Netscape eventually fell victim to overwhelming (and, the courts decided, monopolistic) competitive pressure from Microsoft. Microsoft’s decision to give away its browser, Internet Explorer, as part of its dominant Windows operating system, combined with its ability to throw more programmers at Web browsing than Netscape, led to the increasing slippage of Netscape’s market share. In the end, Netscape was sold for $10 billion to AOL, which never did much with it. But though Netscape may p. 64 have been only a shooting star in commercial terms, what a star it was, and what a trail it left.
“We were profitable almost from the start,” said Barksdale. “Netscape was not a dot-com. We did not participate in the dot-com bubble. We started the dot-com bubble.”
And what a bubble it was. “Netscape going public stimulated a lot of things,” said Barksdale. “The technologists loved the new technology things it could do, and the businesspeople and regular folks got excited about how much money they could make. People saw all those young kids making money out of this and said, ‘If those young kids can do this and make all that money, I can too.’ Greed can be a bad thing—folks thought they could make a lot of money without a lot of work. It certainly led to a degree of overinvestment, putting it mildly. Every sillier and sillier idea got funded.”
What was it that stimulated investors to believe that demand for Internet usage and Internet-related products would be infinite? The short answer is digitization. Once the PC-Windows revolution demonstrated to everyone the value of being able to digitize information and manipulate it on computers and word processors, and once the browser brought the Internet alive and made Web pages sing and dance and display, everyone wanted everything digitized as much as possible so they could send it to someone else down the Internet pipes. Thus began the digitization revolution. Digitization is that magic process by which words, music, data, films, files, and pictures are turned into bits and bytes—combinations of 1s and 0s—that can be manipulated on a computer screen, stored on a microprocessor, or transmitted over satellites and fiber-optic lines. It used to be the post office was where I went to send my mail, but once the Internet came alive, I wanted my mail digitized so I could e-mail it. Photography used to be a cumbersome process involving film coated with silver dug up from mines halfway across the world. I used to take some pictures with my camera, then bring the film to the drugstore to be sent off to a big plant somewhere for processing. But once the Internet made it possible to send pictures around the world, p. 65 attached to or in e-mails, I didn’t want to use silver film anymore. I wanted to take pictures in the digital format, which could be uploaded, not developed. (And by the way, I didn’t want to be confined to using a camera to take them. I wanted to be able to use my cell phone to do it.) I used to have to go to Barnes & Noble to buy and browse books, but once the Internet came alive, I wanted to browse for books digitally on Amazon.com as well. I used to go to the library to do research, but now I wanted to do it digitally through Google or Yahoo!, not just by roaming the stacks. I used to buy a CD to listen to Simon and Garfunkel—CDs had already replaced albums as a form of digitized music—but once the Internet came alive, I wanted those music bits to be even more malleable and mobile. I wanted to be able to download them into an iPod. In recent years the digitization technology evolved so I could do just that.
Well, as investors watched this mad rush to digitize everything, they said to themselves, “Holy cow. If everyone wants all this stuff digitized and turned into bits and transmitted over the Internet, the demand for Web service companies and the demand for fiber-optic cables to handle all this digitized stuff around the world is going to be limitless! You cannot lose if you invest in this!”
And thus was the bubble born.
Overinvestment is not necessarily a bad thing—provided that it is eventually corrected. I’ll always remember a news conference that Microsoft chairman Bill Gates held at the 1999 World Economic Forum in Davos, at the height of the tech bubble. Over and over again, Gates was bombarded by reporters with versions of the question, “Mr. Gates, these Internet stocks, they’re a bubble, right? Surely they’re a bubble. They must be a bubble?” Finally an exasperated Gates said to the reporters something to the effect of, “Look, you bozos, of course they’re a bubble, but you’re all missing the point. This bubble is attracting so much new capital to this Internet industry, it is going to drive innovation faster and faster.” Gates compared the Internet to the gold rush, the idea being that more money was made selling Levi’s, picks, shovels, and hotel rooms to the gold diggers than from digging up gold from the earth. Gates was right: Booms and bubbles may be economically dangerous; they may end up with many people losing money and a lot of companies p. 66 going bankrupt. But they also often do drive innovation faster and faster, and the sheer overcapacity that they spur—whether it is in railroad lines or automobiles—can create its own unintended positive consequences.
That is what happened with the Internet stock boom. It sparked a huge overinvestment in fiber-optic cable companies, which then laid massive amounts of fiber-optic cable on land and under the oceans, which dramatically drove down the cost of making a phone call or transmitting data anywhere in the world.
The first commercial installation of a fiber-optic system was in 1977, after which fiber slowly began to replace copper telephone wires, because it could carry data and digitized voices much farther and faster in larger quantities. According to Howstuffworks.com, fiber optics are made up of strands of optically pure glass each “as thin as a human hair,” which are arranged in bundles, called “optical cables,” to carry digitized packets of information over long distances. Because these optical fibers are so much thinner than copper wires, more fibers can be bundled into a given diameter of cable than can copper wires, which means that much more data or many more voices can be sent over the same cable at a lower cost. The most important benefit of fiber, though, derives from the dramatically higher bandwidth of the signals it can transport over long distances. Copper wires can carry very high frequencies too, but only for a few feet before the signal starts to degrade in strength due to certain parasitic effects. Optical fibers, by contrast, can carry very high-frequency optical pulses on the same individual fiber without substantial signal degradation for many, many miles.
The way fiber-optic cables work, explains one of the manufacturers, ARC Electronics, on its Web site, is by converting data or voices into light pulses and then transmitting them down fiber lines, instead of using electronic pulses to transmit information down copper lines. At one end of the fiber-optic system is a transmitter. The transmitter accepts coded electronic pulse information—words or data—coming from copper wire out of your home telephone or office computer. The transmitter then processes and translates those digitized, electronically coded words or data into equivalently coded light pulses. A light-emitting diode (LED) p. 67 or an injection-laser diode (ILD) can be used to generate the light pulses, which are then funneled down the fiber-optic cable. The cable functions as a kind of light guide, guiding the light pulses introduced at one end of the cable through to the other end, where a light-sensitive receiver converts the pulses back into the electronic digital 1s and 0s of the original signal, so they can then show up on your computer screen as e-mail or in your cell phone as a voice. Fiber-optic cable is also ideal for secure communications, because it is very difficult to tap.
It was actually the coincidence of the dot-com boom and the Telecommunications Act of 1996 that launched the fiber-optic bubble. The act allowed local and long-distance companies to get into each other’s businesses, and enabled all sorts of new local exchange carriers to compete head-to-head with the Baby Bells and AT&T in providing both phone services and infrastructure. As these new phone companies came online, offering their own local, long-distance, international, data, and Internet services, each sought to have its own infrastructure. And why not? The Internet boom led everyone to assume that the demand for bandwidth to carry all that Internet traffic would double every t
hree months—indefinitely. For about two years that was true. But then the law of large numbers started to kick in, and the pace of doubling slowed. Unfortunately, the telecom companies weren’t paying close attention to the developing mismatch between demand and reality. The market was in the grip of an Internet fever, and companies just kept building more and more capacity. And the stock market boom meant money was free! It was a party! So every one of these incredibly optimistic scenarios from every one of these new telecom companies got funded. In a period of about five or six years, these telecom companies invested about $1 trillion in wiring the world. And virtually no one questioned the demand projections.
Few companies got crazier than Global Crossing, one of the companies hired by all these new telecoms to lay fiber-optic cable for them around the world. Global Crossing was founded in 1997 by Gary Winnick and went public the next year. Robert Annunziata, who lasted only a year as CEO, had a contract that the Corporate Library’s Nell Minow once p. 68 picked as the worst (from the point of view of shareholders) in the United States. Among other things, it included Annunziata’s mother’s first-class airfare to visit him once a month. It also included a signing bonus of 2 million shares of stock at $10 a share below market.
Henry Schacht, a veteran industrialist now with E. M. Warburg, Pincus & Co., was brought in by Lucent, the successor of Western Electric, to help manage it through this crazy period. He recalled the atmosphere: “The telecom deregulation of 1996 was hugely important. It allowed competitive local exchange carriers to build their own capacities and sell in competition with each other and with the Baby Bells. These new telecoms went to companies like Global Crossing and had them install fiber networks for them so they could compete at the transport level with AT&T and MCI, particularly on overseas traffic . . . Everyone thought this was a new world, and it would never stop. [You had] competitive firms using free capital, and everyone thought the pie would expand infinitely. So [each company said,] ‘I will put my fiber down before you do, and I will get a bigger share than you.’ It was supposed to be just a vertical growth line, straight up, and we each thought we would get our share, so everybody built to the max projections and assumed that they would get their share.”
It turned out that while business-to-business and e-commerce developed as projected, and a lot of Web sites that no one anticipated exploded—like eBay, Amazon, and Google—they still devoured only a fraction of the capacity that was being made available. So when the dot-com bust came along, there was just way too much fiber-optic cable out there. Long-distance phone rates went from $2 a minute to 10¢. And the transmission of data was virtually free. “The telecom industry has invested itself right out of a business,” Mike McCue, chief operations officer of Tellme Networks, a voice-activated Internet service, told CNET News.com in June 2001. “They’ve laid so much fiber in the ground that they’ve basically commoditized themselves. They are going to get into massive price wars with everyone and it’s going to be a disaster.”
It was a disaster for many of the companies and their investors (Global Crossing filed for bankruptcy in January 2002, with $12.4 billion in debt), but it turned out to be a great boon for consumers. Just as the nap. 69tional highway system that was built in the 1950s flattened the United States, broke down regional differences, and made it so much easier for companies to relocate in lower-wage regions, like the South, because it had become so much easier to move people and goods long distances, so the laying of global fiber highways flattened the developed world. It helped to break down global regionalism, create a more seamless global commercial network, and made it simple and almost free to move digitized labor—service jobs and knowledge work—to lower-cost countries.
(It should be noted, though, that those fiber highways in America tended to stop at the last mile—before connecting to households. While a huge amount of long-distance fiber cable was laid to connect India and America, virtually none of these new U.S. telecom companies laid any substantial new local loop infrastructure, due to a failure of the 1996 telecom deregulation act to permit real competition in the local loop between the cable companies and the telephone companies. Where the local broadband did get installed was in office buildings, which were already pretty well served by the old companies. So this pushed prices down for businesses—and for Indians who wanted to get online from Bangalore to do business with those businesses—but it didn’t create the sort of competition that could bring cheap broadband capability to the American masses in their homes. That has started happening only more recently.)
The broad overinvestment in fiber cable is a gift that keeps on giving, thanks to the unique nature of fiber optics. Unlike other forms of Internet overinvestment, it was permanent: Once the fiber cables were laid, no one was going to dig them up and thereby eliminate the overcapacity. So when the telecom companies went bankrupt, the banks took them over and then sold their fiber cables for ten cents on the dollar to new companies, which continued to operate them, which they could do profitably, having bought them in a fire sale. But the way fiber cable works is that each cable has multiple strands of fiber in it with a potential capacity to transmit many terabits of data per second on each strand. When these fiber cables were originally laid, the optical switches—the transmitters and receivers—at each end of them could not take full advantage of the fiber’s full capacity. But every year since then, the optical switches p. 70 at each end of that fiber cable have gotten better and better, meaning that more and more voices and data can be transmitted down each fiber. So as the switches keep improving, the capacity of all the already installed fiber cables just keeps growing, making it cheaper and easier to transmit voices and data every year to any part of the world. It is as though we laid down a national highway system where people were first allowed to drive 50 mph, then 60 mph, then 70 mph, then 80 mph, then eventually 150 mph on the same highways without any fear of accidents. Only this highway wasn’t just national. It was international.
“Every layer of innovation gets built on the next,” said Andreessen, who went on from Netscape to start another high-tech firm, Opsware Inc. “And today the most profound thing to me is the fact that a fourteen-year-old in Romania or Bangalore or the Soviet Union or Vietnam has all the information, all the tools, all the software easily available to apply knowledge however they want. That is why I am sure the next Napster is going to come out of left field. As bioscience becomes more computational and less about wet labs, and as all the genomic data becomes easily available on the Internet, at some point you will be able to design vaccines on your laptop.”
I think Andreessen touches on what is unique about the flat world and the era of Globalization 3.0. It is going to be driven by groups and individuals, but of a much more diverse background than those twelve scientists who made up Andreessen’s world when he created Mosaic. Now we are going to see the real human mosaic emerge—from all over the world, from left field and right field, from West and East and North and South—to drive the next generation of innovation. Indeed, a few days after Andreessen and I talked, the following headline appeared on the front page of The New York Times (July 15, 2004): “U.S. Permits 3 Cancer Drugs from Cuba.” The story went on to say, “The federal government is permitting a California biotechnology company to license three experimental cancer drugs from Cuba—making an exception to the policy of tightly restricting trade with that country.” Executives of the company, CancerVex, said that “it was the first time an American biotechnology company had obtained permission to license a drug from Cuba, a country that some industry executives and scientists say is surprisingly strong in p. 71 biotechnology for a developing nation . . . More than $1 billion was spent over the years to build and operate research institutes on the west side of Havana staffed by Cuban scientists, many of them educated in Europe.”
Just to summarize again: The PC-Windows flattening phase was about me interacting with my computer and me interacting with my own limited network inside my own company. Then came along this Internet�
��e-mail–browser phase, and it flattened the earth a little bit more. It was about me and my computer interacting with anyone anywhere on any machine, which is what e-mail is all about, and me and my computer interacting with anybody’s Web site on the Internet, which is what browsing is all about. In short, the PC-Windows phase begat the Netscape browsing–e-mail phase and the two together enabled more people to communicate and interact with more other people anywhere on the planet than ever before.
But the fun was just beginning. This phase was just the foundation for the next step in flattening the flat world.
Flattener #3: Work Flow Software
Let’s Do Lunch: Have Your Application Talk to My Application
I met Scott Hyten, the CEO of Wild Brain, a cutting-edge animation studio in San Francisco that produces films and cartoons for Disney and other major studios, at a meeting in Silicon Valley in the winter of 2004. I had been invited by John Doerr, the venture capitalist, to test out the ideas in this book to a few of the companies that he was backing. Hyten and I really hit it off, maybe because after hearing my arguments he wrote me an e-mail that said, “I am sure in Magellan’s time there were plenty of theologians, geographers, and pundits who wanted to make the world flat again. I know the world is flat, and thank you for your support.”
The World Is Flat Page 8
