Part 3: Audience Questions
On Capital In The Capital
My name is Mark Dell. I spent most of last year helping a PCS license winner try to raise money. We ended up raising over $100 million. Every penny of that came from New York. In 1994, I started the MIT Enterprise Forum in this area and the only bank that sponsored us was a Silicon Valley bank. My question is, whats being done and what will continue to be done to bring money into this area, because I think that might be the ingredient thats lacking in making these people successful entrepreneurs.
MR. WARNER: I think your point is extraordinarily valid. If you look at the number of venture capital firms that existed in this area three or four years ago, it was virtually nil. My firm has been investing, but we are not a venture capital firm. We only invest our own money. But if you look at it today, the Netpreneur Program is in touch with over 50 venture capital firms that are active in this community. We werent on the map three years ago. How many folks even in this audience tonight didnt know before tonight that we were the second largest technology region in the country? Some of us who are part of this community dont know, and its taken the venture community a while. The venture community is a group of lemmings. Lets face it. They will follow where the deals are. The deals are starting to come here. We have seen organizations have tremendous success, such as Friedman, Billings, Ramsey & Co. and other groups. They will follow to this region.
The banks are another story. Its a difficulty. If you want to see a bank executive, you have to go to Charlotte or New York. But I think most of the sources of capital will come from venture and I think you will start to see it as more and more people become successful, as more and more millionaires are made from the AOLs in the region and as you start to see the creation of angel networks. We have got to do a better job of networking amongst the capital sources and in providing forums like this one so that companies like yours will be familiar with finding sources like myself and others in this room.
MS. SMITH: Is Fran Witzel here? Fran, could you stand up? This is Fran Witzel
firstname.lastname@example.org who runs the investing forum for the Netpreneur Program. He is online, he is somebody you can call. He has networked a number of the venture capitalists. We have an anonymous deal routing program and other resources on and off line. There are other services in the area as well, like the MIT Enterprise Forum begun here in 1980, the Dingman Center at the University of Maryland, programs at George Mason University, the Grubstake Breakfast and so forth. These kinds of things are going to help as well.
On Analog Spectrum Regulation
Paul OKeefe of Science Applications International. One question I had is about wireless bandwidth. The laws of physics dictate that mobile wireless requires low frequencies of below a couple gigahertz. We have this legacy problem of analog broadcasting being allocated a lot of bandwidth or spectrum which is inherently more useful and more valuable as digital wireless, whereas a lot of those fixed services could presumably be moved up frequency someplace. So heres something of a political question. How do you see the FCC in the future handling this issue of analog broadcasting spectrum becoming much more useful for digital wireless?
MR. OBRIEN: I am tempted to say when pigs fly. And no sooner. You have to recognize that the link between the political process and running for office and local broadcasting is so powerful, that when it comes to who you want to take on and who you dont want to take on in this world, the broadcasters are always on the top of my list.
Whos Who In Orbit?
Im currently a student at George Washington University, a junior in the business school. Im doing a marketing presentation and it happens to be on Orion Corporation, so Mr. Puente, Id like to speak with you afterwards if possible. Just a couple of questions. But in the meantime, I have a couple of questions for the gentlemen in the panel. What is the difference, in laymans terms, between Orion and Orbital?
MR. PUENTE: Well, we are actually two different satellite systems. Orion is in asynchronous orbit at 22,000 miles. We have, and are planning more, stationary satellites around the globe. We are very high bandwidth and very high capacity so that we can carry voice, video, data, Internet. You can carry 155 megabits of Internet traffic over a transponder. In Davids system, he is going after a different market segment and much lower capacity. Maybe David might want to answer that.
DAVID THOMPSON: When we grow up, we want to be like Orion.
On Sustaining Corporate Culture
Julie Chapman from NetStart, Inc. Weve talked about money, weve talked about technology, but I personally always like to talk about people. Maybe those of you in the operating side of businesses can talk about how you create and sustain a corporate culture which is truly entrepreneurial and that can move fast enough with the market as its growing. Maybe Brian, as an MCI veteran, can talk a little bit about how Bill McGowan made that happen.
BRIAN THOMPSON: Its not easy. Its easy when you have four people. But as you start to grow, it really is a function of setting some basic principles in place. Bill McGowan had a unique style in which he said that, having been a consultant in the earlier part of his life, he found out that the right way to deal with problems if you are a consultant is ask people what their problem is and then ask them how they are doing what they are doing. After they tell you that, you just tell them to do the exact opposite. If they are having problems doing it that way, if you tell them to do the opposite, it might work out more than 50% of the time. The fact of the matter is that when McGowan started MCIand it does sound silly but its truehe said, "How does AT&T do it?" You would tell him and he would say, "Okay, do it just the opposite." Believe it or not, that was one of the fundamental premises on which MCI was based. If the monopoly does it this way, and if you are going to be a competitor, do it a different way. If they are going to take 15 people to do something, do it with one person part-time.
It is fundamental, and there are basic things about a company that do take on the leaders view, and there were many things that we did. One of the most important things we did as we got larger at MCI was to spend more and more top management executive time trying to find those people who were trying to write procedures, so you could fire them. It really is true that as you grow fast, one of the most difficult things to do is to keep your hands-on process within an organization such that you are not going to stifle people and yet have creativity take place. Unfortunately, if you are growing fast, as MCI was when I joined and as LCI is today, your major difficulty is in hiring the right people.
One of the most important things you have to do is bring people in that are self-starters, who can deal with terrible ambiguity in their life, who are able to recognize bureaucracy and not take it on. Unfortunately, quite often what happens is you hire people who are highly skilled, who have come from a larger organization, and the first thing they want to do is hire a staff. They want to create those procedures because thats where they came from and thats where they were successful. If you are going to be successful in growing an entrepreneurial culture, pay more than the attention you think you ought to the process of hiring and also to the process of firing, because both of those are critically important to keeping the right kind of an organization.
The other thing I would say that was fundamental at MCIand I believe in it and I continue to believe in itis bring in from outside more than half of the people you are trying to put into to new positions in the organization. Bring them from outside because its critically important that you create a new sense of perspective on your company all the time. When you start to believe that you have got the right answers within the company and the place to hire is within or to promote is from within, I think you got a problem.
MR. OBRIEN: Yes, Id like to add one thing which I think is paramount. The question is how does the culture of the company handle mistakes? If somebody makes a mistake, which is what everybody will do sooner or later, are they free to walk in and tell you first? When I say to peopleand this is the culture we encourage isI want to be the first to know. Because maybe its not a mistake, you just think it is. But even if youre right, that its a huge mistake, the sooner I know about it the better. We give you so much responsibility here that of course you are going to make mistakes, because average age in our company of 5,000 employees is under 34, so we say, Okay, so you made a mistake, so now lets fix it. Does the culture reinforce that? Is that really what happens when a mistake takes place? I think as the companies get bigger and more bureaucratic and more layers, the culture of dealing with mistakes changes, unfortunately.
Filling Up The Skies?
Hello. My name is Skip Keats and my company is Stoa-Futura Consulting. This has nothing to do with my company; its purely something thats always been of interest to me. My first memory as a kid was Neil Armstrong bouncing around on the moon. What I am curious to know is, as we go ahead with the space stationswhich are from my understanding are somewhere between a low-Earth orbit and geostationarywith all the satellites and things going up, are they going to at some point start to run out of space, one? The other question is, are the satellites being designed so that they communicate not only with the ground but also with what will besome day presumablystations outward from the planet?
DAVID THOMPSON: We could have some fun with that one, talking about space stations and such, but let me give you a couple of serious answers. For at least a thousand years, if we are fairly smart in how we do it, we wont need to worry about running out of space. If we are careful, we are unlikely to see physical collisions between satellites. We certainly dont want to see a collision because as we add more and more satellites to a given orbital ring around the Earth, a collision between two satellites will very quickly become a collision between many satellites. Those of us that are in the business of designing and building satellites do pay attention to that, and we are going to have to pay more and more attention to it over the next five years. We currently have roughly 175 commercial satellites in service around the world. That number will go up by at least a factor of five over about the next five years, so its going to become a little bigger concern.
Today satellites, by and large, are relatively simple in terms of the functionality they provide. A customer on the ground sends a radio transmission up to a satellite. That satellite hears the transmission, shifts its frequency and sends it right back down to some other location on the ground. We are rapidly approaching a point when we will have a lot more satellites that do a lot more than that; smart satellites that know how to do onboard processing of a message to figure out where it ought to go, whats the minimum cost routing for that message to get from point A to point B. Then well have a lot of cross-links between satellites. Satellite A will talk to satellite B will talk to satellite C. For the time being, though, thats pretty much the limit of our vision. There is not much application for looking outward. One of these days, a long time from now, there may be. But for the time being, satellites pretty much just talk to people on the ground and occasionally talk to one another.
On Email And Telecom
My name is David. Im interested to know how you think email is going to affect the industry for companies, revenues, market share, etc.?
BRIAN THOMPSON: They started MCI mail in 1982. I can tell you it was a great idea and its finally, I think I heard, making profits big time for MCI this year. But its only an $80 or $90 million business. Email is an adjunct business from our point of view. It is a great ancillary to data systems, but its really not complex and its something, unfortunately, that most people give away with their basic software. It is a very effective way of communicating, not just Internet but within companies themselves. Its a part of the basic services. I dont see it as a huge revenue generator in the broad scheme of things.
On Now And Then
Do you see the same opportunity like when AT&T broke up years ago as today? Do you compare anything, the same situation or in terms of technology?
BRIAN THOMPSON: In terms of market potential, if you were starting a company today, I think I would actually be looking into how I could get into the local competition. There will be all kinds of opportunities that will range anywhere from joining up with power utilities, through cable television entrepreneurs on their second wave of trying to make this thing work. I think the local marketplace continues to be a monopoly thats going to be under attack for the next 20-40 years. There were 500 billion local telephone calls made last year. There were only 47 billion long distance calls. Its taken us 20 years of hard work to get half of those 47 billion long distance calls onto somebody elses network. We have a long way to go in the local business, so I think Id encourage people. They are not easy people to go up against, but I think its a great opportunity.
Im Steven Hall with the Center for International Business. Mr. Puente mentioned his trials and tribulations with Intelsat. I am interested in finding out, with the recent World Trade Organization ruling on worldwide decontrol of telecommunications, where you see your organizations capitalizing onto that. Also, about the privatization thats going on. We read a lot about these megadeals that some US companies are doing and Id like to get your impressions of the international area.
MR. PUENTE: Well, I think that Intelsat is still a major powerhouse. Its still made up of all the telephone monopolies in the world. They want to go private. What they really mean by that, they want to be able to go out and raise capital in the capital markets just like any private corporation, except that they dont have a level playing field. In a lot of those countries, you still cant deliver satellites freely, so I would say that all the satellite people have to watch Intelsat and its privatization very closely. They are a major power and they could really overwhelm the start-up satellite companies. Fortunately today, we have other powerhouses like Hughes Networks, Loral, and other major players now entering the field like GE and Orbital. We would have some power to compete. But the Intelsat organization treaty still exists and its something that has to be watched. They want to break it up, but how? We want to make sure its on a level playing field.
BRIAN THOMPSON: Starting next year, the international marketplace is going to be unbelievably chaotic. It truly is. If you think weve been playing chess here in the US, this is three-dimensional chess, because of the arcane rules that govern accounting rate treatments and other things that are going to disappear.
Monopolies love order. What weve got is the breakdown of monopolies taking place internationally, especially in Europe, starting next year. There are going to be unbelievable things. They are already happening in terms of technology and other applications. You are going to see a huge change in the next couple of years in the international markets.
DAVID THOMPSON: All of us hate monopolies we dont own. Im with John. We have been underdogs since we got started. I will say one positive thing about Intelsattheyre a great existence proof for profitability in the satellite service market. Even though they havent been challenged to be as smart or as creative as they would be in a truly open environmentat least not historically, although that has changed quite a bit over the last ten yearsnevertheless, last year on revenues of about $9 million they had pretax income of almost $400 million. As an existence proof, thats great.
On People Dynamics
Hi, My name is Timothy Spear of Ventara Corporation. How do you prevent a company that is very fast-growing, where you do a lot of delegation, from getting into turf wars and political infighting and utter chaos?
BRIAN THOMPSON: I think youve really got to work hard on performance-based reward systems. You really do. Human nature, unfortunately, is such that people believe that if they can suck up to somebody at the top, they can get ahead. Thats something that really starts at the top. If you ensure that performance is rewarded, that you are able to give people out of the clear blue sky a reward for doing something thats uniquewhether its stock options or a bonus or even just recognitionyou are going to find out that your whole organization will come around to recognizing that its really performance that makes the difference, not collusion.
MR. WARNER: On that same note, team building is at least one of the things that we look at in companies. When we look at the idea and we look at the quality of the people, we also look at the quality of the entrepreneur and how willing he or she is to share equity with their team. Somebody who wants to keep it all for herself or himself is not somebody you want to invest with.
On Training And Education
Bert Katz, ARC International Corporation. A number of you spoke about people. I dont want to use the word "assets" because that implies ownership of people, but in human resources, what issues, what challenges do you see over the next five to ten years in terms of training and human resources? Obviously there is a knowledge component, but there is also a skill component. What kind of issues and challenges do you see our region facing in those areas?
MR. WARNER: We have huge, huge needs. Probably everybody in this room has heard the figures of 19,000 unfilled technology jobs in Northern Virginia alone. If we dont do a better job in universities and other institutions of higher learning, not just in the region but throughout Virginia and Maryland and the District, these jobs are going to pick up and leave. One thing that is clear with entrepreneurial, technology-based companies, they dont have to be physically in any location. They dont have to be next to the river or next to the railroad line. Unless we can do a better job of training a work force, companies that are here today are going to end up somewhere else tomorrow.
I think to solve that problem we have got to stop thinking about it as simply the public sectors responsibility. It really has to be a cooperation between the public sector and the private sector. American business spends $75 billion a year on continual training. A lot of us say if the school systems were doing a better job, perhaps they wouldnt have to spend that much. Business needs to recognize that they must do a lot more partnering with school systems a lot earlier. Id say as early as the middle school. We have to do a much better job of vocational training because not everyone needs to be a rocket scientist. The work force shortage is an area that will be the major policy issue well have to face in this region.
On Competition And Commodities
My name is David Gross. I work for MCI and Im also a private investor. One of the things we are seeing in telecommunications right now is the convergence of many different kinds of services, both wireline and wireless. In telephony, particularly wireless, you are seeing now three to five carriers in each MSA with PCS offices. This is creating a lot of competition. As you get more competitive, there is concern that the telecommunications industry is going to look an awful lot like the airline industry, where you have large capital outlays, lots of competition and essentially product where people are selecting purely on price. One of the results of these price wars is decreasing margins and, ultimately in some cases, takeovers and so forth. My question is, how is the telecommunications industry going to develop some guidelines for pricing power so that it doesnt become like the airline industryconstantly fighting price battles while it tries to cover huge capital costs?
MR. OBRIEN: Well, since were in wireless, Ill tell you how weve done it. Starting six or seven years ago, we projected a world that looks exactly as ugly as the world you just portrayed. We said, "What chance do we have in a world like that?" Our answer was, "We dont have any chance at all if we stay the way we are now." That was back in 1990-91. We made ourselves into something that we thought was differentiated from the way the rest of the world was going. So far we have a network that supports a differentiation, and our competitors dont. Now, are our competitors stupid? No. What I always say is you never have to worry about people emulating your failure. You have to worry about them emulating your success.
Of course, you are going to spawn emulation if you are successful. Im sure our competitors are figuring out ways to knock off our successful differentiation or thinking about how to respond to itthats what makes it so exciting. It would be wonderful to be a monopoly, but only if you are the monopolist. Its not wonderful to be in the business otherwise. So Ill take it this way. Ill take my chances.
MR. WARNER: Actually, I think the analogy doesnt completely hold. Airplanes move a person from point "A" to point "B." We are adding an incredible number of ancillary services. Look at the growth in the data market in the last few years, and weve just touched the tip of the iceberg in terms of how we are going to move the revolution around. There are a number of new wireless competitive opportunitiesfixed wireless local loop, high gigahertz spectrum plays, last mile non-fiber alternativesthat are going to drive the cost of building network constantly lower. Is it going to be a competitive world? Absolutely. But is it going to end up the way the airline industry was a few years ago? I dont see that.
Where Does Wireless Compete?
Peter Shannon with Ventara Corporation. Coincidentally my question is similar to the gentleman before me, its about competition. Will the emerging space-based communications systems be competing in the same markets as existing wireless and PCS systems? And if so, will that make the cost of entering this market for new players prohibitively expensive?
MR. OBRIEN: In most cases, satellite systems have a set of attributes that make them very competitive in markets that tend to be poorly served or not served at all by land-based technologies. There are some exceptions to that rule, in the entertainment segment of direct-to-home TV, for example. Over the last couple of years, we have seen satellite broadcasting go from supplying under-served or poorly-served low-population density areas to competing on a completely different basis with cable in higher population density areas. However, I think in general the model that influences a lot of our thinking is what we call the "doughnut" model.
There are three regions to the doughnut. There is the hole inside, thats the urban centers. There is a certain set of technologies which work really well there, including a major contribution from fiber. Then there is the doughnut itself, where the explosion of digital wireless technology is probably going to promote quite a bit of growth. Lastly, theres outside the doughnutsparsely populated areas or areas which are highly populated but where the income density is low. Thats where satellites really have a strong competitive advantage. Its going to evolve, and 10 or 15 years from now the proposition will be different, but I think for the near term that governs a lot of the thinking from a satellite operators perspective.
Are There Really Opportunities?
Thank you. My name is Bob Smith and I help nonprofit organizations make strategic use of interactive technologies. A year ago Congress passed what they termed landmark telecommunications legislation that was going to open up competition in the telecommunications world. However, since then, we have seen a lot of mergers, big companies getting bigger. Are there really new opportunities for entrepreneurs in telecommunications or networks, or are we going to see more of a contraction over the next couple of years?
MR. OBRIEN: Do you mean "what is the opportunity?" or "are they out there?" There are a lot of good ones but I cant tell you what they are.
MR. PUENTE: I think there is a great deal of opportunity out there and there will be some consolidation but there will also be a lot of new companies coming up.
BRIAN THOMPSON: I think its going to take a while before the bill finally acts. Its going to be great. As I said earlier, I think there are going to be great opportunities in the marketplace.
DAVID THOMPSON: Im also an optimist in that regard.
MR. WARNER: The bigger a company gets, the slower and more lumbering it becomes and the more niche opportunities there are.
On Internet Service Providers
My name is Ken Pittman with Woodard Walker Associates, a telecommunications consulting firm. Mark, can you give me the opportunity to invest in an Internet service provider? If its midrange, whats the ideal profile, if you can, for an Internet service provider and would you take a position on how to break even?
MR. WARNER: I think you are going to see, very quickly, consolidation in the ISP market and, frankly, thats something we are looking at right now. I dont know all the specifics, but I think you are going to see a number of opportunities come along.
Part 4: Closing Comments