DOT-COM CARTHAGE:

The Old World Meets the New Economy, Round II.

 

By Kenneth Neil Cukier

European Editor, Red Herring

 

Remarks presented at the Harvard Business School Eurotrek conference

8 January 2001, London.

 

I.

Good afternoon.

To give you an example of how times change, and to set the tone for my remarks today, please let me first remind you of an earlier moment when the Harvard Business School invited a journalist from the technology media to speak.

Two years ago, in the winter of 1999, Jason McCabe Calacanis the editor of "Silicon Alley Reporter," addressed a class of students. (You may know the story -- it’s somewhat legendary!) He told them to drop out of school and get into the Internet economy -- that it was the largest land-grab in their lives, that it was happening right before their eyes, and that they would completely miss out on it. About the incident, he was quoted as saying: "You should have seen the look on their faces: They were terrified. And you know why? Because they knew I was right." Calacanis would later boast about the irony, as he saw it, that he addressed a Harvard class, himself unable to even get admitted to the school.

We can only wonder what will ever happen to him, and his company. But we can consider what kind of reaction such a speaker would have today. And where the members of that HBS class are today….

The speaker would sound pollyannaish, irresponsible, and foolish. And as for the class, what they learned after two years on Soldiers Field Road -- assuming that Harvard Business School teaches you anything at all -- they can probably use their entire professional careers. In fact, they probably don’t have to worry that they missed out on getting suckered into accepting worthless stock options only to see the first line on their CV resemble the listing of "F*edCompany.com" -- the web site for floundering dot-com firms.

With the Nasdaq having ended 40 percent down on the year, and over 60 Internet companies now trading 90 percent off their peak prices -- in fact, in many cases, tech stocks that once hovered around $100 now trade under a dollar and risk being de-listed -- one wonders where it’s all headed, what it means. Two years ago at Davos, the joke going around was that Brazil could increase the value of its suffering currency, the Real, if it only added a dot-com suffix to its name!

Now, the entire sector, the entire cause for the "boom" -- the technology industry and entrepreneurship -- seems entirely repudiated. Empty. Unsustainable. Illusory.

It shouldn’t be. The changes to society, business and national economies due to information technologies -- the companies that create it, and the companies that use it -- are real and are enormously substantial. Now that the hype is over, the real work can begin.

And that brings us to the question, of course, facing all of you: Where to begin that real work? As HBS comes to Europe for Eurotrek, you’re probably wondering, should you take a job in the Old World?

Well, I suppose I’m somewhat divided. I am, after all, a French-American. Like my heritage, so too my perspectives. You see, I’ve lived in Europe for a third of my life. And for the past decade, Europe has been something akin to a developing country in regards to technology, a market-oriented regulatory environment and modern business culture. However, as John Turner of McKinsey & Co. explained yesterday, Europe last year underwent a powerful transformation. These forces are potent, and cannot be turned away simply because a speculative stock exchange has lost a large part of its value.

So for the next 20 minutes, I hope to lay out a case for Europe as a favorable region for the Internet and high-tech industries. Then, I’ll explain why we can read the tea-leaves in completely the opposite direction. And finally, I’ll conclude with a few general points about where I see the future of information technology heading, and what it might mean for all countries and regions.

 

II.

 

Europe is changing, and the Old World poses some interesting opportunities for young business professionals.

Consider: If you were to devise a marketplace to enter as a business person, which would you want? A market that has: Mature industries? Established leaders? Savvy and modern business practices? And running at full capacity?

Or a market that’s fragmented by language, by currency, by legal regime, by culture, by regulatory environment and by geography? With old-style, dusty business practices and fewer established big leaders?

The latter probably affords more opportunity. There’s more inefficiencies of the sort that the Internet is wonderful at wrestling. The second market is just ripe to get side-swiped by disruptive technologies. Europe, obviously, looks a lot like the second picture I’ve described.

In fact, there’s many advantages to working in Europe:

For one thing, the US Internet sector has been devastated, and Europe is still fertile ground. Think of the hype that the US Internet sector has lived through over the past year -- companies like drkoop.com -- and you’ll realize that Europe has not had to bear the cost of such silly excesses. As a sign that there is an entrenched attitudinal shift away from overly-generous capital market support for start-ups, last October the number of withdrawn IPOs outnumbered the amount of companies that filed to go public in the US, for the first time in modern financial memory.

In fact, the exemplar of the US’s Internet hype is no better seen than in the category of Internet incubators, the financial hubs that intended to mint new dot-com companies in the same way that Henry Ford built cars. Both Internet Capital Group and CMGI, the two most notable, publicly-traded incubators, are trading over 90 percent off their high for the year. A third, Divine Interventures, went public this July after pulling its IPO a few times. They went out at $9, quickly bounced to $12 for about a day, and from then on descended steadily. Today, five months later, it trades at around $1 and teeters on the edge of Nasdaq rules that threaten it with being de-listed (should the shares trade at under $1 for over 30 consecutive trading days…). Some VCs have even taken the hithertofore unprecedented decision to disband new funds and effectively return the committed money raised to their limited partners. Such was the case with Crosspoint Venture Partners’ $1 billion fund in November, and a few weeks ago, Geocapital Partners sent a letter to its LPs explaining that they were abandoning a new $500 million fund since they did not believe that it could earn sufficient returns in the market, there being an oversupply of money and an undersupply of decent dealflow to support it. In short, the US’s Internet sector is on bended knee.

In contrast, Europe is a world leader in promising new technology. It’s forging a path in wireless technology, which has received the most attention lately, and where Europe dominates the US and the rest of the world. Also, in interactive television, which seems poised to become the future of the Net and media entertainment in many ways, as the Net and TV continue to meld. Also, in smart card technology, which can serve as the cornerstone of secure electronic commerce. And in microchips -- but chips that do something specific, not just go fast. An example is the Cambridge, England-based ARM Holdings (which makes chipsets for mobile phones and other portable computing devices) versus Intel.

In fact, technologically speaking, Europe has been the source of the very innovations that has brought us the so-called "New Economy". The Internet’s original conceptual design and even its terminology -- words such as "packet," for the digital bits of messages on the Internet -- was created here in the UK, by Donald Davies, working at the British Post Office’s telephone research lab (itself a reminder of Europe’s public utility roots for telecoms). And the World Wide Web, of course, was invented by a Brit working in Geneva.

In terms of having an international strategy -- the larger world beyond one’s borders that is so important today since it’s a key market for growth tomorrow -- Europe goes global quicker, faster and better than the US. It’s goes international from day one, since the local, national market is never big enough to support large companies. As an example of the two different approaches to international strategy from a US and European firm, consider the big merger and acquisition deals recently, say, in telecoms. Both regions harbored a sleepy, second-rate company created in the 1980s, that emerged as a major telecom player which startled the world. Both grew mainly by acquisition. Both bought everywhere in Europe. But look at the big moves:

In the US the company was WorldCom of Jackson, Mississippi. The biggest moves in the past 3 years was merging with MCI for $37 billion (the final price tag was much higher when the deal was concluded), and seeking to merge with Sprint in a $129 billion transaction (although the deal was pulled after regulatory approval seemed unlikely). In both cases, the big deals were with two US companies. WorldCom was focused on its home market.

In Europe, the company was Vodafone, the UK-based wireless operator. The biggest moves recently were acquiring Airtouch in the US in January 1999 for $56 billion, and acquiring Mannesmann in Germany (for a staggering $180 billion, which also shook up Europe’s nationalistic and state-influenced business culture). This year the company spent over $15 billion to acquire important stakes in wireless operators in Japan, China, Switzerland, Spain and Ireland, to name but a few. And tomorrow, Vodafone intends to announce that it will purchase a 35 percent stake in Mexico’s wireless carrier Grupo Iusacell for around $1 billion, marking its first foray into the Latin American market.

The result today is that Vodafone is in a much better position than WorldCom. A good part of that certainly has to do with the technology niche they’re in -- WoldCom runs an Internet backbone network and long-distance phone calls, while Vodafone is in the sexier wireless sector. But their international moves are indicative of their different mindsets, and investors have applauded Vodafone’s big global ambitions.

In other major trans-Atlantic deals, it’s been Europe that’s been the suitor. Daimler bought Chrysler. Bertlesmann bought Random House (and was bold enough to invest in Napster). And Vivendi bought Seagram/Universal Studios, as well as US filter (which makes the French company the largest supplier of water in America.)

In terms of the economics and the labor market, Europe is in good shape, and in some ways better, perhaps, than the US. According the OECD, the percentage growth in Europe’s job market has outpaced the US for the past two years, and the figure is set to continue. In the US, meanwhile, the technology sector has been routed: US tech and dot-com companies have laid off around 36,000 people in the past six months. Importantly, as the economies of the US and Europe increasingly harmonize, Europe is actually becoming less dependent on the US’s economic weather patterns. Where economist expect the US economy to become sluggish, they expect Europe to dip only slightly. The OECD believes that US GDP growth will fall this year 5.2 to 3.5 percent, while Europe will, relatively speaking, hold steady, falling from 3.5 to 3.1 percent. And in Europe, the more spare capacity means there’s more room for possible growth. In the case of its single currency, the euro, although it has had a bad year, its value has gained 10 percent in the past four months, and many expect it to rebound further.

Regarding law and the Internet economy, the argument can be made that Europe’s industrial-policy heritage is a beneficial force. That in the first stage of the Internet’s development, the hands-off policy advocated by Washington was useful since it was an infant industry, but for the Internet to grow into a truly mass market medium, it needs to offer the same legal protections that exist offline to instill mainstream consumer confidence. And that means it needs the steady hand of public policy -- which Europe, less ideological about regulating the Internet, can bring. The European Commission is forging rules covering the legal recognition of digital signatures, privacy, consumer protection, and the embryonic stages of taxation for online commerce. That may develop the sector, not hold it back.

In fact, the argument can be made that a new social current is sweeping Europe, whereby people are finally willing to forego a degree of job security in return for a greater payback in job satisfaction. "Entrepreneur," after all, is a French word. And the argument can be made that "Europe.com" is a sprightly, innovative, ambitious land prepared to compete globally and win in the New Economy.

 

III.

 

Or, of course, maybe not. Maybe not. Maybe not at all….

Actually, Europe has been devastated in regards to the Internet sector, and the US is still the land of plenty. Instead of "Go East young man -- to Europe!," perhaps it’s: "Yankee go home!" Rather than London, Paris or Prague as the hot-spots for innovation, the geographical primacy still belongs to New York and Silicon Valley.

Consider Germany’s Neuer Markt, the new market for high-growth companies, Europe’s veritable "Nasdaq" for retail investors and the exit-strategy for many European start-ups and their venture capital backers. Of its 338 companies listed, around 250 of them listed in 1999 or 2000. The NeMax 50 benchmark index is down around 75 percent from its high. Two-thirds of all its IPOs currently trade below their issue price. And there’s been some high-profile failures. Intershop Communications -- whose founder used to adorn the cover of magazines like BusinessWeek, as the poster-child of Europe’s ability to create world-class companies that can compete globally -- lost over 60 percent last Tuesday; an inauspicious auger, since it was the first trading day of the new year.

Or, consider letsbuyit.com. (Don’t you just love these dot-com names?! It’s so suggestive of the deluded, immature and infantile nature of so many of these companies, that they had to spell out in such patently silly ways what it is they do right in the domain name. We’ll look back on them over time and wince in incomprehension that they could have ever seriously chosen such a name, and that we could have ever actually seen it as being somewhat -- I stress somewhat -- normal.) The company -- an online group-buying retailing site that aggregates purchases among many individuals in order to lower the cost of the product to each -- pulled its IPO thrice before eventually listing in July. Now, a mere five months later, it’s poised to be de-listed. Last week saw its share price fall 70 percent in a single morning.

Importantly, the story of letsbuyit.com serves as an excellent point of reference, since it is emblematic of how doing business in Europe is uniquely different than in the US, and the inherent problems that companies face in devising a pan-European strategy. Today, as letsbuyit.com seeks protection from its creditors, the company operates in 14 different countries and 12 different languages. To understand the scope of its international morass, consider that the company was founded in Sweden, incorporated in The Netherlands, based in London, and listed in Frankfurt. The problem that the company faced -- that it couldn’t avoid -- was that it had to go international to grow, even though the barrier to market entry into each new territory was so high, and tougher than a start-up can bare.

But the most severe problem in Europe’s high-tech sector this past year -- Europe’s version of the US’s incubator mess -- is telecommunications. Understand: Europe’s Internet hype wasn’t dot-coms, but telecoms. And, specifically, the third-generation wireless frequency and the vision of the wireless Internet, all referred to under the banner of "3G." Look at this tangle of thorns:

The cost of 3G licenses in Europe, where many countries have opted for the auction approach, is expected to total around $100 billion. On top of that, the license holders will need to upgrade their network infrastructure, which is estimated to cost another $100 billion. As a result, the debt load on carriers has been staggering. And these concerns have knock-on effects in other areas of the economy. For example, the Bank of England last month warned UK banks about their dangerous over-exposure to the telecom sector -- it turns out that telecom companies borrowed over $140 billion in the third quarter of 2000 to finance 3G infrastructure and license fees, or 20 percent of all borrowing this year. Loans in the telecom sector represent around 40 percent of the major UK banks' regulatory capital and around 5 percent of group assets. And the amount of telecom loans falling due in 2001 is more than $250 billion, raising the question how it can possibly be refinanced, considering that the public markets are now skeptical of the ventures.

In that respect, look at the stocks. European telecom companies were punished in 2000; as a sector, it fell 53 percent. It’s a potent matter, since incumbent operators are generally among the most capitalized companies on the national bourses, and in some ways a psychological bellweather for European industry. And there have been some notable losers: British Telecommunications, Deutsche Telecom and France Telecom are all between 50 and 60 percent down on the year. The Dutch telecom operator KPN, and Finland’s Sonera, both plunged around 70 percent. And in the most embarrassing case, the floatation of Sweden’s government-owned teleco, Telia, backfired: The shares ended the year down over 40 percent. But in this case, it can’t be blamed on the high cost of financing a 3G license. That’s not because Sweden opted to forego the costly auction and essentially give the spectrum out for free, as they did. It’s because -- remarkably -- the former state-run carrier failed to submit a convincing business plans to be awarded one from the government regulators!)

Meanwhile, a plethora of new market entrants have actually gone bust, while some high-fliers have turned into penny stocks. And to make matters worse, many European telecom companies -- in complete delusion -- believe they can IPO their wireless units, such as France Telecom, BT and Deutsche Telekom. They’re in for a rude surprise. For instance, when France Telecom bought the UK wireless operator Orange last year, it expected to float the company for around $150 billion; today, they still believe there’s investor appetite for the shares -- but investment banks are looking at an amount at least half their initial projection. Institutional investors don’t want to finance the operators’ 3G debacle, especially after the dismal results of other telecom and wireless stocks in 2000.

As if that wasn’t discouraging enough, there’s worse. It’s something that few people in the industry ever speak of -- they prefer to keep it hidden from view -- but as a reporter, I’ll reveal it now. It’s this: 3G has unproven customer demand. It has no established business model on who pays whom, and how, and how much. And the technology does not work -- it barely works on the experimental networks, and to my knowledge there is no working fully-deployed network outside of laboratory conditions.

From a historical perspective, the problems facing Europe’s broader telecom sector might be summed up as the cost of the delay of telecom liberalization. It’s this: Just as Europe’s telecom industry opened up to competition, the Internet hype took hold, and VCs were flush with cash, and retail investors especially generous. The result was an over-supply of money, which funneled its way into an over-supply of telecom companies. (Technology development also played a role: Europe went from a bandwidth scarcity to a surplus, at a time when the price of telecom infrastructure went into a free-fall due new ways to generate greater capacity.) And ultimately, a lot of second tier telecom companies got burned.

Specifically as it relates to 3G, the matter has hit preposterous proportions. In countries that ran auctions or charged steep fees -- basically Europe’s three principle economies, Germany, France and the UK -- the value of the government’s stake in their incumbent telecom operator fell by more than the income that was generated by the auction itself. In other words, instead of a windfall, the actions led to a net loss!

In terms of technology, yes, Europe has good engineers and good ideas. But they have no skills in marketing. And guess what? It’s not about technology anymore, it’s about selling it. Japan, for instance, became a world leader on the back of Silicon Valley’s patent library. They were better at making things, and they also made things that people wanted, like consumer electronics. Similarly, the US can simply do European technology better than Europe can do it itself, and thereby beat Europe.

That’s how we do it with our geopolitical outsourced R&D lab -- otherwise known as Israel! AOL bought ICQ -- for real-time Internet chat -- from Mirabilis in June 1998 for a fast $287 million in cash. And Lucent got optical networking this year from Chromatis for $4.5 billion in stock, for the profitless company. (Though, if you’re familiar with the industry, you might wisely say that Lucent still hasn’t gotten optical networking at all! And Lucent's stock tailspin slashed the value of the deal to about $1.4 billion.)

Yes, Europe was instrumental in creating the conceptual framework for packet-switched date communications, like the Internet. Donald Davies! But the emphasis is on "conceptual." It was theoretical. It took DARPA, the US Defense Department’s Advanced Research Project Agency, to create the actual working network. Yes, Tim Berners-Lee created the World Wide Web while at CERN, the nuclear laboratory in Geneva. But it took a band of radical university students in Illinois to build on his invention to really popularize it, for it to become the Web we have today, by creating the first browser, Mosaic, which quickly transformed into the software company Netscape, which set off the Net revolution.

Regarding going global, Europe, rather than being the paragon of internationalism, is a basket-case. National rivalries always seem to get in the way. In 1999, a bid by Deutsche Telekom to acquire Telecom Italia was rebuffed by the politicians. And France -- whose France Telecom was a partner with the German operator -- acted like a jilted lover.

In fact, I believe that the only way that European businesspeople or businesses can come together is if there’s an American to act as a neutral intermediary, without the cultural baggage or the cultural stereotypes. (That, or a Dutchman, since they speak everyone’s language and no one speaks there’s!) In the technology sector, there’s two examples of this. EUnet, the first pan-European Internet backbone, was based in Amsterdam and run by an American CEO (Glenn Kowak, who noted that part of his success was because he was American and not viewed as biased.) And this year, the social networking group to take the continent by storm and act as the standard-bearer for a major cultural shift in the way Europeans view entrepreneurship -- called "First Tuesday" -- was founded and spearheaded by Americans (John Browning has lived in Britain for years but is American. Julie Meyer, who you heard from earlier today on a panel, is an American despite her splendid French and INSEAD MBA).

Actually, the only European institution that can successfully bring Europeans together harmoniously is NATO! The rest resembles what Mikael Shields of AtomFilms described yesterday as "Treaty of Versailles-style" negotiations.

In terms of economics, and the labor market, Europe is off the rails. Unions are attacking Europe’s "New Economy" companies. Today in "Le Monde," the newspaper reports that Club Internet, Freesbee, Spray and Amazon.fr are all organizing unions to extract the sorts of concessions that long existed for off-line firms. To be sure, in the US, the AFL-CIO has gotten involved in the tech scene, but at the end of the day, the labor market in the US is flexible, not rigid, static, like in Europe. As an example, it takes a worker laid off in San Francisco about six hours to get a new job. Possibly six days -- if he’s a philander, a pilferer, a liar and a cheat.

There’s burdens like the 35-hour work week in France. And that doesn’t just apply to the large corporations with factory workers and mundane middle managers: It applies to any company with over 20 employees. Can you imagine trying to create an Internet start-up, with all the commitment it entails, if your entire workforce is forbid from working more than 35 hours a week?! But hey! This is France! Soon, the Cisco routers imported into Paris will stop forwarding packets during the weekends. French-language versions of the Netscape Web browsers will want to take vacation on public holidays, les fêtes nationale, and refuse to serve up hyperlinks! Alors, je m’en fiche!

Then, there’s the question of stock options, that are taxed into oblivion in most European countries -- and forever on the policy agenda for reform, and forever unaddressed.

And although the euro may have clawed its way back 10 percent, it’s still down around 15 percent against the dollar since it was introduced a year ago.

As per law and the Internet, Europe’s state-sponsored involvement sometimes does more harm than good. On the Internet, it could be dangerous, and damage many of the positive changes taking place. Government involvement can lead to problems, as we’re finding out after a French court ruled that Yahoo in the US is accountable to French law, which is clear display of extra-territoriality, be it cyberspace or not.

And although there’s been many social changes in Europe over the past year, things have not changed dramatically. "Entrepreneur" may be a French word, but when he or she goes to see a venture capitalist for funding, the person knocks on the door of someone involved in what the French call "capital-risque" -- or "risk capital" -- and I believe that this different terminology affects the overall perspective of the practice: It’s not a venture, that highlights the upside, it’s a risk, that emphasizes the downside.

 

IV.

 

Okay. Alright…. What we need now is a bit of balance.

Ultimately, both assessments are true. Europe is all these things. It’s a paradox. Europe once again uplifts as much as it disappoints. It frustrates us, and it inspires us. Once again, Europe gets it right, really right; and it gets it terribly, sinfully wrong. That’s Europe.

You can see Europe, and working in Europe, sort of like prospecting, like so many other expeditions that history has known.

For some, you’re Shackleton: Two years lost in the Arctic. For others, you’re Vespuci: It’s resplendent, amazing, and novelties -- and riches -- lie behind every corner.

In some cases, it might be like the experience of the Europeans going to the New World, where the natives are not quite as advanced. Or, it’s like the British in India; an older civilization that just needs a bit better administration to unlock the natural wealth it contains.

Or, you’re Neil Armstrong. And you’ve just landed on the moon.

You’re not quite sure what it’s good for -- but you’re here!

And this is not to criticize Europe, but to understand it.

 

V.

 

This leads me to conclude on some general points about technology and society. About the direction of the information-technology revolution, and how it is applied.

I’m interested in how technology is made accessible. How new models of business and human activity are spawned by it. And by the nature of distributed power -- and what that means for "hubs," like geographic hubs, like Silicon Valley. Or places like London.

Today’s technology -- computers and the Internet -- isn’t user-friendly. It’s complex. Difficult. Upsetting. It’s impossible to use, and it will never become a mass-medium unless this changes completely. Using the Net today is like wanting to switch on an electric light, but having to learn all about ohms and watts to do so. This has to change.

An important step in that direction happened in the 1970s. It was the time when Moore’s Law was created, and we all know the statistic -- about how way back when, a computer fit into an auditorium this size, cost a hundred quadrillion dollars, and had as much performance power as my five-dollar wristwatch today. And how computers today are so powerful, that we waste transistors -- memory and processing speed -- we no longer need to husband computing resources like the original computer designers and software developers. All that’s true. But an important thing came out of that abundance in computing power -- in big memory, fast processors and low cost. Computing went from performing tasks ‘outside of itself’ -- such as number crunching a calculation -- to working to simplify its own operations so humans (its "input-mechanism") could more easily work with it. Some of the computer’s power was devoted simply to making the human interface better, so that people could be more productive with it. We got the "graphical user interface" and the computer -- gloriously selfishly -- used a portion of its power on nothing more than itself, making its own use easy. And the users went from being computer scientists, to being simply educated people with no specialized technical training.

A new, similar revolution must occur if computing is to move to the next stage, and become ubiquitous. If it is to be adopted and used by all people. Anyone who’s ever bought a computer for a parent, or a grandparent, knows exactly what I mean -- the frustration that what might seem obvious to us, experienced with computers, is as alien as hieroglyphics to others uninitiated in computing. Again: This must change. I believe we are on the verge of that, too -- although it’s not going fast enough to my tastes, or profound enough in scope. But I sense a "design revolution" in the way that engineers and business people approach modern computing -- and the slow-but-steady adoption of hand-held computing devices, like PalmPilots, etc, is a good barometer of success. A really exciting phenomena, actually.

Likewise, we’re still in the Dark Ages in terms of our approach to the Internet. We’re carrying-over our old forms of thought about its potential when we interact with it, rather than devise radical new ways of doing things over the radically new medium.

Again, to use the analogy of electricity: When the first electrical power grid was laid, it was used for only one purpose: Lighting. Only later did other uses come about, and now today, it’s used for things that could never be imagined when the electric light bulb was introduced -- things like air conditioners or televisions. Or personal computers. Which is to say that the electrical power grid was not simply a revolution for lighting -- it was the platform for an unlimited swath of subsequent revolution.

Similarly, the Internet. When the first telecommunication cable was stretched between two points, it was used for a single purpose: The telegraph -- two-way, real-time, one-to-one communication. That changed only in form, in efficiency, a bit later when voices replaced the dots and dashes, with the telephone. But that was it. And in our imagination, we saw the wires for only a single usage: Human conversation. Now, of course, it’s those very same wires, upgraded in efficiency, that allows everything from video and music and text between computers via the Net. We need to understand the Internet NOT as a revolution -- but like the printing press to ideas, or the right angle to architecture, to cities -- as the platform for revolutions.

And we’re seeing only a small fraction of the Internet’s possibilities. Our eyes are veiled, entrenched by our perspectives of the off-line world. It’s for that reason that so many of today’s dot-com companies are so laughable: They’re simply importing the business model that existed off-line onto the new medium, rather than discover innovative new approaches of doing things that truly incorporates the power and characteristics inherent in the new medium. Amazon sells books -- sounds like a… bookstore! And Ventro and VerticalNet do business-to-business exchanges -- just like… it’s done today in the offline world, except that they’re making it marginally more efficient by doing it online. Napster’s peer-to-peer networking approach I believe is just the extreme tip of the iceberg of the startling new things we’re going to see. Things that upend our notion of what the Net is, in the same way as the electric motor or the PC completely gut our conception of the electrical power grid vis-à-vis the light bulb. (In fact, I suspect I know the exact date when we will all become broad-sided by the most astounding new things, by truly new business models: I bet on 2018. I get that date because it’s the year that a child born when Netscape went public in 1995 -- who therefore has always known the Internet and knows no other -- may have graduated Harvard Business School. Yes, the person is only 23 years old. But, hey! The kid’s a prodigy. This is HBS, right?!)

My final point relates to the changing nature of society, and international relations, and -- on that theme, a bit less grandiose, something somewhat closer to your immediate concerns: Where you might want to consider settling for your first job out of business school.

Society is beginning to resemble the Internet itself -- power is distributed; decentralized. The Internet is an "interconnected network" of independent, autonomous, private sub-networks. There is no "center," per se -- all the power is distributed to the ganglia of end points. So too, modern society, increasingly. However global society, like the global network, is not really a true Web; rather, it’s a hub-and-spoke system, and some nodes are more important than others. More traffic passes through them. They’re more "valuable." Nevertheless both society and the Internet backbone is still a meshed network, and any end-point can talk to any other end-point -- there’s complete connectivity.

Thus, what does that suggest about the future direction of the Internet society? Does the primacy of Silicon Valley as a hub -- a social networking hub -- really matter in this new world, where power is distributed? Can a bunch of people plotting great things at a noodle shop in Nanjing or a saloon in Cyprus be as important as a café in Mountain View? Can London be as significant a hub as San Francisco, and therefore you shouldn’t feel that you’re setting your opportunities back by working here.?

Of this, I confess, I am unsure. I am uncertain.

I do know that the world is in the process of molting, changing into new forms. In terms of the transforming power of technology, it does not follow predetermined patterns, or linear analysis, or laws of nature. It can’t be a "disruptive innovation" if it’s predictable. To borrow from Michael Lewis’ image in his book "The New New Thing," technological and business innovation is not an army marching in lock-step to the syncopated rhythm of the war drum, it’s the guerrilla crawling on his belly to launch an ambush.

And that’s the nub. It’s no longer about armies and orders, but snipers and intuition. Like technology and the Internet, so too society. Our world, unconsciously, as if by osmosis, is soaking in all the underlying characteristics of the digital network. The result on the surface is a bit disquieting.

Where kings once ruled subjects, and citizens pledged allegiance to nation-states, in the new world we’re entering, we find our identity as global consumers allied to global brands. And there is a new intellectual dominance of the private sector in areas that were formerly the remit of public policy. The idea of "industry self-regulation" is as sacrosanct as motherhood, as if the state itself might someday whither away. There’s an argument for this: We can’t control the Internet, so they say, and as globalism continues to run its course, it’s not clear what international, and legitimized organization accountable to the public can oversee many spheres of commercial activity…. Ergo, we leave it to the private sector to act faster. But in so doing, it’s not in the public interest, because we have surrendered our role as citizens, for simply being consumers.

Consider that of the international institutions that we increasingly look to for global stability, we have the International Monetary Fund, the World Bank, the World Trade Organization and the Davos summit by the private World Economic Forum. All are inherently concerned with finance and commerce as their first priority. And of course it’s provoked a backlash. Yet consider: The main dissent to these global support structures are not tweed-clad academics and posh DC think tanks, but informal-yet-well-organized bands of protesters. Distributed power; the forgotten "end-points." They have re-set the policy-making agenda by their activities -- another reminder that the modern "snipers" are not to be overlooked; not in technology, not in business, not in politics.

This is not to sound Marxist -- that’s not what we mean by "’Red’’Herring!" But the point I raise is simply that the center of power -- in this case, political power -- is fracturing, splintering, it does not hold. In business, of course, that has led to the rise of "The Entrepreneur and The Start-Up" as the engine of global economic growth and the future of commercial innovation. But even in the area of international relations, we’re moving to an "Internet model" whereby state-to-state diplomatic relations is being superceded by multinational corporation to multinational corporation rapports -- for competition or commercial alliances.

And the nature of war, and the threat to peace, also incorporates a private-sector, Internet-like approach. No longer do states raise armies and declare war. Sure, the "Blue-Chip" nations do. But now, for the "secondary-market-listing countries," private armies are billeted by people like bin Laden, and rather than target the enemy country’s government, or military counterparts, the method used is random acts of terror against civilians. Just as power has been distributed in an Internet model in terms of society, so too, in this case, has the nature of the dissent from the centralized organs of power also been distributed: And these snipers represent the "Netscapes" of international security and stability -- they can cause a lot of disruption.

This would suggest that the notion of society’s centralization has had its day -- dead, like Communism -- and that we’re in a world were no single point can dominate; that, in fact, we can support an infinite number of hubs. It’s takes us back the question I posed at the start: That perhaps the primacy of Silicon Valley is on the wane, and that London or Vienna can be a viable place to pursue a career…. But that is a somewhat over-stated idea. I’m not so sure. Hubs are important -- HBS is a sort of hub, and certainly Rome was a hub, a beehive of activity during the Renaissance, and Germany, too, during the reformation. Today it is Silicon Valley, for some of the most important changes that are happening in the world, since the astounding developments are of a primarily -- albeit not exclusively -- technological nature.

Two years ago, Jason McCabe Calacanis of "Silicon Alley Reporter" sized up the world, and the changes in technology, and the opportunities it afforded, and recommended to HBS students that they leave school, take their tuition money and invest it in their own dot-com start-up.

So am I today saying that you all should forget about Europe and go to Silicon Valley? Or New York? Or, on the other hand, is it equally viable, in a world where power is distributed, decentralized, to set out your shingle in the Old World? In fact, I am not sure. I am uncertain. It is not the answer that you would like to hear, but it is the only responsible one I can give.

Thank you.

 

Copyright 2001 Kenneth Neil Cukier - This work may be freely reproduced provided the author and title is identified.