Microsoft refugee Peter Neupert.
To manage its increasingly complex information and logistical needs - thousands of suppliers, millions of customers, five warehouses scattered across the US and Europe - CEO Jeff Bezos has been raiding the brain trust of another smart retailer: Wal-Mart. Rick Dalzell, a Wal-Mart IS veep, came on board as CIO in mid-1997, and logistics chief Jimmy Wright joined Amazon last summer after 13 years with Wal-Mart.
There's already a verb to describe Amazon's ability to elbow aside existing market leaders to grab the number-one spot in an online retail category (see "Barnes & Noble's Epiphany," page 132); when it launched a new auction service this spring, it added eBay and Onsale to the growing list of companies it's hoping "to Amazon."
In classic new-economy style, Corning has been shedding businesses left and right to concentrate on fiber and photonics. Last April, Corning sold all but a token 8 percent of its housewares division - the makers of Corning Ware - to Borden. This follows divesting itself of a large commitment to the medical-testing biz (MetPath) in January 1997. Corning took a $350 million loss on Dow Corning, a joint venture with Dow Chemical, back in 1995 and now values its 50 percent interest in the bankrupt silicone breast-implant maker at $0. (If Dow Corning does indeed emerge from Chapter 11 this fall, that could prove a nice upside surprise.)
Fiber makes sense for Corning, whose history with glass goes back to the birth of the lightbulb. The number of fiber miles is expected to double in five years. Sales of optical cable and photonics equipment now account for some 60 percent of annual revenues. "What we basically have done in the last three years," says CEO Roger Ackerman, "is cut the company in half and double its profitability." (See "Glass Works," page 125.)
THE WIRED INDEX
The Future Is Undervalued
Acxiom
Affymetrix
AIG
Bandwidth Broker
America Online
AMR
Applied materials
Cable & Wireless
Charles Schwab
Cisco
DaimlerChrysler
Dell Computer
EMC
Enron
FDX
First Data
Globalstar
Incyte
Info Wholesaler
Intel
Lucent
Marriott Intl
MCI WorldCom
Microsoft
Monsanto
News Corp.
Nokia
Nucor
Portal Powerhouse
Parametric
PeopleSoft
Qwest
Reuters
C-Plus-Plus Banking
Schlumberger
SmithKline Beecham
Sony
State Street
Sun
Thermo Electron
Wal-Mart
Walt Disney
Wind River
Yahoo!
Glass Works
Department of Complaints
The Contenders
Citigroup
Amazon.com
Corning
