MR. McGINTY: Let me begin by asking about Washington, DC, as a high-tech sector. People are familiar with Route 270 and the biotech firms that grew up out there. I guess theres a lot more to it than that, and Ill start with you, Mario Morino.
MR. MORINO: Yes, I think there is, Derek. You have a major concentration in communications todaytelecommunications right through wireless and DBS satellite bases that stretch from Lynchburg, Virginia, up through Marylands 270 corridor. You have a growing concentration in the software and hardware areas. I think the emerging area is in contentinformation content, that ranges from healthcare information products coming out of the National Institutes of Health (NIH) to bioinfomatics, to content derived from the federal government information base, just to name a few examples.
MR. McGINTY: Now, is there a critical mass here? Are there a certain number of firms, a certain number of things beginning to happen that you can start looking at the region and say, "Hey, this is a center of this sort of development," and has that happened here in the Washington area?
MR. MORINO: Yes, it has, and I think its not even near its a peak. It is just beginning. There is a study that was done two years ago by George Mason University that indicated there were over 2400 technology firms in this region. It stunned a lot of people when they realized the amount of revenue that was being generated by those businesses. There are 600-700 network-based and new media businesses that we are tracking at the Netpreneur Program and were firmly convinced we are probably not even touching a third to a half of the total that are in this region right now.
MR. McGINTY: Mr. Ramsey, as someone who works in the investment banking field, Im sure many of these firms come to you for the cash to start up and maybe to keep going when their first operations dont yield profits right away. Whats the sense you have of the region and how quickly its growing?
MR. RAMSEY: Well, I think all you have to do is look at the history of our firm which was also a start-up just a little over eight years ago. If you had asked me two and a half years ago, would we try to develop a practice around financing high-tech companies, Id have said, Absolutely not. Its a world that is incredibly efficient. There is plenty of capital out there for all types of technology firmshardware, semiconductors, across-the-board. But that was before the emergence of the online world and the Internet.
Its clearas you can see by pioneers like America Online, CyberCash and all the others that it is a whole new world that needs capital. It needs new ideas. It needs a fresh look. It needs people who are willing to think out of the box, who do things differently. Being in the middle of that, with these 2400 companies probably ten minutes from our office, is an exciting opportunity.
MR. McGINTY: Why this area, from your perspective?
MR. RAMSEY: Well, as Mario said, this area is the center of communications. Its where all the major telecom giants either have major operations or are headquartered. Its where the whole base of the Internet was started, back with the original federal government funding. And so, just like any other area which benefits from regional people being there, its spawned the start-ups of major corporations like AOL, UUNET and others. And its increasing.
MR. McGINTY: Mr. Kimsey?
MR. KIMSEY: Well, I was born and raised here. Thats why America Online is located here, so that happened to be an accident and serendipity rather than a process of logical forethought. But, in fact, Russ is exactly right. This has become a center for telecommunications and high-tech industries centered around telecommunications. Ive bemoaned for a decade the lack of an infrastructure to support that, accountants, lawyers and so forth. I think all of that now is coming to pass. I think the community is developing into a "Silicon Corners," if you will. I think we are every bit a rival to Silicon Valley. There have been more high-tech start-ups in the Washington area than any place in the country except the Valley, and I think that speaks to all the points that Mario and Russ have made.
MR. McGINTY: What do you think about the market in terms of investing and certainly in these sorts of firms right now. There was a time, a couple of years ago, when it was just so hot, maybe even a year ago, where, if it had "Internet" on it, everybody was interested. Then we saw your old company, AOL, have its problems with busy signals and theres other things that havent come through as quickly as people thought they would. The Net is not making money the way people expected. Has the ardor cooled a bit now? Are people a little more nervous about it?
MR. KIMSEY: Well, everything goes in cycles and nothing stays hot forever. It goes up and it recedes, and it comes back. I think its an enduring business we all sit here witness to, and weve just begun to see the development of this phenomenoand this medium, to be specific. I think were in the last half of the first inning, maybe the top of the second.
MR. McGINTY: So you really think this is still on the ground floor.
MR. KIMSEY: Oh, absolutely. Theres no question. The technologies that surround the development of this medium are only just beginning to show their promise. As you forecast them out, youll be able to speak to a wall and itll answer you, and point at things and they will respond. Youll be able to carry things around in your pocket that talk to you; youll write on them, and they will translate that into the digital signal.
MR. McGINTY: You know, Ive heard all this before, though. Weve been hearing this for a while now. Are we over-selling some of these promises by saying those sorts of things?
MR. KIMSEY: Well, these technologies exist today. Theyre just buggy, too expensive, too heavy. You cant pinpoint with any accuracy when exactly these things will happen, but I think anybody even remotely associated with any of these industries knows intuitively its going to happen.
MR. McGINTY: Now, William Melton, let me get you into this. I mentioned VeriFone, which everybody knows about because, if you buy something with a credit card, they use it. What is it that you sense about the Internet as a medium for trade today?
MR. MELTON: I think we can say that the Internet is advancing in something of a half-life of what previous industries have advanced. If you looked at the adoption rate of television over a 30 or 40-year period, if you looked at the adoption rate of the Automatic Teller Machines (ATM)those things that you go to the bank and pull your money out ofATMs have seen about a 20-year adoption rate. The VeriFone point-of-sale terminals, thats about a 15 or 20-year period. I think, on the Internet, were seeing things go in about a half-life of that. We intuitively understand the promise of the Internet, that it makes geography go away. It makes, in many cases, time shift, if not go away. You can be any place in the world, anywhere, a few clicks of a button and you have the whole world at your fingertips.
Now, last year during the "hot" phase or the "manic" cycle, as you may describe it, everybody thought that maybe it would happen overnightin six months or 12 months or eight months. It doesnt happen that fast. But it certainly is not going to take 20 years. Its in a period of three, five, eight or ten years, which is twice as fast as any major sort of technological phenomena adoption rate that weve ever seen before.
MR. McGINTY: ATMs are such a ubiquitous technology, now. Theyve almost made travelers checks obsolete. You go to another place and you just use your ATM card. You wonder now, how did we live before these existed. Do you think well ever say that about the Internet?
MR. MELTON: Oh, absolutely. In the early days of ATMsunfortunately I have to admit that I was around during those days and Im old enough to know thatthe banks that were installing those large, expensive boxes in the walls of their banks spent millions of advertising dollars trying to figure out how to get people to use those things. We had . . .
MR. McGINTY: And they broke down a lot.
MR. MELTON: They broke. They had all the problems that you would think of. We had, at one time, what was called the 30% glass ceiling. In other words, it was common knowledge among bankers that we would never, ever get more than 30% of the population to use those things.
MR. McGINTY: Really!
MR. MELTON: It was just understood. Of course, today that would be laughable. But thats with the benefit of hindsight.
MR. McGINTY: So you suggest that the Internet will come to that level of acceptance? You gentlemen agree with that?
MR. MORINO: Yes, absolutely.
MR. KIMSEY: Absolutely.
MR. MELTON: Today, were lucky if we haveJim, your numbers would be better than minebut were lucky if we have possibly 15% to 20% of the US population really online today.
MR. KIMSEY: I think its probably even lower than that, when you look at everybody that has a computer and a modem and a specific designated account. However, theyre probablythrough accessmaybe 15% of the folks, but that leaves 85% who arent.
MR. MELTON: And out of that, some of the industry is drawing the same conclusion about this 30% glass ceiling, that only 30% of the population will ever be the sort of educated techies who will use this new stuff. I would suggest that in ten years well look back and well laugh at that sort of a projection.
MR. RAMSEY: Derek, you mentioned the ATMs being ubiquitous. As a financier, Id have no interest in the Internet if I thought it was going to stay the way it is today. But I think people are being too shortsighted if they dont recognize the power of what this communication medium is all about and the fact that the Internet will be fast, it will be ubiquitous and it will be dial tone. You dont pick up a phone today and say, Ive just picked up an analog device, now I will connect. No, it is dial tone. And the same thing will happen with the Internet.
Youll have browsers built into everything. People wont think about whether theyre getting on the Internet or something else. Thats just how theyll communicate. The power of the communication revolution which Mario talks about, is truly a transformation occuring around the Internet. Its not about technology; its about the power of communication around the Internet. You already see that in America Online and othersreally, America Onlines the one building the brand.
MR. MELTON: If you think about the early days of the automobile, not many people drove, because they had to know how the carburetor worked and they had to turn the crank and it was . . .
MR. McGINTY: It was too hard.
MR. MELTON: . . . it was too difficult, exactly, and as Russ has correctly pointed out, people wont even think about what technology they are using, just as you dont think about whats under the hood of a car any more.
MR. McGINTY: But youre saying it has to become a transparent technology.
MR. MELTON: Exactly.
MR. McGINTY: You have to be able to use it without being techno-whatevers.
MR. MELTON: Yes.
MR. MORINO: It is about high technology in a lot of ways, but Id argue its much more about people and social dynamics at the end of the day. When you step back to look at the strengths of this region, whats moving today is the communications process. Think of the firms herethe MCIs, the LCIs, the UPIs and the ones which are just emerging left and right. The more traffic that occurs, the more the industry here will grow enormously.
Now, if you just step out to the five and eight-year cycle that Bill was talking about, and imagine that there is a degree of use, theres a degree of ubiquity. Look at the information content here in this regionour ability to package, to add context and knowledgethen consider the insatiable demand people have for information, for understanding, for context. I think that becomes the ultimate second wave of opportunity for this region.
MR. McGINTY: Bill Melton, I wanted to ask you about the CyberCash phenomenon youve tried to create. You guys are doing what, about 10,000 transactions a day now or something along that line?
MR. MELTON: At the end of our first quarter, thats what we were doing. Were obviously continuing to grow.
MR. McGINTY: What do you think is the point you have to get to where you feel as though youve really broken through for your company, and what are the difficulties that are still standing in the way of having this sort of common currency of the Net that would allow us all to engage in the kind of trade youre talking about.
MR. MELTON: Well, let me correct what might be a misperception. We do not create currencies. People that are down the street from herethe Federal Reserve and the government, you know, those folks who have gunsthose are the ones that create currencies. We dont do that. In the physical world there are many kinds of payment instruments or currencies, all the way from the cash you carry in your pocket to checkbooks, debit cards and credit cards. All of those currencies, all those payment instruments, need to be migrated to the Net. Thats our businessproviding the technology that migrates the currencies, the payment instruments that youre deeply familiar with, to usability on the Net. So with that little clarification in mind . . .
MR. McGINTY: Okay. Thank you, Bill.
MR. MELTON: I dont want anybody with guns coming after me. I would say that its obviously, again, a matter of getting to critical mass. And that critical mass has to come from contentthe things that you want to buy on the Net, the critical mass of the tools in the hands of the consumers, the browsers that are equipped with security tools, on up to a general awareness of the availability of these tools. I would suggest that it will happen some time in mid to late 98. It it will become just understood, at least among those who are informed in this area, and then moving on in 99 and by year 2000 it will be as understood as ATMs are.
MR. McGINTY: So two to three years, youre saying, well be in the midst of using this thing very, very, very significantly.
MR. MELTON: As commonly as you use your ATM. Two and three years from now, you wont think of sending a check in the mail to your daughter whos away at college. Youll get on the Net and send her the electronic check through email.
MR. McGINTY: Impressive. If it happens. What about the security concerns? Im sure thats the first question.
MR. MELTON: Its the first question, but actually, its the least of all the questions. Security at this point has been largely resolved. We, and anybody thats serious about this, uses strong, industrial-strength securitysecurity keys that are over a thousand bits long that are unbreakable with any technology we know of today. And they certainly can be extended to be longer keys if we need them. Security is not the issue. The issue is getting all the pieces working together, including understanding by the consumer.