In a world where the accelerating pace of change has become a cliché, the most astonishing thing is how much has stayed the same in the two years since we created the Wired Index. It all boils down to two constants: the vast new opportunities created by technology, and the creative destruction of capitalism.
That destruction became clear in the spring's precipitous market swings. After a serious drop, then rebound, the Dow Jones Industrial Average finished the year ending April 17 up 2.4 percent. The Standard & Poor's 500 did a little better, rising 8 percent-plus. Meanwhile, the Wired Index climbed nearly five times as far, up 39.4 percent. The more tech-centric Nasdaq gained 42.5 percent – but only after its emphasis left it exposed to a severe drubbing in mid-April. The relative diversity of the Wired Index, as well as a focus on sound businesses over volatile startups, served as insulation during the sell-off frenzy. In mid-March, Nasdaq's year-to-year return was 50 percentage points higher than that of the Wired Index. A month later, the gap was just 3 percent.
This volatility underscores the point we first set out to make: A new economic order is emerging, driven by information and characterized by ultrahigh efficiency. The arc of the Wired Index's 40 constituents – businesses selected for their visionary grasp of technology, innovation, globalism, communication, and strategy – traces a line that shows the new economy taking shape.
As recently as 1998, economists argued that low inflation, low unemployment, and strong growth couldn't coexist – a contention so engrained it was immortalized in a textbook mathematical function, the Phillips curve. But the experts are being forced to rewrite their books.
In the year ahead, the new economy faces two critical tests. First, investors must continue coming to grips with the value of companies whose prospects defy traditional measurement. We've only just begun to realize the new economy's opportunity for growth. That said, something screwy is definitely going on around technology shares. When the open market, as it did for a crazy week in March, prices 5 percent of Palm at nearly twice the value of parent 3Com, which owns the rest, somebody is buying 2 gallons of paint in a 1-gallon can. (This became obvious to investors weeks later when Palm issues sank below their initial offering price.)
The other great test will arise from the recovery of Asia and Europe. For the first time in years, the regional economies of the world may all be performing strongly at once. Is the Phillips curve moot because technology and information are boosting productivity, or because, in a global economy, cost is determined by the supplier with the lowest price? Stay tuned.
Of course, shifts in the economy inevitably leave some companies behind. If the Wired Index is to serve as a true gauge of the new economy's progress, we must occasionally recalibrate its composition. At the same time, a yardstick that constantly changes its length isn't much good for measuring anything. To ensure a controlled and deliberate process, we follow a simple rule: Changes can be made only after one or more constituents undergoes a substantial modification in form, such as a merger or insolvency. At that point, the entire list is open to review.
Several such instances in recent months prompted us to reassess the Index's makeup. America Online announced its acquisition of Time Warner; Monsanto became part of Pharmacia & Upjohn; MCI WorldCom declared its intention to merge with Sprint; SmithKline Beecham announced its merger with Glaxo Wellcome; and AMR spun off its Sabre division. Consequently, we reassessed all 40 companies, evaluating whether each one had retained the characteristics that compelled us to choose it in the first place. In all, we opted to make one refinement, seven drops, and seven adds, effective May 1.
We originally chose AMR, the parent company of American Airlines, because its Sabre electronic reservation system represented the vanguard of the travel business. Now that Sabre stands on its own in the market, it will in the Index as well.
Monsanto is out – not because of the uproar over its focus on genetic engineering and agribusiness, but because it has disappeared into a much larger and less distinctive enterprise.
Thermo Electron couldn't sustain its ability to spin off innovative new firms. The company's approach has been eclipsed by newer models of Internet-based collaboration developed by the likes of CMGI and ICG Communications.
We've dropped PeopleSoft as well. Together with most other makers of enterprise software, it hasn't kept pace with opportunities created by the Internet to outsource key business functions.
We originally included Cable & Wireless because it was uniquely positioned to build a global fiber-optic network. But others, including Wired Index constituent MCI WorldCom, are doing that far better now, so we bid C&W adieu.
We still like Wind River, the mini Microsoft that makes operating systems for chip-enabled devices. But in this day of rocketing capitalizations, the relatively tiny firm has become virtually invisible; although the Index is market-cap weighted, Wind River became too small to register.
A sad good-bye, also, to Acxiom. It's a fine company, but it failed to graduate from collecting and dispensing data to optimizing its value. In this crowd, even 28 percent annual growth doesn't make up for missed opportunities.
Finally, and perhaps most controversially, we've dispensed with Dell. This superstar rewrote the rules of the computer industry with its direct-sales strategy and, to its credit, is trying to remake itself. But its core product now represents an increasingly narrow swath of the global computing fabric.
Replacing the outgoing companies are some that have taken Dell's principles to the next level. One is Flextronics, which provides manufacturing services to the likes of Ericsson, Philips, and Cisco. Two others are Oracle and i2 Technologies, both of which make software that manages industrial supply chains. Where Dell created stores without shelves or inventory, these innovators are helping companies create factories without assembly lines, and that qualifies them for inclusion in the Index.
To reflect the growth of ecommerce – still one of the new economy's wildest frontiers – we've added BroadVision, which builds software to manage information-rich electronic transactions.
Vodafone AirTouch, another new arrival, is assembling a globe-straddling wireless network that promises to make the Internet as ubiquitous and essential as the air through which it travels.
With the departure of Monsanto, European biotech giant Aventis becomes our standard-bearer for genetic engineering, one of the core technologies of the century. Our fingers are crossed that this company will learn from Monsanto's mistakes and navigate the political minefield more successfully.
Finally, we're taking a flier: JDS Uniphase. By increasing the carrying capacity of fiber-optic cable, this company may yet revolutionize the world's networks.
Training the refocused Wired Index on the roiling field of global business, we'll be looking for several trends that are making the new economy ever newer:
• Increasing stock market volatility. One of our favorite new economy principles is the preservation of uncertainty, formulated by Jim Griffin of Aeltus Investment Management: As better information reduces uncertainty about the future, investors bid up prices – but rising prices inflate valuations, restoring uncertainty. When superefficient markets respond to this push-pull, they do so immediately and mercilessly.
• Commoditization of transactions. Thanks to BroadVision, i2, and others, anybody with a Web site will be able to buy and sell products and services. New types of intermediaries will arise to package a stunning variety of products and services into combinations that serve proliferating customer niches.
• Ubiquitous communication. The mobile Internet will enable communication anywhere, anytime – giving rise to a wide range of products and services. When your car breaks down, its cellular link will automatically call for help. Your mobile phone will verify your eticket at the boarding gate.
• The return of the conglomerate (for a while). Both to create partnerships and to exploit economies of knowledge, a new form of conglomerate will arise – but only until markets find more efficient means. At that point, the conglomerates will be torn down.
• Blurring of software and service. Instead of buying word processors, companies will access secretarial services via the Web. Sun is leading the way, with Microsoft hot on its heels.
• A widening gap between old and new. Change feeds on itself. Those who stand on the sidelines of the new economy will soon find themselves unable to jump in.
The seeds of these developments are taking root in the 40 companies of the Wired Index. Follow it with us: A future of unprecedented growth lies ahead.
INSIDE: 40 ENGINES OF THE NEW ECONOMY • Company profiles + interviews. Page 232 • A gatefold map of the WIRX universe. Page 243
IN-DEPTH REPORTS • Warehousing wealth at State Street. Page 269 • Affymetrix's biochip power play. Page 279
Performance of $1,000 invested in March 1995 (as of March 2000)
| WIRX| $7,858.68
| NASDAQ| $5,595.66
| S&P| $2,992.91
| DOW| $2,626.92
The Wired Index averages share price changes for 40 companies. Like most modern stock indices, it is market-capitalization weighted. To prevent big-cap companies from dominating, the Wired Index has a market cap ceiling of $30 billion.
For daily market numbers, click $WIRED at stocks.wired.com.
Like most biotech companies, Affymetrix resembles a black hole on paper. But after six years of sizable losses, the company is ready to rev up production of its GeneChip DNA analysis technology and watch its profits replicate. Thomas Weisel Partners analyst Scott Greenstone expects to see Affy cut losses in half this year and turn a $27 million profit in 2001.
Such rosy projections haven't reduced the stock's volatility. AFFX was up 1,000 percent at one point, then dropped more than 30 percent in mid-March amid fears that the US government might declare genomic data public domain (even though Affymetrix is in the business of providing research tools, not patenting gene sequences). The stock spiked again with Celera's April announcement that it had mapped the human genome, and then fell anew with the news that Affy lost a patent case in the UK.
Arguments that the latest biotech bubble won't burst – that the mapping of the human genome will usher in a new era of genomic productivity – are compelling. But do nouveau-Net investors have the stomach to ride the roller coaster?
Insurance companies stay in business by managing risk, and the key to managing risk is diversification. With offices in 130 countries, AIG is about as geographically diverse as it gets, issuing policies where other firms can't or won't – Uganda, Paraguay, Bangladesh, Vietnam. This breadth has meant a steady 15 percent annual growth rate, even as the industry as a whole has stagnated. And it brings its own reward: AIG moves in tandem with the world's developing nations as they log on to the new economy and leapfrog their industrial forebears.
After canceling nearly $1 billion in unprofitable insurance premiums over the past two years, AIG is lean and hungry to expand. One persistent rumor has painted Merrill Lynch as a takeover target. CEO Hank Greenberg denies it, but he can't deny that it would be a good fit. SunAmerica, acquired last year, bolstered AIG's financial services portfolio with retirement-savings and asset-management products that are scheduled to roll out to the largely untapped Asian market this year.
Another reservoir of potential growth is the Web. Analysts at Robertson Stephens estimate that online insurance sales will reach $6 billion by 2003, and AIG hopes to tap in this year with an expanded AIGdirect.com. Then the company's digital reach will match its global scope, creating a synergy that could give new meaning to the term "comprehensive coverage."
America Online's Pending buyout of Time Warner will be remembered as the symbolic moment when new media eclipsed the old. To many investors, though, the deal seemed more likely to turn AOL into an old media sluggard than Time Warner into a new media star, and the stock price quickly lost half its value.
A rebound in March proves, according to AOL's president of interactive services, Barry Schuler, that investors are beginning to grok the company's strategy. "The merger will make broadband happen better and faster," he says. "It will transform Time Warner into an Internet-valued stock."
Until broadband happens, there's AOL TV – a brazen ripoff of Microsoft's WebTV that's scheduled to debut over the summer. AOL TV's set-top box, connected to the Net via old-fashioned modem, will augment broadcast programming with a Web browser to provide Net-based enhancements. The next version will use TiVo's technology to pause and record shows – features Microsoft rolled out in December.
Can AOL out-Microsoft Microsoft? Both companies have the same core competency: marketing to the masses that follow early adopters. But AOL also has a captive audience of 22 million users, compared to WebTV's 1 million. And now it owns Time Warner Cable's high-speed pipeline and its media channels – TNT, CNN, HBO, the WB – whose cooperation is necessary to create enhanced content. As broadband catches on, the set-top box promises to morph into a portal-cum-server for the networked home of the future. Could it be that AOL's vision is clearer than Wall Street's?
Between fiscal 1998 and '99, the semiconductor industry hit a speed bump as the Asian flu, sub-$1,000 PCs, and a sudden oversupply of chips brought revenue growth skidding to a halt.
But the real story was as plain as the processor in your watch: Chips everywhere. Intelligent devices. Moore's law enshrined in everything from cars to the roads they drive on. And Applied Materials, the world's largest vendor of semiconductor manufacturing equipment, at the center of it all.
During the slump, CEO Jim Morgan bided his time, streamlining production processes, ramping up capacity, and elbowing aside competitors like Tokyo Electron, Lam Research, and Novellus that weren't prepared to intensify R&D when the going got tough. Last year semiconductors grew 16 percent, semiconductor manufacturing equipment grew 19 percent, and the 10 largest equipment companies grew 31 percent. Applied's revenue grew 50 percent.
The company will ride into the future, Morgan says, on three waves of technology: smaller line width (recently reduced to .18 microns), new materials for lines (copper) and insulation (low-K dielectric), and bigger wafers (moving from 200 mm to 300 mm).
"The first wave pulled us out of the downturn of '98-'99," he adds. "The other two are just glimmers out on the ocean." The CEO has been hanging ten on the first swell and he's in position for the next – but even if the tide shifts, he has proven he can hold his own against the undertow.
Aventis' roots in dye synthesis – the business of German chemical concern Hoechst Aktiengesellschaft circa 1865 – have grown into one of the world's largest life sciences companies, with facilities on five continents. Aventis has been around only since last December, when Hoechst merged with France's Rhône-Poulenc. The rigors of government approval make it difficult for many biotechs to stay afloat long enough to sell anything, but Aventis hopes to mitigate bureaucratic delays with an innovative multithreaded R&D process.
Although the company is a leader in vaccines and active in agriculture and husbandry, 75 percent of sales come from pharmaceuticals. Yet many of its drugs aren't available in the US, the world's largest market, and one that offers high margins and uncontrolled prices.
In a bid to boost US revenues to 40 percent of its total, Aventis is investing in its sales force and putting the final touches on a new wave of FDA-approved products. Given the US' favorable attitude toward biotech products in general, this goal seems both audacious and eminently achievable – that is, entirely appropriate for a company whose potential is as limitless as that of the genetic code.
When every online buyer can find a seller and vice versa, the Web becomes a bazaar teeming with niche markets. Communities can aggregate around mutual needs or symbiotic relationships; free-floating products and services can be collected by third parties into an endless variety of personalized combinations. This web of liquidity is BroadVision's playground.
While the average ecommerce site is a tangle of custom code, BroadVision offers an integrated solution right out of the box. The buzz alone was enough to drive the stock price up 315 percent between November and March. It could fade as ecommerce operations get beyond their initial investment phase, but as Prudential's Peter Ausnit points out, "Once you install an ecommerce server, the company that built it has a lot of power over you."
With an eye to the future, CEO Pehong Chen is busy assembling technologies critical to the next wave of online business. In January, he put up $877 million in stock to acquire Interleaf, whose XML-based technology will enable BroadVision's customers to create templates that can be streamed to a variety of devices – not just Web browsers, but cell phones, Net appliances, and whatever comes next.
NEW BLOOD
Richard J. Markham CEO, Aventis Pharma
How do you justify a $3 billion R&D budget?
We don't call it R&D anymore. We call it DI&A, drug innovation and approval. The goal is to produce innovative drugs that gain approval so they can be sold to patients who need them, and DI&A helps us focus on products that will make a difference in the end. We've just submitted a new class of antibiotic for approval that we developed much more quickly than we could have in our former paradigm.
How will you avoid following Monsanto over the cliff of biotech backlash?
Aventis and Monsanto are structured differently. Seventy-five percent of our business is Aventis Pharma, which includes pharmaceuticals, vaccines, and plasma proteins. Aventis CropSciences represents only 25 percent, and most of that is traditional crop production and protection, with biotech R&D for new products only. Of our $3 billion R&D budget, $2.4 billion goes into Pharma, and while our strategy is to optimize R&D synergies between pharmaceuticals and agriculture, the two operate separately.
Will the public warm to frankenfoods?
We must look at this issue from a long-term perspective. Population growth, increasing life expectancy, and environmental degradation create a need for more and better products. Advances in genetic engineering could enhance the yield and nutritional benefit of crops. These advances are developing at an unprecedented rate. It will take a little longer for everyone to understand their value.
NEW BLOOD
Pehong Chen CEO, BroadVision
Does personalization matter to the post-B2C Internet?
Personalization is delivering the right information to the right people. Through the end of last year, we were considered a B2C player, and with 56 percent of our customers doing B2C, that's still true. But 36 percent of our customers are doing B2B.
How real is the exchange phenomenon?
It's real. Companies are genuinely looking for more efficient means of doing business. But a lot of hotheaded service companies jumping on this wave can't articulate a business model. That's a very dangerous position. Things come and go. Two years ago it was push technology; tomorrow it'll be something else.
How many exchanges does one industry need?
Each market will have one or two key exchanges, not 100 or even 20. And they'll constitute only about 10 percent of all transactions – the rest will still be direct sales. Exchanges will fall out of favor, just as etailers have fallen out of favor today.
What point are etailers missing?
It's smarter to try and get 30 percent of a person's lifetime value than 30 percent of today's market. Companies today deal with their customers on a troubleshooting basis, but at some point they're going to figure out that success is about building long-term relationships.
Imitation may be the sincerest form of flattery, but in Charles Schwab's case, it's a call to battle. The discount brokerage has adapted so successfully to the Internet that old-line Wall Street firms and ebrokerages alike are scrambling to emulate its click-and-mortar model – and eating away its market share.
Schwab has responded by reinventing itself once again, this time as an information-age version of a full-service brokerage. The 1999 run-up in the company's stock price, coupled with changes in regulations that formerly separated brokerages from banks in the US, gave Schwab the means to acquire upscale bank US Trust in January for $2.7 billion. The result: an instant high-end service profile that should attract the kind of customers who can keep Schwab's asset base growing at its habitual 40 percent rate. The February acquisition of CyBerCorp, a pioneering developer of direct-access software that routes stock trades directly to market makers, puts the brokerage in a position to streamline its operation and popularize online trading of nonstock securities as those markets jack in.
The next step is wireless – "An opportunity to make our offering truly seamless," says CIO Dawn Gould Lepore. Schwab is already WAP-enabled in Hong Kong and Europe, and it plans to roll out the wireless PocketBroker service for Palm and other PDA devices in May. Schwab's artful blend of tech, marketing, and business savvy is bound to become a mainstay of the wireless Web.
Telcos need to pump increasing amounts of IP data through their lines, and Cisco wants to make it as painless as possible. The company's strategy is to sell routers and switches compatible with both traditional TDM gear and next-generation, high-bandwidth optical transport – and then move customers up to optical components.
Cisco picked up its optical product line in four significant acquisitions last year: Cerent, Monterey Networks, Pipelinks, and Perelli Optical Systems. Together, they give the company an end-to-end fiber solution that's orders of magnitude faster than the best legacy systems, and a lot more scalable.
But telcos aren't going to buy all this pricey hardware unless consumers clamor for broadband services. To make sure they do, Cisco is investing in broadband technologies of all kinds. In fact, its bid for wireless broadband – the VOFDM standard approved by the FCC in March – promises to leapfrog cable and DSL while sidestepping the line-of-sight issues that plague wireless transmissions.
The stakes would be astronomical even if Cisco's market cap weren't vying with that of Microsoft. This is one of those companies that make financial analysts tear their hair out looking for a flaw. Net income leaped 29 percent in FY 98, then bounded another 55 percent in FY 99. Net income per employee amounted to a staggering $121,000, compared to $110,962 for peers and $64,623 for S&P 500 companies.
Can the first mover in network routers survive a head-on confrontation with optical forces such as Lucent and Nortel? All the hardware is in place – now it's time to turn on the juice.
Germany's auto leviathan rang in the new millennium with a bid to change the structure of the industry: a $200 billion online market for car parts, launched in collaboration with GM and Ford. Dissolving not only the inefficiencies of traditional purchasing systems but the alliances built into them, the new exchange is expected to cut costs for the three giants by up to 10 percent over the next few years. Eventually, according to analysts at Goldman Sachs, DCX's one-third stake could be worth as much as 15 percent of the company's $66.1 billion market cap.
Though DaimlerChrysler fared well overall in 1999, the stock price failed to follow suit. Chalk it up, company spokespeople say, to the market's disdain for nontech stocks last year. They're counting on B2B rocket fuel to kick DaimlerChrysler into overdrive. Given the staggering potential of B2B automation, the automakers' exchange could do more than succeed – it could change the way the world does business.
In a world gone digital, the top provider of platform-independent data storage is a good thing to be. EMC's profit was up 50 percent in 1999; its revenue was up 24 percent.
With gigabytes proliferating like rabbits in springtime, what could possibly stand in the company's way? Some analysts worry that Web-hosting providers like PSINet might bundle storage with other services and lure customers away – but EMC's open-platform policy makes it just as likely that online storage providers would use EMC gear to do it. A bigger challenge comes from behemoths like IBM and Hewlett-Packard, which would love to sink their claws into the enterprise storage market.
An R&D budget of $1.7 billion over the next two years, with 80 percent devoted to software research, should keep competitors at bay. The only thing that worries Don Swatik, VP of product management, is keeping pace with demand – "the dark side of the good news," as he puts it.
Having turned natural gas and then electricity into spot markets – sold as needed rather than through long-term contracts – Enron is aiming to do the same with bandwidth. "The core competence is identical in each business," says president Jeff Skilling. Selling bandwidth as a commodity changes the rules for competition in telecom, where the price of entry once meant building an entire vertical market. In Enron's scheme, service providers will be able to buy what they need and/or what they can afford.
How big is the market? "Bigger than the combined energy and electricity markets worldwide," Skilling predicts – a sure bet to increase revenue beyond the 28 percent jump in 1999.
The immediate plan is to get bandwidth from other networks and resell it. Meanwhile, the company has been laying its own digital pipeline at a furious pace, accumulating 13,000 miles of fiber to date. Although hydrocarbon and photons are as different as the old and the new economy, the logic of the network applies to both.
Renowned for using savvy information management to deliver more than 4.5 million packages daily to 210 countries, FedEx finds itself in the middle of a global revolution in the management of industrial supply chains. Sure, the Internet can move information around the world in a flash – but when you need to deliver circuit boards, it's a job for FedEx.
FedEx's just-in-time deliveries have helped companies like Dell reduce inventory and increase responsiveness, but lately UPS has stolen some of its thunder by cutting deals with etailers. FedEx aims to one-up the competition by midyear with a full-service supply-chain management solution developed in partnership with B2B software developer SAP and consultancy KPMG. By helping suppliers and manufacturers coordinate their needs in concert, the service will cut costs and time to market.
Despite FedEx's new economy panache, it's hard to ignore the fact that its business depends on the old economy's lifeblood, petroleum. As fuel prices rose in 1999, the company was forced to protect profits by piling on surcharges. The added efficiency of new online customer services such as invoicing and bill payment will help offset fuel costs, but with oil prices expected to remain high for the foreseeable future, it's FedEx's B2B play that's just in time.
Industry analysts predict that online transactions will increase by more than 100 percent annually for the next five years. As the company that authorizes and processes half of the Net's credit card orders, First Data is at ground zero of the ecommerce explosion.
You get a sense of the size and scope of this outfit when you consider that, even with 50 percent market share, online transactions account for only 1 percent of First Data's business. The rest is in real-world credit card transactions, of which the company handles 40 percent.
To drive that offline business to the Net, CEO Ric Duques is cultivating startups like TransPoint, a joint venture between First Data, Microsoft, and Citibank that processes online billing. The partners sold TransPoint to CheckFree for $1 billion in stock in February. "Now," Duques says, "we have a piece of the biggest electronic billing operation, and it will use First Data's services."
Merrill Lynch analyst Stephen McClellan has a different take. "By selling TransPoint," he scoffs, "they moved out of participating directly in what will be one of the biggest ebusiness markets."
In the short run, First Data stands to gain more from the shift from paper money to electronic payments at gas stations, movie theaters, and fast food restaurants. But the number of online merchants taking advantage of the company's services rose by 200 percent over 1999, to 80,000. If it can sustain that momentum, First Data eventually will stand uncontested as the disintermediator's intermediary.
For electronics vendors, the new economy means production capacity on demand. The benefits of outsourced manufacturing – vastly simplified operations, reduced overhead, turn-on-a-dime flexibility – have made Singapore-based Flextronics the world's fourth-largest provider of electronics manufacturing services (EMS). Compaq, Ericsson, Philips, and Cisco have taken advantage of the company's back-end logistics, and Fujitsu Siemens, 3Com, and VA Research Linux Systems signed on in 1999.
Communications products account for more than 30 percent of the company's revenue. With big telecom players like Alcatel and Lucent expected to outsource $20 to $30 billion worth of manufacturing within the coming five years, Flextronics is in line to become the fastest-growing EMS company. It's already one of the most international, with facilities in the Americas, Europe, and Asia. Yet rapid growth may be its Achilles' heel. In the coming year, Flextronics will integrate the Dii Group's worldwide facilities with the other six companies it has acquired since January.
So far so good, though, as revenue is expected to grow more than 75 percent this year and another 65 percent in 2001. With a 1,500 percent return since its IPO in 1994, Flextronics is an unsung powerhouse of the new economy.
NEW BLOOD
Mike McNamara President, the Americas, Flextronics
Is outsourcing smarter when the economy is up or down?
In an up economy, it's pretty straightforward: Instead of needing to make 100 units, you need to make 200. In a down economy, if an OEM isn't outsourcing, it's stuck with excess infrastructure. This forces OEMs to ask where they really want their capital to go. Our business is unique that way: The entire risk profile of investing in bricks and mortar goes away.
What's rolling off the production line today?
Handheld wireless devices are the fastest-growing segment. The telecom guys are adding bandwidth so fast that if you buy a cell phone today, before long you'll want another one because they'll have pagers and scrolling capabilities to access the Internet. Increasing bandwidth also means there's a lot happening for us on the infrastructure end – routers, switches, and hubs.
Is it tempting to take over the entire supply chain?
We're investing in our own component manufacturing operations to get as much of it as we can. This puts us in the plastics business, so we need a tech road map to stay on top of things like thin-walled plastics that are lightweight but don't break when they hit the floor from 4 feet.
NEW BLOOD
Pallab Chatterjee COO, i2 Technologies
What does $9.3 billion buy these days?
The biggest B2B commerce solution available. With the merger of i2 and Aspect, we have 400 of the world's largest customers and a $200 million R&D budget – the largest in the world focused entirely on B2B. We now incorporate design collaboration, direct procurement, and content all in one place.
How much can an online exchange save?
Increasing efficiency in the supply chain and the delivery process can cut 30 percent of costs, but there's much more to it than that. We're reshaping commerce, allowing companies to synchronize with their customers and their trucking and freight suppliers.
Does one size fit all?
In a sense, yes. All types of companies can benefit from working together. We're crafting a number of vertical exchanges, like myaircraft.com for aerospace. Everyone can benefit.
What can we expect from your alliance with IBM and Ariba?
It brings together all the indirect capabilities of Ariba's B2B ecommerce platform, the direct capabilities of our TradeMatrix services, and IBM's ebusiness consulting capabilities. It's the closest thing to a total Internet platform to date.
After accidentally blowing up 12 telecommunications satellites in southern Siberia in 1998, Globalstar was on pins and needles as it prepared to launch the rest by January 2000. Now 52 are up and orbiting, creating a worldwide wireless telecommunications infrastructure to be reckoned with.
If anyone was in doubt, Globalstar's Siberian surprise proved that satellite networks are devilishly difficult to operate. Not only are they costly to build, launch, and maintain, but it's tough to convince customers to lug around a bulky satellite handset. Line-of-sight issues and transmission delays complicate matters further.
Nonetheless, Globalstar will report its first revenue this year, thanks in part to the bankruptcy of Motorola-backed nemesis Iridium, which fell back to earth last March. Globalstar capitalized on its competitor's demise by offering former Iridium customers rebates of up to $500 to sign up. And there's the rub: Without handsets in customers' hands, a satellite network is just a flock of silent birds.
To grow the user base, Globalstar is counting on relationships – with Vodafone and the armed services of Italy – that focus on letting people communicate from out-of-the-way places. The company's best hope is to concentrate on areas that don't yet have a wireless infrastructure – developing nations that stand to be among the new economy's biggest beneficiaries.
At a moment when every company with a Web presence is searching for a B2B angle, i2 has developed the broadest vision of what B2B might mean: industry-wide online collaboration, in which every aspect of a company's business – product design, procurement, inventory control, content development, distribution – benefits from instant communication and transactions.
The company is on track to pull it off. TradeMatrix, i2's platform, currently ties together industries as diverse as pharmaceuticals and aircraft manufacture. With its buyout in March of enterprise software developer Aspect Development – at $9.3 billion, the software industry's largest acquisition ever – i2's network will encompass 17 million parts (not counting services) and 100,000 suppliers. i2 believes it can boost the value of its customers, such as Motorola, IBM, Nucor, Hewlett-Packard, and Ericsson, by $50 billion by 2005. Analysts predict 35 percent growth annually.
B2B's heyday, like B2C's before it, can't last, but that makes i2 doubly wise to have invested its ample valuation in something tangible. It's a different company now, but one that has what it takes to stick out the rough ride ahead.
While Celera stole headlines by claiming to have deciphered the human genome in April, Incyte has quietly focused on making it possible to put this gargantuan body of knowledge – the nucleotide sequences that characterize some 140,000 genes – to use. Based on public domain research, Incyte's flagship LifeSeq Gold database now covers 95 percent of the territory, including data about gene expression, links to disease, and an actual clone of each gene.
Unlike most of its customers, who pay up to $15 million to access LifeSeq Gold, Incyte doesn't make drugs. But it does apply for patents – thousands each year. Database subscribers agree to share any sequences they complete based on fragments obtained from LifeSeq, but if they market a product based on one of the database's 50,000 proprietary genes, Incyte hits the jackpot.
The practice of patenting genes has come under fire lately, and critics haven't spared Incyte, which has a penchant for claiming sequences whose functions aren't fully understood. Meanwhile, Affymetrix is pursuing Incyte's market with tools that produce the kinds of information Incyte sells.
Shifting the customer base from drug companies to academic facilities, which spend twice as much on research, should boost nonpatent revenue in the coming year, but the company is already on to the next big thing. Proteomics – the study of human protein expression – promises a quantum jump in drug efficacy, and Incyte's LifeProt database, launched last May, lays the groundwork. In the race to reengineer the chemistry of the human body, Incyte is still one step ahead.
NEW BLOOD
Kevin Kalkhoven Cochair and CEO, JDS Uniphase
Futurist George Gilder calls JDS Uniphase "the Intel of the telecosm." True?
That's a nice thing to say, but to become that, we'll need to master one thing that Intel has mastered: manufacturing at very high volumes. Can we get there? Yes, but not right away. We're using so many different materials; Intel just uses silicon. When we've mastered that problem, I'll be happy to take the title.
When will optical networks reach the home?
I don't think it will happen. There are too many roadblocks, and alternative technologies may be better than fiber: DSL, cable, and third-generation cellular, or 3G, which can run at 2 Mbps. In North America we tend to take a parochial attitude toward cellular, because ours isn't very good compared with the rest of the world's. In Europe, a whole generation of kids has been raised on cellular. It can work.
Does that cap your market?
Soon there will be 1 billion cell phones worldwide, and every one will connect to a base station. Think about the bandwidth demand that will create – especially at 3G speeds.
Can we look forward to optical chips?
We'll never see an optical chip, but eventually we'll have hybrid optical chips. You need a silicon substrate to drive the electronics and silica for the optical circuits, and the lasers will be made from gallium arsenate or gallium indium phosphite, just as they are today.
For the first time in its history, the company inside just about everyone's PC faces real competition. Advanced Micro Devices shattered the 1-GHz barrier in March and promptly inked contracts with Compaq and Gateway.
Intel president and CEO Craig Barrett didn't break a sweat. For one thing, he had the 1-GHz Pentium III waiting in the wings, to say nothing of a prototype next-generation 1.5-GHz Willamette. For another, he had already started to broaden the company's focus to include non-PC revenue streams.
The new target is ebusiness, which means selling scalable networking products and high-end support services. In fact, the company's own fledgling ecommerce effort already brings in $1 billion a month, helping to lift Intel out of the low-margin catfight that has driven rivals like IDT and Cyrix from the PC business. With income up 20 percent in FY 99 (not counting acquisitions) and Q4 revenue reaching a record $8.2 billion, it's in fine shape to make the transition.
But is it the right one? The coming generation of handhelds will need a different kind of processor – one that sucks up less battery life, like the Crusoe chip announced by Transmeta in January. While Crusoe has yet to prove its mettle, it demonstrates that AMD isn't the only snapping turtle swimming in Intel's pond.
Bandwidth is the difference between delivering ASCII and full-screen, full-motion video with 5.1 surround sound. Uncork bandwidth, and you make way for unfettered digital communication between every node on the Net. That's just what JDS Uniphase, formed by last July's merger of JDS Fitel and Uniphase, aims to do.
The first company to manufacture a full range of opto-electric components, JDS Uniphase averaged 100 percent growth in 1999, igniting Wall Street's recent love affair with fiber optics. Meanwhile, the company has changed the structure of the industry, shifting the components business away from kingpins like Lucent and Nortel and into the hands of upstart suppliers. In the coming year, it will quadruple its manufacturing capacity, broaden its product portfolio, and bundle complex components into simple modules.
The phenomenal growth of the optical components industry has yet to show up on JDS Uniphase's bottom line. For the last six months of 1999, sales totaled $511.8 million, up from $121.2 million – but profit was down $255.7 million. Wall Street accepted this as the typical goodwill loss when you combine companies that have intangible, rather than physical, assets. Nothing stands in the way of a blazing 2000.
Analysts suggest that, like railroads, fiber might go bust when the building boom is over. But where trains gave way to airplanes, JDS Uniphase will be optimizing the light-carrying capacity of fiber for a long time to come.
Lucent committed what amounts to a cardinal sin in the new economy – failing to move at broadband speed when it came to managing change. After fumbling the integration of Ascend Communications and failing to meet demand for optical networking gear, the company missed its quarterly earnings estimate, for the first time ever, in Q4 1999. That loss of focus cost Lucent its luminous position in optical systems to Nortel. (To say nothing of the loss of rising star Carly Fiorina.)
Fortunately, the fundamental picture remains promising. "The clouds hanging over Lucent have little to do with demand for their products," according to Paul Sagawa, an analyst at Sanford C. Bernstein & Co. "They're the best broad play on all the important categories in Internet infrastructure."
To optimize its potential for growth, the company is jettisoning its business in traditional telecom gear. The new focus will be the communications industry's hottest hardware segments: optical, IP, and wireless networking. It's a strategy that analysts agree will put Lucent back on top – until the next test of the company's reflexes.
Booking 355,000 hotel rooms across the planet gives you the opportunity to collect the world's most extensive store of information about the characteristics, habits, and preferences of people who travel. So far, Marriott has tried to leverage its customer database into targeted marketing of its many brands with mixed results: Revenue was up 10 percent in 1999, though net income rose only 3 percent.
The big payoff should come when the company joins its customer profiles with the 12 million stored in its frequent-lodger program – the largest in the travel industry. By cross-referencing personal profiles with product preferences, the world's busiest host will be able to target incentives and promotions with unprecedented precision.
"We're also striking deals with the likes of E*Trade," says Lynne Roach-Hildebrand, SVP of Marriott Loyalty and Database Marketing. Savvy customers will use their reward points to buy shares of MAR.
Eighty acquisitions in five years have extended the reach of MCI WorldCom's fiber network into 65 countries and across the gamut of telecom services. But without a wireless strategy, it risked getting stuck in a 20th century tar pit. Enter Sprint, the cellular sovereign of the States. If the proposed $129 billion merger goes through late this year, the conglomerate stands to dominate the new era of telecom in the US.
MCI WorldCom has always had a knack for positioning itself at the frontier, and for achieving the kind of consistent 20 percent-plus earnings growth that rivals high fliers like Cisco and Microsoft. Adding Sprint, MCI WorldCom's business becomes downright hyperkinetic.
Sprint will give MCI vice chair John Sidgmore a massive opportunity to upsell the company's 20 million voice customers to high-growth, high-margin services. Analysts reckon the wireless data market will surge from $1.8 billion today to $13 billion by 2003. "If we can put wireless and data together, we'll be big winners," Sidgmore says. "If we can't, we'll be in big trouble."
The US Justice Department may yet force Microsoft to curb some of the aggressive behavior that led to its monopoly on the desktop. But the real cost of the two-year antitrust case has been the diversion of Redmond's attention from the serious business of reinventing itself.
As the company argued its case, momentum began to shift from Web browsers to Web-enabled phones, gaming machines, and appliances. Bill Gates, who took on the titles of chair and chief software architect after handing the CEOship to Steve Ballmer in January, is painfully aware of the company's vulnerability. Shorn of monopolistic advantages, Microsoft will find it doubly difficult to maintain the high growth rates and 40 percent margin that once made it the most highly valued company in the world.
Eyeing the low-hanging fruit – deep-pocketed online businesses – Gates and Ballmer are pouring $400 million into a joint venture with Andersen Consulting to support the Microsoft enterprise platform based on Windows 2000. It's going to be a lot harder to push the X-Box networked game console, announced in March, past Sony, Sega, and Nintendo.
Microsoft talks a lot about the Internet, but Net-related products and services are expected to contribute only 14 percent of Microsoft's $24 billion revenue in 2000. A bold plan to boost that percentage – a subscription-based ASP model currently being tested on MS Office – is equally likely to eat into revenue from packaged software.
It looks like an uphill climb, but Microsoft has always thrived on competition. The beast of Redmond may have lost a few teeth, but – with an $18 billion war chest and a formidable army of programmers – it's still got one powerful set of jaws.
Lo and behold, the Fox has seen the light: The future of News Corp.'s sprawling media empire is digital!
Murdoch isn't exactly ahead of the curve, but he has an unimpeachable record of doing the obvious better than anyone else. On the other hand, News Corp. is mired in the notion that the next big platform is interactive TV delivered via satellite. A rumored deal with General Motors – Murdoch has his eye on Hughes Electronics, the GM division behind DirecTV and DirecPC – would secure a broadband infrastructure. But with satellites falling out of the sky lately, it seems just as likely to come crashing down on his head.
Meanwhile, back in reality, Rupert's 27-year-old son James, executive VP in charge of News Corp.'s Net ventures, sees the future in the company's $1 billion investment in Healtheon/WebMD. "Its business model is more spherical than vertical or horizontal," he says. "It has all these different revenue streams within a given category."
The goal is to "build the connected side of our content categories," James says, which may translate into "aggressive" investment in startups as News Corp. tries to establish multiplatform distribution for its properties. "The World Wrestling Federation and Martha Stewart are compelling models," he adds. "Those sorts of businesses become really powerful when they're integrated." Which begs the question: Is News Corp. going for a body slam – or a closet makeover?
NEW BLOOD
Mark Jarvis Senior VP Worldwide Marketing, Oracle
Esther Dyson has suggested that database software is becoming a commodity.
Esther is completely wrong. The database is becoming the new operating system. When you go to a Web site, you don't care about the operating system, but you care about the quality of the information and the integrity of your transactions. Rather than becoming a commodity, the database is becoming a nuclear weapon.
Is Oracle an ebusiness?
We're halfway there. We're consolidating so we have one of everything, like dot-coms do, instead of one of everything for each country, like old businesses do. Today, we need only one data center instead of the 42 we used to have. Considering we're a high tech company, this has been very painful. But becoming an ebusiness is about change in technology, structure, process, and culture. In another 12 months we'll be completely there.
Where does Microsoft fit in?
Microsoft is irrelevant. Their products won't turn you into an ebusiness. Sixty percent of our sales these days are to dot-coms replacing a Microsoft database that doesn't scale. The Microsoft era is over, and the new leaders are emerging – companies like Cisco, Sun, and Oracle.
You've got to be quick on your toes to double manufacturing capacity overnight. With cell phones outselling computers, televisions, stereos, and even landline phones, that's what Nokia is gearing up to do by year-end. The 17 production lines in the company's main Fort Worth, Texas, plant are pounding out phones 24/7 at a rate of 2 million each month.
While arch-rival Ericsson struggled against "internal manufacturing problems," Nokia squeezed out the first WAP mobile phone that augments voice communication with scaled-down Web pages. Next year's GPRS handsets will add always-on capability and DSL-speed data rates. Thus, in a deft one-two punch, Nokia will usher in the ability to reach out and touch someone anytime, anywhere, in voice or text.
Although fulfilling ravenous demand is a sine qua non for staying in business, Nokia wins because it makes a better product – and even when it's not technologically superior, it's cool enough to debut on the couture runways of Paris, as model 8210 did last October. This isn't the first time technology has become a fashion statement, but it might be the first tech fashion statement that changed the world.
As befits an evolved form of the traditional steel company, Nucor's agility served it well during a nasty downturn last year, when foreign manufacturers dumped steel into the US market at a loss. The company's new thin-slab technology, which enabled it to melt and roll scrap metal at a fraction of the usual cost, helped keep it afloat, and now its girders, bolts, bars, and grinding balls are back in demand. Earnings for the quarter ending December 1999 hit a record $1.12 per share, and a profit margin of 8.9 percent blew away analyst expectations.
But for all its tech smarts, Nucor got hit by a classic new-economy blindside: It failed to patent the thin-slab process, which got picked up by competitors like Steel Dynamics, Hylsamex, and Commercial Metals. CEO David Aycock won't make that mistake next year, when he plans to roll out proprietary strip-casting technology that promises even greater productivity and environmental friendliness.
Five years ago, Larry Ellison resolved to build his company's database architecture around the Internet – and today, Oracle is at the heart of the ebusiness boom. Profit surged to $1.3 billion in 1999, a 59 percent gain over 1998.
Some of the gain is attributable to the efficiency of the company's own software. Last June, Ellison said he would use it internally to slash $1 billion in costs and raise margins to 30 percent. Analysts passed it off as typical Ellisonian bluster – but nine months later, Oracle had blown past both goals, with Q3 earnings up 80 percent.
Ellison's sharp timing didn't stop there. Oracle Applications Release 11i, an add-on to the Oracle8i database released in May 1999, arrived just in time to spark the B2B fever from which the Net has yet to recover. The first version was developed to power the mold-breaking online parts cooperative of DaimlerChrysler, Ford, and GM. Three more partnerships followed with top players in the retail, minimart, and paper industries.
"The exchanges put Oracle at the epicenter of ecommerce," says analyst Melissa Eisenstat of CIBC World Markets. But given Oracle's plan to skim a percentage of sales, "there's no immediate revenue impact. They have to prove that the technology and the business model work."
As far as we're concerned, the technology is proven, and the business model is flexible. Oracle has what it takes to drive the evolution of business in a networked economy.
Once a top manufacturer of mechanical design and engineering software, PTC (formerly Parametric TechnologiesCorp.) has spent the last 18 months adapting to the Web – and suffering the pain of corporate redefinition. "It has required us to learn a lot more about our customers and the industries they work in," executive VP Barry Cohen admits.
The company's renewed vision amounts to a fundamental shift in the way engineering companies work, embracing fluid collaboration, heterogeneous environments, and rapid product development. Windchill Factor!, the tool suite that embodies this "flexible engineering" concept, has already attracted clients like Lockheed Martin (to the tune of $3.5 million), General Electric, Siemens, and Sun. Windchill earned $80 million in FY 99, and $38.3 million in Q1 2000 alone, an increase of 700 percent over the same period last year.
As PTC's conventional CAD business stagnates – total quarterly revenue is down 4 percent in Q1 2000 – Windchill's software-as-service approach points a clear path to the future.
Will it work? "They're now at the point of being able to renew attention and effectiveness in the core business," says Jay Vleeschhouwer of Merrill Lynch. "The short answer is yes."
Building on the original old economy network, Qwest launched its fiber-optic pipeline by striking a deal with Southern Pacific Railway to lay cable along its tracks. But after running fiber from coast to coast and shore to shore, the company realized it didn't have a local strategy.
So last year, Qwest jumped into the dating game, seeking a partner that could help it cover the all-important last mile. Finally settling on US West last July, big Q secured the FCC's blessing in March.
Qwest chair and CEO Joseph P. Nacchio admits that the merger will "test our ability to execute on a much larger scale," but there's little potential downside. The company will have 29 million customers and 3 million miles of fiber in the US, plus another 1.3 million worldwide. According to A. G. Edwards analyst Anthony Ferruglia, "the cost, revenue, and capital synergies are all there."
The ability to restructure continually without losing focus is a key network economy skill, and Reuters has been getting a lot of practice at it lately. While run-of-the-mill dot-coms bite into one another's markets, the original provider of international financial information – Reuters started with carrier pigeons in 1849 – is biting at its own legs to stay competitive.
"The big issue for old-media companies like us," admits Tom Glocer, CEO of Reuters Information, "is to have the courage to cannibalize parts of our existing business, even if they have high profit margins." Take recent Web content partnerships with Multex and Dow Jones, both of which aim to bolster Reuters' traditional strengths with juice from erstwhile competitors. Can the company defer to rivals and turn bigger profits than it would on its own? Or is it all simply a ploy to attract Silicon Valley capital?
A more intriguing part of Reuters is Instinet, an electronic agency brokerage. Instinet has been on an acquisition binge lately, taking pieces of investment bank WR Hambrecht, institutional brokerage Lynch, Jones, & Ryan, and Belzberg Financial, a developer of trading software.
The two sides of the company are managed separately, but a recent reorg hints at a powerful synergy: Information supplied by Reuters will drive investors to the company's own trading network. As the global markets become increasingly accessible through the Net, Reuters is in line to take a big piece of the action.
Like the space shuttle shedding its rocket, AMR spun off Sabre, its electronic travel reservation service, in March. But in this case, the rocket's fuel is far from spent. The service, a prototypical B2B exchange that connects travel agents, airlines, hotels, and car rental companies, is now free to pursue relationships with carriers that hesitated to share a seat with American Airlines, and it's ready to take its pet project, Travelocity.com – the Internet's third-largest ecommerce site, according to Media Metrix – to the moon.
Online travel bookings were up 184 percent in 1999, and revenue from Travelocity.com was up 215 percent in Q4 alone. With the mother ship left behind, Sabre's prodigious productivity becomes pure thrust.
Will Sabre be able to navigate without AMR's experience? The parent wasn't providing much more than administrative support in recent years, and now the service is free to fly where the market dictates. Let's put it this way: Maybe American should have gotten out of the passenger business to fine-tune this rocket.
How did an oil exploration company land a contract to build North America's first smartcard-enabled rail ticketing solution for Dallas Area Rapid Transit? The answer is information expertise, whether the task is tapping oil fields or tracking fares and destinations.
Schlumberger has been hauling computers into the desert and beaming data back to its client for decades, but the oil industry's cycles of boom and bust have driven the company to leverage its skills into other areas. The acquisition of Fairchild Semiconductor in 1979 brought strengths in microprocessor manufacture and testing, which have led to dominance in smartcards, the chip-on-a-card wonders that are fast approaching the computing horsepower of the average PC. Last year, the company introduced the first smartcard-based identity module for mcommerce, electronic passports, and other high-security functions.
But Schlumberger is ahead of the market, and meanwhile a worldwide surfeit of oil has stunted growth two years in a row. 1999 was especially difficult, with sales down 22 percent. Analysts expect the smartcard business to take off this year as the wireless Web fuels an explosion in mobile transactions – but today it accounts for less than 14 percent of Schlumberger's business. The company will have to market its innovations aggressively to complete the long transition from the old economy to the new.
From discolored teeth to cancer, if you've got an ailment, SmithKline Beecham has a remedy. In 1999, the company parlayed its global presence in pharmaceuticals, vaccines, and over-the-counter medications like NicoDerm and Tums into an 11 percent boost in net income. Most of the growth came from new products like Lymerix, the first Lyme disease vaccine, and Paxil, the first medication designed to treat social anxiety disorder.
One of the keys to growth has been the company's head start in genomics, but COO J. P. Garnier is counting on marketing for the next boost. A pending merger with pharma giant Glaxo Wellcome, scheduled for approval this summer, will give SmithKline the muscle it needs to make the most of the 400 branded products in its pharmacopoeia.
The new PlayStation2 game console – or rather, Internet-enabled home entertainment center – embodies the very qualities that make Sony a quintessential new-economy company: It's global, connected, multimedia, and ambitious. Between its ample holdings in movies, music, and the Web – and an electronics business that spans professional and consumer domains – this Godzilla is poised to stomp an indelible footprint into the broadband playground.
Sony formed its Broadband Entertainment unit in February, and since then it has been partnering to the hilt. Sun, Intel, and Palm are helping develop Net appliances. Those with wires will be networked via the up-and-coming IEEE 1394 standard, thanks to patents shared with Apple, Compaq, Matsushita, Philips, and Toshiba. Another patent pool – the eight-member HAVi alliance – covers audio/video networking protocols. Previous deals with Cablevision and TiVo are still in play.
With 180,000 employees spread among 78 business units across the globe, can Sony coordinate such an enterprise? "It won't be easy," admits Howard Stringer, chair and CEO of Sony Corporation of America. "We still operate like a traditional vertical company, and this business is horizontal." Indeed, the online and computer entertainment groups aren't represented in the new unit's steering committee, and the PlayStation division is off concocting its own broadband strategy. If Sony hopes to network the world's living rooms, it will need to move still faster and smarter.
NEW BLOOD
Arun Sarin Board of Directors, Vodafone AirTouch
Does a cell phone make a good browser?
Yes, but it's different. We're building a mobile-centric portal. It won't be about reading SEC reports – it'll be about getting pinged when a stock hits 130. Always-on connections are coming in about 18 months, and that will create a huge ecommerce opportunity. But the phone needs to be smarter. You can't make people fill in a form by punching buttons; you need to use a serial database.
How does commerce change when the customer becomes a moving target?
Today, through cell registration, we know where all our customers are within a mile or so. In two years, when cell phones have GPS chips, we'll know where they are within a hundred yards. If a customer's profile shows that he likes Starbucks, we'll be able to send a message saying there's a Starbucks around the corner, and if you drop in, you can get 50 cents off a cappuccino.
Are Nokia and Ericsson keeping up?
We'd like them to move faster. GPRS (general packet radio service) will be here in December, and that will bring speeds in the area of 100 Kbps, but the handsets have problems with heat and battery life. Our aspiration is to double in size and become a trillion-dollar company. We won't get there by pushing our suppliers.
It's a rare financial asset management company that puts technology first, but if you ask CFO Ron O'Kelley about State Street, which holds $6 trillion for institutional investors, that's where he's likely to start. While competitors like Chase Manhattan remain tied to proprietary networks, State Street bet on the Internet, creating a suite of services that empower clients in 24 countries to manage their money more effectively.
The company sold its banking arm last October to concentrate on Web-based services: Global Link, a portal offering foreign exchange data, trade execution, and high-powered chat; Lattice, an equity trading network with access to multiple exchanges and OTC offerings; and Bond Connect, an auction for bonds (still in test).
There's a lot of upside left in what amounts to a $100 trillion market worldwide for managing financial risk, and State Street is mining it on the Net.
Sun excels at new economy brinkmanship, betting on long-shot ideas and sticking with them until the rest of the world comes around. The company's vision of network computing initially met with a lot of head-shaking, but its stock has risen 200 percent since last June as its Solaris operating system and Ultrasparc servers have become the standard for companies looking to dot-com themselves.
Sun's gamble for 2000 is Jini, which gives networked appliances the smarts they need to interoperate seamlessly. The technology took competitors by surprise when it was announced in 1998, but since then the heralded Internet appliances have failed to materialize. Meanwhile, Microsoft's Universal Plug and Play alternative looms in the background.
"We've heard it all before," CTO Greg Papadopoulos says. "Like Java, Jini will rise on an exponential curve once it reaches critical mass."
We don't doubt that the networked home is coming, but it's going to be a while before it develops enough momentum to make Jini's future secure. Meanwhile, Sun will need to turn its innovative attention to more pressing issues: fending off challenges to its server business from Hewlett-Packard and IBM and to Solaris from Windows and Linux.
Just as mcommerce is starting to edge out ecommerce, the future of ubiquitous mobile communication belongs to Vodafone. In two gulps last year, the British telecom provider became the world's largest – and only truly transatlantic – wireless network. The appetizer was AirTouch, the US mobile provider acquired for $60 billion last June. Then came the $181 billion main course, Germany's Mannesmann, announced in March and still pending.
Thanks to a partnership with Bell Atlantic, Vodafone AirTouch will boast 24 million subscribers in the US, plus around 30 million in Europe and a few million more scattered throughout Asia and the Middle East – not to mention its stakes in local providers in 24 countries. CEO Chris Gent is betting that cell phones will connect those millions to the Net. To hold their attention once they're there, he's building a portal he claims will rival Yahoo!
At $292.9 billion, Vodafone AirTouch's market cap is more than 250 times earnings. As Gent tries to prove the company's worth to investors, he will also have to demerge Mannesmann's Orange unit to avoid antitrust charges in Britain. Competition will be fierce, but for now Vodafone AirTouch rules the cellular spectrum.
Retailers looking to build "the Wal-Mart of the Web," take note: Daddy's home!
Wal-Mart built a retailing empire on whip-smart inventory management and savvy distribution logistics. Do the same principles make for success online? The coming year will tell as the sultan of superstores hoists its $137 billion operation onto the Web.
Hoping to prod a stampede of bargain-hungry shoppers, in December Wal-Mart joined with America Online to create an inexpensive ISP for newbies. Another strategic partnership, a collaboration between Oracle, Chevron, and McLane (Wal-Mart's $8.8 billion wholesale division), will create a B2B marketplace for convenience stores. To build the momentum, in March the company brought in a Web-savvy CEO, Jeanne Jackson, late of Banana Republic and the architect of that company's Web presence as well as those of the Gap and Old Navy. Meanwhile, the revamped Wal-Mart.com is the very model of a user-friendly online shopping experience, complete with Wal-Mart Travel and a Photo Center that displays snapshots developed through Wal-Mart's brick-and-mortar locations.
The fate of Wal-Mart.com comes down to the question of which is more valuable: understanding technology or understanding consumers. The former is critical, but the latter is in shorter supply. Wal-Mart has it in spades.
If content is king, why isn't Mickey wearing a crown? As earnings plunged for the second year in a row, this time by $500 million, even CEO Michael Eisner had to express his disappointment in the company's 1999 annual report. The biggest losers were Studio Entertainment ($300 million in the red) and Internet & Direct Marketing (down $54 million) – bad news when you're trying to leverage the strongest brand name in family entertainment into a new-media empire.
Disney's failure to replicate its TV, movie, and theme park successes on the Web isn't for lack of trying. The company sank $500 million into Go.com last November, and experiments like the Zeether site express the playful spirit that made earlier creations so irresistible. The Mouse needs to come up with a strategy to keep the jamboree going until the Net evolves into a viable mass-entertainment vehicle – or it faces the prospect of being swallowed by some hep cat.
Does Yahoo! need to own content? That's the $64,000 question – or, given AOL's bid to acquire Time Warner, the $164 billion question. CEO Tim Koogle doesn't think so. "Consumers value Yahoo!'s open access model," he states flatly.
Obviously, life as an independent content platform is sweet. With revenues soaring by 120 percent and profit margins increasing 85 percent, it's no wonder Yahoo!'s stock price tripled over the course of 1999.
This puts Koogle under enormous pressure to justify the company's elephantine valuation – and, as it happens, he's in an excellent position to do so. As advertisers clamor for access to the site's 145 million users, ecommerce is starting to fill the coffers. Transactions and merchant fees generated 10 to 15 percent of 1999 revenue, estimates US Bancorp Piper Jaffray analyst Safa Rashtchy. And in March, the portal announced a B2B initiative, opening the door to a market that's expected to balloon from $200 billion in 2000 to $2.5 trillion by 2004.
Thanks to a deal with Palm to bundle Yahoo! Messenger and Yahoo! Mail – the equivalent of setting Palm's browser homepage to Yahoo! – the Web's strongest brand name will be the nerve center of the wireless Web. Eat your heart out, AOL.
WIRX Steering Committee: John Browning, Ted Greenwald, Jeffrey O'Brien, Spencer Reiss
America Online, Nokia: Adam Fisher (afisher@wiredmag.com)
Affymetrix, Applied Materials, BroadVision, Intel, JDS Uniphase, Nucor, Oracle: Amanda Griscom (agriscom@feedmag.com)
AIG, Charles Schwab, First Data, Incyte, Lucent, MCI WorldCom, Microsoft, Sony, Sun Microsystems, Yahoo!: Andy Marks (amarks@nyc.rr.com)
Aventis, DaimlerChrysler, EMC, Enron, Flextronics, i2 Technologies, News Corporation, PTC, State Street, Vodafone AirTouch, Wal-Mart: Hillary Rosner (hillaryr@interport.net)
Cisco Systems, FDX, Globalstar, Marriott International, Qwest, Reuters, Sabre, Schlumberger, SmithKline Beecham, Walt Disney: J. Schulz (jschulz@hyperformer.net)
Financial data: Bloomberg; SEC filings
– Compiled by Maureen Foley, Wired research
| Sabre| TSG | Travel services | Dallas/Fort Worth | 1963 | 10,500 | 16.6 | $4.2 billion | $2.4 billion | $331.9 million | 13.8% | $48.0 million | 2.0% | -34.2% | 11.9%
| Schlumberger| SLB | Oil-field services | New York | 1927 | 55,000 | 66.3 | $38.7 billion | $8.4 billion | $366.7 million | 4.4% | $520.8 million | 6.2% | 26.4% | 6.3%
| SmithKline Beecham| SBH | Pharmaceuticals | Brentford, England | 1830 | 53,300 | 30.2 | $73.6 billion | $12.5 billion | $1.8 billion | 14.4% | $1.5 billion | 12.2% | -0.1% | 6.9%
| Sony| SNE | Consumer electronics | Tokyo | 1946 | 177,000 | 81.1 | $101.2 billion | $53.4 billion | $1.4 billion | 2.6% | $6.9 billion | 13.0% | 147.9% | 7.6%
| State Street| STT | Investment services | Boston | 1792 | 17,213 | 32.4 | $14.4 billion | $3.3 billion | $619.0 million | 18.8% | N/A | N/A | 4.0% | 18.0%
| Sun Microsystems| SUNW | Network computing | Palo Alto, CA | 1982 | 29,700 | 97.0 | $148.3 billion | $11.7 billion | $1.0 billion | 8.5% | $1.3 billion | 10.8% | 209.0% | 20.2%
| Vodaphone AirTouch| VOD | Wireless networks | Newbury, England | 1999 | 12,642 | 26.5 | $292.9 billion | $5.3 billion | $1.1 billion | 20.8% | $58.3 million | 1.1% | 32.9% | 31.8%
| Wal-Mart| WMT | Retailing | Bentonville, AR | 1962 | 1,140,000 | 42.2 | $240.5 billion | $165.0 billion | $5.4 billion | 3.3% | N/A | N/A | 14.2% | 14.9%
| Walt Disney| DIS | Entertainment | Burbank, CA | 1923 | 100,000 | 68.0 | $80.2 billion | $23.4 billion | $1.3 billion | 5.6% | N/A | N/A | 17.1% | 19.8%
| Yahoo!| YHOO | Internet portal | Santa Clara, CA | 1994 | 1,992 | 326.8 | $62.1 billion | $588.6 million | $61.1 million | 10.4% | $67.7 million | 11.5% | 20.9% | 497.7%
Wired Index Averages| $100.6 billion | $19.4 billion | $1.5 billion | 11.9% | $1.3 billion | 14.6% | 88.7% | 89.7%
Wired Index Totals| $4.0 trillion | $777.8 billion | $61.7 billion | $31.6 billion
† For historical reference only; legal founding date may differ *Calculated 4/17/00 1 4-year average 2 3-year average 3 FY 00
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| THE WIRED INDEX
| AIG
| Aventis
| EMC
| Enron
| Fedex
| Intel
| Lucent
| Nokia
| Nucor
| Oracle
| PTC
| Qwest
| Reuters
| Sabre
| Sony
| Wal-Mart
| Yahoo!
| Department of Complaints New additions to the Index.
