Until now, Craig McCaw was most famous for starting the eponymous cellular company that he sold to AT&T in 1994 for $12.6 billion.
This serial entrepreneur wasn't as fortunate with his next venture: the construction of a satellite-based broadband communications system. Before it flopped, though, McCaw received financial backing from Bill Gates and a bunch of other well-heeled backers, who invested more than $292 million into the venture.
Craig McCaw
(Credit: Stephen Shankland, CNET News)After the dot-com bust, McCaw set out to offer portable wireless high-speed Internet service. His company, Clearwire, clearly qualified as one of those BIG IDEAS: WiMax is said to allow for wireless Internet service that's five times faster than 3G networks.
So far, Intel, Google, Comcast, Time Warner Cable, and Bright House Networks have ponied up $3.2 billion in Clearwire and its operating subsidiary (for about 22 percent of the company.) Each of those investors has an obvious interest in facilitating a wireless Internet outside of the phone companies, which are adopting Long Term Evolution format, a rival technology expected to become available in 2010.
But now, McCaw and Clearwire face a potentially huge headache. Bloomberg is quoting Clearwire CEO Ben Wolff acknowledging the impact of the recession on credit (and investors.) The upshot: Clearwire may be forced to put its network expansion plans on hold if it can't raise another $2 billion.
Wolff declined to say whether Clearwire would have to delay the project, but he nonetheless did acknowledge the obvious:
"It's clear that capital markets are closed for either borrowers or companies that are trying to raise capital, regardless of what kind of company it is," Wolff said. "We've seen challenges across the board."
That's putting it mildly. In the last year, Clearwire's investors have watched their shares lose more than 75 percent of their value. Clearwire's management needs to sell its partners on sticking around, let alone putting more money into the pot. McCaw knows how to sell an idea-but even he's running into a brick wall called the recession.
So it was that a senior Intel executive today shot down any suggestion it was planning to bail out Clearwire.
"They've got enough money to keep going for quite a while," Sean Maloney, the company's sales and marketing head, said during a conference call. "They've got a pretty fat piece of capital to go out and build the network."
That's not the news Clearwire wanted to hear. But given current events, where so many companies are pushing the reset button, Intel's message only restates what's now obvious to everyone. It really is a new world order.
On a day after the stock market suffered through one of its classic fits of pique at the news du jour, it's hard to find any bright side to a 382-point loss. But something's happening here and--apologies to the immortal Buffalo Springfield--what's taking place is becoming increasingly clear.
The conventional wisdom is that these are (among) the worst of times, with the tech economy hostage to the vagaries of the larger global economy. I suppose that it's reasonable to expect things to get a lot worse before they get any better. But how about some historical perspective?
As bad as things seem--and they ain't good--this still would not be the first time that Silicon Valley and the larger technology sector stumbled through a slowdown.
And keep in mind that the big innovations hatched during the times of trouble only became visible in history's rear-view mirror: 20-20 hindsight is never in short supply. That was true in each of the past three decades, and there's no reason not to believe it won't be equally true this time around.
But here's where the storyline needs an edit.
Ever since Wall Street's fall meltdown, the mantra has been that the reduced access to capital threatens to choke off technology innovation and force a lot of start-ups out of business and, oh, wouldn't that all be horrid for the "community."
I'm not so sure about that. And besides, not all innovation is grinding to a stop.
On the surface, there's no doubt that a number of start-ups will get wiped out by what Marc Andreessen once glibly referred to as the coming "nuclear winter" (Andreessen had no idea how prescient he would turn out to be.) But isn't that the way capitalism is supposed to work? And frankly, the world is not going to miss yet another widget maker or a social network for left-handed gimps.
Some perspective helps. For instance, the more interesting Web 2.0 companies aren't in dire straits. Andreessen's own Ning pocketed $44 million in July 2007 and another $60 million last April. Meanwhile, Facebook received $240 million from Microsoft in October 2007, giving Mark Zuckerberg more freedom to build the service brick by cyber brick.
The fact is that Web 2.0 has played out. The VCs who invest in this sort of thing continue to argue otherwise, but I've tuned them out. Nobody's offered a convincing explanation as to why Web 2.0's 15 minutes of fame aren't about up.
At the other end of the spectrum, this horrid economy is creating a paradox: the strongest technology companies are actually doubling down to extend their advantage.
Just this week, Intel disclosed its plans to spend $7 billion over the next couple of years. The investment will go to upgrade Intel's manufacturing technology here in the U.S. (stimulus bill or no stimulus bill) with an eye toward the introduction of 32-nanometer technology. That is quite a sum, but consider that Intel had about $12 billion in cash and investments on its balance sheet at the end of its last quarter. In other words, there's a lot more where that came from.
Elsewhere, pay attention to what's taking place at Cisco Systems. Talking with analysts earlier this month, CEO John Chambers didn't seem overly concerned as he warned sales might decline by as much as 20 percent in the current quarter. In fact, he predicted that a stronger Cisco will ultimately emerge, ready for the recovery.
Maybe he was telegraphing what was in store. On Monday, Cisco announced that it was selling $4 billion worth of bonds in what's the probably prelude to another Chambers shopping expedition. A company representative says that $500 million will go to pay down existing debt. That still leaves $3.5 billion in Monopoly money with which to go on a spree.
And it will. This is a company that thinks big and, more important, thinks strategically. Cisco bought for $500 million in 2003 A couple of years later, it paid $6.9 billion for . And in 2007, Cisco spent $3.2 billion for WebEx.
Chambers learned the hard way how to survive a rapid downturn. He was at Wang when it fell apart, and he had to make the tough choices on layoffs at Cisco when the dot-com boom ended. Ultimately, his quick decision-making allowed Cisco to emerge from the bust faster than many other tech companies. It wouldn't be a shock to see that same savvy management this time as well.
And like his counterparts at Intel, Chambers has money in the bank while so many others are struggling to hang on. You know that old cliche about cash being king? These days, it's more like the Holy Roman Emperor.
The Black Monday announcement of more than 71,000 jobs lost is a stunner. Today it was Texas Instruments and Sprint Nextel adding their names to the listof tech companies handing out pink slips. Tomorrow? Anybody's guess.
In uncertain times, the only sure bet is that Congress is going to come under renewed pressure to revisit its practice of granting temporary visas to foreign workers. Already, Iowa Sen. Charles Grassley (R-Iowa) is pressing Microsoft to give Americans priority over foreigners working in this country with H-1Bs.
"My point is that during a layoff, companies should not be retaining H-1B or other work visa program employees over qualified American workers," Grassley wrote on Friday after Microsoft announced its first across-the-board layoffs. "Our immigration policy is not intended to harm the American work force. I encourage Microsoft to ensure that Americans are given priority in job retention. Microsoft has a moral obligation to protect these American workers by putting them first during these difficult economic times."
Microsoft said Monday it had no plans to change its position on H-1Bs.
Last year, when Bill Gates appeared before Congress, BusinessWeek reported that Microsoft had received 959 visa petition approvals, roughly "one fifth as many as Infosys (Technologies, the top participant), while Intel got 369."
When it reported its quarterly earnings last week, Microsoft announced plans to fire about 5,000 employees. A spokesman said that some of the employees let go held H-1B visas but declined to get more specific.
Intel, which last week announced plans to close two plants in the U.S., similarly said that layoffs resulting from the economic slowdown would not factor into the company's H-1B plans.
The Intel layoffs will affect between 2,000 and 3,000 people, but "those aren't the kind of people who will be at risk of losing their jobs," a spokesman said.
The U.S H-1B program offers temporary work visas to foreign nationals who are considered by the U.S. Citizenship & Immigration Services to be qualified for a "specialty occupation." Companies argue that they need access to foreign-born college graduates with coveted technical skills. However, granting visas to foreign workers often is a controversial step. The argument gets even louder when the ranks of American jobless start swelling.
Among the charges is the claim that technology companies are less keen on hiring hard-to-fill spots than on creating a cyber lumpenproletariat willing to work for cheaper wages. The critics have also seized on instances where U.S. firms fired Americans while continuing to employ foreigners who held H-1B visas.
With the new political constellation in Washington, it's unclear what, if anything, will happen to the program. But Les French, the director of the tech labor group WashTech, said he hoped Grassley's move was a harbinger.
"We can only hope the general public is outraged that companies continue to apply for visas while Americans get laid off," said French. "We're going to try and get a grassroots effort going on our part to target senators who haven't been friendly on this question to step up and correct the problem. It's not only Microsoft. It's a growing list. My guess is that it's going to be business as usual and that the visas will be gone in the first few months of the fiscal year."
What with a deepening recession and concern about the health of financial system, the best-case expectations for technology spending ranged between the bleak and the desperate.
So what do we get? A counter-intuitive start to the earnings season.
(Credit:
IBM)
The sub-text to IBM's post-earnings conference call on Monday easily could have been: "We're in a recession and ain't life grand?" (We'll have to wait until next month for Hewlett Packard to report its December quarter, but barring a shocker, HP may sing a similar tune.)
Not because these are salad days for the hardware businesses-just the opposite. That's why it's so interesting. In fact, the tech spending slowdown is hurting demand for computers and servers. IBM's computer hardware revenue (the Systems and Technology business) felt the pain as much as anyone, declining by 20 percent in the fourth quarter of last year.
But consider this: IBM's two global services branches notched a record pre-tax profit with a 14.5 percent margin, up four points from the prior year while the company's software revenue grew 3 percent. So what if IBM's sales team floundered in the quarter. Big Blue's higher margin mix compensated for any decline as gross profits rose to 47.9 percent from 44.9 percent.
Sam Palmisano, who has capably run the company since 2003, is winning plaudits from investors nervous about where things may be heading. But the major thanks goes to Palmisano's predecessor. Don't forget it was Lou Gerstner, who steered IBM into the very high-margin businesses that are now acting as bulwarks against the recession.
IBM had lost millions selling personal computers and PC operating systems. But between 1993 and 2002, Gerstner reshaped the company. He pointed IBM in a different direction, directing the company to invest billions building up its services and high-end software offerings.
By late 2004, the CEO baton had been passed to Palmisano, who was in a position to sell the PC business to Lenovo. Gerstner's emphasis on high-margin businesses was a shrewd choice that looks even better in light of subsequent history. These days the PC business is imploding. The lousy numbers recently turned in by bellwethers Intel and Seagate, only hint at how grim it has become in PC land.
Watching Mark Hurd operate at HP, I'm reminded a lot of Gerstner. NCR's former No.1 has a similar sensibility and he understands that commodity companies don't have a bright future. Paying nearly $14 billion last year to buy Electronic Data Systems was his master stroke. But it was part of the same strategy that included paying big bucks to buy application management software, Mercury Interactive, as well as Marc Andreessen's a data center automation software maker, Opsware.
The odd man out these days? It might be Michael Dell.
Count on the chattering classes to get it wrong. If I had a nickel for each time some expert or another weighed in over the years with a prediction of doom for Microsoft or Intel, I'd be kicking it in the Bahamas right about now.
There has been no shortage of upstarts, touted at one time or another, as can't-miss candidates to upset the computing world's constellation of forces over the past 30 years. All got bloodied for their trouble.
But have you noticed? As 2009 gets under way, it just seems the new year's outlook for the Wintel duopoly looks more unsettled than I can recall.
And not just because of the lousy economy or the concomitant stock market crash. Every technology company is feeling the pain. At some point, though, it's reasonable to assume that the economy will regain its footing and businesses will return to hiring. What's different this time around is that a rebound is not guaranteed to spell boom times for Microsoft or for Intel.
Intel built its business model around the need for constantly increasing performance. But here's what's new: more people than ever do their computing on the Internet. Up until now, Intel has dismissed concerns that the Atom processor, which powers Netbook devices, will cannibalize full-power notebooks or desktops. But we're still too early into the Netbook phenomenon to know how this is going to play out. Intel may wind up selling tons of Atom chips but the part fetches much lower profit margins than do the company's more full-featured processors. How much processing performance do you really need anyway? What about this checklist? Word processor, instant message client, Web browser. For most of us, that's more than enough. Intel wants the Atom to become a success. I'm not sure it can afford Atom to turn into a smash success.
I'm not sure whether a world populated by ultra-small, low-cost notebook computers is all that great for Microsoft, either. The company won't be able to exact the same licensing fee for a $300 computer that it does for a $1,200 PC. And with more people engaging in Internet-centric computing all the time, there are more free software alternatives.
None of this is to suggest that either Microsoft or Intel are even close to calamity. But they've each got a lot to consider as the year gets under way. The proliferation of Netbooks and the emergence of Internet-based computing raise myriad questions for Microsoft and Intel-and there are no easy answers on the horizon. The great 20th century economist Joseph Schumpeter wrote clairvoyantly about a process he termed creative destruction. I wonder if we're about to see its manifestation.
You're likely as sick as I am hearing about our supposed inevitable rendezvous with Armageddon. But there is a major difference between how the technology industry handled the dot-com bubble burst and how it's managing through one of the more extraordinary periods in the history of capitalism.
First, the bad old days. You doubtless remember irrational exuberance. With the exception of Cisco's John Chambers and a handful of other executives who were among the earliest to warn that clouds were gathering, most of the digerati in late 1999/early 2000 remained blithely upbeat about the future--until, that is, it was too late.
This time around their mood is quite grim and perhaps that's the best news anyone could have asked for.
• Expecting the worst, companies are ripping up their budgets and starting over from scratch.
• There's a feeling that we've been through this already (which is true) and managers know where to cut in order to survive a prolonged crisis.Who knows how IT managers will react if the bottom completely falls out. But so far, I'm not seeing signs of panic. What's more, any company that survived the near-death experience of the 2000-2002 IT recession presumably logged enough institutional knowledge to help get through the tough times once again.
Don't take this as reason to pop out the champagne. Nobody really knows how "tough" things are likely to become and there's little clarity about what's supposed to happen next. Speaking after the company posted its third quarter results on Tuesday, Intel's CEO Paul Otellini said fourth quarter sales could be anywhere between $10.1 billion and $10.9 billion. Which result is more likely? The best answer is that it all depends--hardly.
I was talking earlier with ZDNet's Larry Dignan, who reported on Gartner's IT conference held this week in Orlando, Fla. Larry, who picked up on a more sober vibe at the conference, which attracts a roster of major hitters from the IT business each year, also heard that there will be increasing customer pressure on vendors to renegotiate terms of existing contracts.
That's quite an interesting news nugget to consider. If that behavior becomes the norm, it is going to severely pressure profit margins at the big software makers. (And put a major hurt on the smaller ones.) That assumes customers will have the upper hand in any negotiation. But with the Dow Jones Industrial Average collapsing before our eyes, the old rules don't apply.
If these were normal times, Intel's quarterly earnings report would barely generate more than passing interest. A penny above, a penny below--only Wall Street and day traders give a damn.
But these aren't normal times. Intel today said that its fourth quarter revenue may be anywhere between $10.1 billion and $10.9 billion. That's one helluva wide margin. You see, because of all the recent nastiness in the markets--they just don't know.
Intel explained that the stock market's slo-mo meltdown has created a "high degree of uncertainty" where Intel will finish up the year. That's a big change because this company is usually as precise as a cruise missile in narrowing down its target.
Speaking on the conference call with analysts this afternoon, CEO Paul Otellini allowed that while the just-concluded quarter played out "mostly" as expected, he said the financial crisis had created "some kind of stress that may impact" Intel's business in the current quarter. He's just not sure how.
This much he does know: consumer purchases remain "light at this point in the quarter" and Intel can't predict whether the stock market collapse will keep shoppers away from the malls this December.
You can't fault Intel's brass for not having a better crystal ball. Messrs. Bernanke, Paulson and Bush don't know with any assurance how things are going to end up, either. If you're looking for the silver linking, Otellini did remind his listeners that the current economy bears little resemblance to the post-dot-com downturn.
"One of the things I remember...was that people stopped buying computers," he said. What with all the bankruptcies piling up, there was no shortage of hardware and you could buy second-hand computers and servers at sharp discounts to their sticker prices.
Current uncertainty in global economic conditions pose a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news, which could negatively affect product demand and other related matters. Consequently, demand could be different from Intel's expectations due to factors including changes in business and economic conditions, including conditions in the credit market, that could affect consumer confidence; customer acceptance of Intel's and competitors' products; changes in customer order patterns including order cancellations; and changes in the level of inventory at customers."
If he was liberty to do so, Otellini would have directed his listeners' attentions to that qualifier. But as the boss, he figures there's no sense in stirring up more panic. Still, this is a holy sh*t moment with Intel basically flipping a coin about where it thinks it's heading. And you know what? The rest of the technology industry is in the same boat.
It's reached the point where I don't trust any of the big research houses to get it right when it comes to IT spending.
Last month Forrester reduced its 2009 IT spending forecast while at the same time upping its projections for the remainder of this year. (I should add that Forrester issued its declaration just before the big financial meltdown got going in earnest.)
Meanwhile, tech CEOs gathering this week at the Gartner Symposium ITXpo conclave in Orlando are moping around as they regale each other with ever more depressing tales from the trenches. The Gartner graphic I've embedded here explains why they're uneasy about the near-term:
(Credit:
Gartner)
Nobody is yet predicting a collapse of the mainstays of IT a la what's happening to the nation's increasingly beleaguered automakers. But the economic slump is taking a bite out of everyone. After the market closed Tuesday afternoon, Intel reported a 12 percent jump in net income, but warned that the fourth quarter would be "difficult to predict." And in its boilerplate statement, the company included this caution:
The recent financial crisis affecting the banking system and financial markets and the going concern threats to investment banks and other financial institutions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit and equity markets. There could be a number of follow-on effects from the credit crisis on Intel's business, including insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies; counterparty failures negatively impacting our treasury operations; increased expense or inability to obtain short-term financing of Intel's operations from the issuance of commercial paper; and increased impairments from the inability of investee companies to obtain financing.
News.com Poll
Translation: Intel's worried about the solvency of key suppliers. Speculative, to be sure, but still a big departure from the company's recent talking points.
At this point, everyone's guessing about what's supposed to happen next. How long will it take for the emergency moves by the U.S. Treasury and the G-7 to percolate through the credit markets? What kind of lift might that give to the economy - and indirectly, the IT economy? Will consumers feel confident enough to fill their shopping baskets with consumer electronics gadgets come December?
A lot of questions, few answers. The only safe conclusion is that this is going to take a while to work out. For a good read on what may be in store, check out Larry Dignan's excellent post on ZDNet testing the proposition that software megavendors are too big to stumble.
Click here for ongoing coverage from CNET News, "Tough times for tech."
Writing about the Tuesday introduction of new iPods by Apple, American Technology Research's Shaw Wu observed that the product debut came smack in the midst of a lousy economic cycle where "macro headwinds are becoming more apparent."
That qualifies as more than mild understatement.
Atom: Let's get small.
The economy's wheezing, big banks are collapsing and oil prices remain sky high. So then why is PC demand expected to be strong through the end of 2008--and beyond?
That's the gist of a new report out of IDC. No matter that Lehman's on the ropes or that Uncle Sam had to rescue Freddie Mac and Fannie Mae before they went insolvent--and the financial sector is a big consumer of IT products. IDC still projects that global PC shipments will grow nearly 16 percent this year and remain at a double-digit pace through 2011.
And the No. 1 reason, according to IDC: the low end of the portable business is super-hot. I suppose the explanation isn't rocket science: when the economy's hurting, who doesn't want to find a bargain?
One other nugget in the IDC report caught my eye: a nascent trend marked by increasing "form factor diversity" in notebooks. The upshot is that with prices dropping, you'll find more people who own several different computers.
And when it comes to inexpensive notebook computer, we're primarily talking about Atom-based machines. Though it's unclear how long Intel will have this business to itself. Dirk Meyer, who now runs Advanced Micro Devices, recently acknowledged that the company also has its eyes on the ultra-low-cost notebook market.
One person who lives and breathes this market is my gadget-loving colleague, Erica Ogg, who explained the pros and cons of the latest notebook computer technology during a segment we recorded Wednesday on the CNET News Daily Debrief. Check it out.
Intel has invented a way to double the air flow generated by fans used to cool ultrathin notebook computers.
Demonstrating a prototype of the technology in public for the first time at its developer forum taking place this week in San Francisco, Intel says the upshot will be cooler computers--and it's not referring to style.
Fan prototype developed by Intel.
(Credit: CNET News)"This will have the same power consumption and noise level of current fans," said Bradley Urban, an engineer inside Intel's thermal technology development unit.
As with other engineering advances coming out of its research side, Intel intends to license the proprietary design to computer makers--the idea being that anything which fosters more demand for Intel-based computers will, by definition, add to the company's bottom line.
Call it a product announcement by stealth: you'll find the technology demonstration in a nondescript booth at San Francisco's Moscone Center, a half stone's toss away from the myriad Atom-based notebook PCs Intel is putting on display at its developer forum.
In a side-by-side comparison, the Intel fan flow moves a Styrofoam ball around a track significantly faster. "It's a 2x comparison," Urban said. He added that Intel took less than a year to work out the kinks for a reliably faster fan to fit into ultrathin notebooks.
"As soon as we can get it into production, we will," he said. It was unclear how long this next step in the process will take before faster fans wend their way into the commercial market. "Maybe two years," he offered.
