advertisement
advertisement

Will the Net Bounce Back?

Last year’s Internet Summit was full of boasting and banquets. This year’s gathering of tech’s brightest stars featured mea culpas and buffets. A field report on the past, present, and future of the Internet economy.

There are few spectacles in business more fascinating than watching technology-industry insiders explain the world to themselves. That spectacle was on full display at this year’s Industry Standard Internet Summit in late July at the Four Seasons Hotel in Carlsbad, California.

advertisement

In its three-year run, the summit has provided a faithful mirror of the Internet sector’s dramatic arc from boom to bubble to bust. The low-key sobriety of this year’s conference offered a sharp contrast to the excess on parade last year, when the economic slump was merely a “healthy correction” and swaggering VCs and hungry entrepreneurs overran the halls, more intent on taking calls and making deals than listening to speakers.

Production values came down a notch — basic cocktails and a buffet replaced last year’s fireworks and four-course feasts. The crowd of 500 was noticeably thinner as well and was more studious than celebratory. The conference theme itself, “Answering Big Questions,” reflected a new gravity.

Benchmark Capital’s golden boy, Bill Gurley, and Morgan Stanley’s star Internet and software analyst, Mary Meeker (looking a little worse for wear after a brutal year in the market and the press), took the stage in their recurring roles as summit hosts. Throughout, the pair walked a thin line between that classic Silicon Valley narrative of engineering a fresh start from the rubble of failure and the unshakable funk of the current economic reality. The tug between hope and gloom was best encapsulated in the first question asked, which gauged the audience’s level of pessimism about the economy: A full 48% of audience members believed that “the worst is over, but the speed of the upturn is unclear,” while 42% responded that “things will likely get worse before they get better.” And tipping the scales, 10% thought the economy was “already on the way back up.”

Gloom, Interrupted

By contrast, Microsoft CEO Steve Ballmer was almost exuberant as he took the stage — the first in an impressive succession of A-list CEOs, including Jeff Bezos, Michael Dell, Gerald Levin, Scott McNealy, Terry Semel, and Meg Whitman — to give his spin on this moment in the Internet economy: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” (Or according to the murmurs in the audience: the end of one era of Microsoft dominance and the beginning of another.) Ballmer launched into a commanding talk on the future of the enterprise and the “huge untackled problems” (read: opportunities for software companies) around such issues as the integration of systems, applications, and devices; collaboration and federation among organizations; paperless work; and truly real-time transactions. In Ballmer’s soup-to-nuts vision of software, the potential “to make every business more agile, empower every knowledge worker, and improve the life of every home user” is staggering. More staggering to many in the crowd was the fact that Ballmer could simultaneously herald the dawn of the “XML revolution” and its open standards while crowing about the inevitable dominance of Microsoft’s expansive .NET initiative.

As the rest of the roster of big-time leaders rotated on and off the stage (literally — the futuristic set included a revolving stage that slowly turned to reveal each speaker holding onto the podium for dear life), it became increasingly clear that big CEOs plus big questions is not necessarily a recipe for big ideas. The central theme updated Sun Microsystems’s original mantra “The network is the computer” to “Business is the network.” The most progressive note was sounded by Groove Networks founder and software pioneer Ray Ozzie, who described a robust, decentralized business environment powered by decentralized technology. Sun’s own founder and CEO Scott McNealy skipped industry agenda setting altogether and spent his 45 minutes frothing with anti-Microsoft venom.

One CEO who showed up with some of the swagger of Internet glory days was BEA Systems’s Bill Coleman. A Sun alum, Coleman’s original insight was that if the network really is the computer, then it needs an operating system. Apparently, that vision made sense to the market: BEA is the fastest software company in history to reach a $1 billion run rate with more than 10,000 customers and a 250,000-person-strong developer community. BEA’s success is built on a simple premise, says Coleman. If the motivating fear of big companies over the past five years was “getting Amazoned,” the real danger going forward is “getting Delled.” The only companies that stand a chance are those that change their business model to truly leverage the network. Forget “built to last”; the survivors are “built to integrate.” And here’s the sales pitch: You can’t do that with the bolted-on, hard-coded “spaghetti-ware” of most enterprise technology. BEA’s Web-application server promises to power organizations into the next era of networked, integrated, scalable, real-time, personalized, collaborative commerce.

advertisement

BEA might have a future of big wins, but the only rock-solid good news in the here and now came from Meg Whitman of eBay and Michael Dell of Dell Computer. While both presentations had all the energy and imagination of a quarterly conference call, the numbers were intoxicating.

Demonstrating once again that eBay is based on one of the truly great business ideas of the Internet era and is powered by a robust financial model and a real understanding of customers, Whitman let loose with a remarkable set of success metrics. In the last quarter, eBay reported 34 million regular users, 100 million products listed, $2.2 billion gross merchandise sales, and a 25% operating margin. EBay customers buy a Corvette every 3 hours, a diamond ring every 6 minutes, a digital camera every 90 seconds, and a PC every 30 seconds. The growth engine shows no sign of slowing — the company is extending the platform into new territories (18 countries), categories (eBay is the largest seller of used cars on the Net), and services (eBay launched its storefronts function in June and already reports more than 18,000 individual stores).

Whitman attributes the company’s momentum and innovation to its relentless relationship building with customers. It’s simple, she says: “We’re a business fine-tuned by the customer, for the customer.”

In an interview with Michael Dell, Gurley zeroed in on the economic advantages of Dell’s well-examined supply chain. How is it that Dell can ship 18 million built-to-order computers a year with less than five days of inventory and a negative cash-conversion cycle of twenty-four days? It’s all about an intense and unrelenting focus on improving the links to customer demand and focusing on the reduction of risk. To Dell, a one-day-old disk drive equals “one unit of risk, a two-day-old drive equals ten units of risk, and a 5-day-old drive has 100 units of risk.” Said Dell: “This inventory is like fish; it doesn’t appreciate.”

The big question, said Gurley, is why, after eight years of dissecting Dell’s cash-flow advantage, the world — and Dell’s competitors in particular — hasn’t come close to catching up. Michael Dell isn’t waiting for his rivals to figure it out. He announced his intentions to grow the company from its current $32 billion in revenues to a $100 billion business with 40% of the market.

Listening to Prozac

In her annual talk on the state of the capital markets, Meeker put considerably more spin on the numbers. Meeker’s remarks were particularly loaded this year, following the recent firestorm around gross conflicts of interest among technology analysts at big investment banks in general and her role in the Internet boom in particular. It was hard not to hear the wheels spinning as she made a case for the Internet boom as a once-in-a-lifetime “big bang,” rather than a predictable tech cycle. The good news, she said, is that after the bust comes a “boomlet” in company creation and, even better for her clients, a boom in wealth creation. Echoing the party line, she reported that “the worst of the declines are over — and we will get back to normal.” Then, striking a Clinton-esque chord, she admonished, “But people have to remember what ‘normal’ means.”

advertisement

Two of the most compelling speakers at the summit were also the most depressing. Ravi Suria, the Duquesne Capital bond analyst who made his name as the anti-Henry Blodget with a pessimistic analysis of Amazon’s prospects earlier this year, gave a chilling talk on the global fallout of the $650 billion in debt acquired by telecom companies in the past few years. He left the audience with a rare reality check: “The Internet may have set off the biggest wave of wealth creation in history, but it’s also the biggest debt mess in history. This is ground zero of the tech industry today. Every great innovation, technology, and operational advance sits on top of this mess — someone has to pay.”

Dan Benton, CEO of Andor Capital deflated the tech industry’s hope-tinged explanation of the downturn as cyclical. “It’s not about cycles,” he said. “It’s about size — this industry is huge, and the technology is mature.” The only thing capable of “moving the pile” is a captivating innovation. He echoed the plaintive cry of nearly every speaker — “We need a killer app. Give me another email!” — but couldn’t for the life of him come up with a real candidate.

The New New Thing

Legendary venture capitalist and industry agenda setter John Doerr confirmed that the technology business is suffering from an “incredible innovation shortfall.” Doerr cheerfully supplied interviewer John Heilemann with a mea culpa for his part in promoting the Net as a vehicle of massive wealth creation. But he was quick to insist that the new logic of competition is only beginning to take effect. The innovation of the new economy, the power of ideas, and network effects are a “big deal,” he says. “And woe to the companies that ignore those forces.”

Gurley steered the conversation to one technology that’s generating some innovative energy today. In a chalk talk on the 802.11b wireless technology, Gurley described the exploding ecosystem of chip manufacturers, equipment makers, and service providers growing around this fast, flexible, bandwidth-rich protocol that sits on top of an unlicensed spectrum. The range of innovative implementations that it has spawned in companies as diverse as the New York Stock Exchange, Starbucks, Microsoft, and the city of Aspen, Colorado has the viral feel of a killer app. Whether it’s another email — or an infinitely better way to do email — remains to be seen.

The one big question that could have done the most to get the audience out of its doldrums — “What’s at the heart of great leadership?” — got only a slick topcoat with a “Motivation 101” speech from Duke’s Coach K and what was billed as “Leadership Day,” featuring a single workshop with Built to Last author Jim Collins. The summit may not have answered many of the questions it posed, but it did drive home the lesson that the only way you get to the future is to keep asking.

Polly LaBarre (plabarre@fastcompany.com) is a Fast Company senior editor.