The phenomenon that Michael Lewis and Charles Ferguson both seek to describe in their books is the dramatic accumulation of wealth driven by the Internet. Technological and business innovations are the occasion for it, and Ferguson in particular, who tells us how he started and sold his own high-tech company, explains a lot about the workings of the underlying technology. But both of these stories are really about money.
The recent boom in technological advances, formation of new businesses, and personal fortunes is the third, and most dramatic, such wave generated by the computer industry in the last twenty-five years. The first wave involved tangible products—“hardware,” as opposed to the computer programs that constitute software. In the 1960s and 1970s companies in the Santa Clara Valley, between San Jose and San Francisco, produced silicon memory chips for computers—thus the name Silicon Valley. Then they produced silicon logic chips, which direct a computer’s operation. Then many produced computers as well.
The great fortunes from the hardware era include those of the Hewlett and Packard families, of Hewlett-Packard, which started making money in the pre-silicon era, with scientific instruments. The Packard Foundation, with assets of $10 billion, recently overtook the Ford Foundation as the nation’s third-largest private foundation (behind the Bill and Melinda Gates Foundation, at $17 billion, and the Lilly Endowment, at $15 billion). The dominant hardware company of the 1990s is Intel, whose Pentium and other processing chips are used in most personal computers other than the Macintosh. The assets of Gordon Moore, one of Intel’s founders, are estimated to be worth $15 billion, making him the tenth-richest person in the country. Apple, the first famous personal-computer company, is still based in Silicon Valley. So is Sun Microsystems, a hybrid hardware-software company whose products are used to run many Internet sites, and which therefore has been enjoying boom times. Other nearby hardware companies that provide the necessary physical components for the Internet include Cisco Systems and 3Com.
But the largest fortune based on hardware is that of Michael Dell, of Austin, Texas. At age thirty-four, owing to the success of his Dell Computers, he is the fifth-richest man in America, after three Microsoft executives and Warren Buffett, with assets of $20 billion. Theodore Waitt, of Gateway Computers in South Dakota, has assets of $6 billion, one of the largest fortunes built on hardware. (All personal-fortune comparisons here are from the 1999 “Forbes 400.” High valuations of volatile stocks mean that some people have moved up and some down since the Forbes survey earlier this year, but the approximate rankings and magnitudes still hold.)
The second wave of wealth creation involved software—“application” software that people use for work or recreation, like word-processing programs or computer games, and “systems” software used to run businesses or, very often, computer networks themselves. The difference between software and hardware provides a classic illustration of what economists mean by “increasing returns to scale.” Because the cost of producing additional units of software—the “marginal cost”—is extremely low, once you become the market leader in a field, your profits grow astronomically. A copy of Microsoft Office 2000 Professional, the company’s flagship software product for business use, lists at retail for $349 and costs perhaps $20 to manufacture. Microsoft’s total corporate sales in the last fiscal year were just under $20 billion, of which an astounding 39 percent, $7.78 billion, was net profit. By comparison, Exxon’s sales are more than five times greater than Microsoft’s, but its net profit is smaller, $6.4 billion.
Microsoft’s unparalleled profit margin has given it the highest stock valuation of any company in the world, nearly $500 billion. It has created three of the five largest personal fortunes in the world (those of the CEO, Bill Gates; the president, Steve Ballmer; and the co-founder with Gates, Paul Allen). Apart from its effect on the stock market, it has produced an estimated ten thousand millionaires, mainly in the Seattle area. One of Microsoft’s early programmers, Charles Simonyi, has assets of $1.5 billion. Even the company’s head lawyer, William Neukom, who was in charge of the recent unsuccessful defense against antitrust charges, is worth $625 million. The strongest software company after Microsoft is probably Oracle, which makes the database software used to manage information at many Internet sites. Its chairman, Lawrence Ellison, is the eighth-richest man in America, with assets of $13 billion.
But both the hardware and the software revolutions were, in their wealth-creating effects, slow to emerge compared to what is underway now because of the Internet. Less than ten years ago, Tim Berners-Lee, a British physicist working at the research center CERN in Geneva, invented a scheme for linking data on a particular subject, or series of subjects, that were stored on different computers in different places. The Internet had existed for two decades before that, as a communications channel mainly among big computers at universities and research centers. But Berners-Lee took the crucial step in making information on the Internet easy to find and use, through creation of the World Wide Web. The Web—the basis for the graceless abbreviation “www.”—is the system that made possible today’s practice of simply clicking on words or pictures to follow trails of related information. Berners-Lee helped bring this about by writing the specifications for three basic elements of the Web’s operation. One is the “uniform resource locator,” or URL, the exact name for each particular website, no matter where the computers supporting it are located (for instance, http://www.nybooks.com). Another is “hypertext markup language,” or HTML, a way to describe how a website should look on screen, and also a way to build “links” that will take a user to another site when clicked. The third is “hypertext transfer protocol,” or HTTP, which controls the flow of information from the sites to the user’s computer.
Berners-Lee’s innovations have led within this decade to hundreds of billions of dollars in other people’s fortunes. But he circulated his specifications without asking for payment in the early 1990s, and he did not form a company or apparently prosper himself. He has been on the book promotion circuit discussing his memoir about the Web’s origins, Weaving the Web.1
Six years ago, the first commercial “browsers” to aid navigation through the World Wide Web appeared. A stillborn effort called Mosaic was followed by Netscape Navigator. A browser allows you to move easily from one website to another, and to see the contents of each site. If you type in a Web address (or URL) at your computer, or click on a displayed link, the browser displays the information from that website, so that you can read it and use it. Less than five years ago, in May 1995, Bill Gates suddenly recognized the way the Web might change the computer business and sent a memo called “The Internet Tidal Wave” to his lieutenants at Microsoft, saying that he now gave the Internet “the highest level of importance.” The company’s strategy for developing products shifted within months, to create a browser that could compete with Netscape’s and to make its other programs “Web-friendly.” For instance, after this change Microsoft’s word-processing program, Word, allowed users to save documents as normal text files on a personal computer—or as pages that could be posted for others to view, with their browsers, on the Web.
Then, in August 1995, Netscape had the initial public offering for its stock, the beginning of the subsequent Net IPO boom. It is hard to think of the four-plus years since then as making up a distinct historic era, but most of the great Internet fortunes have been amassed during just that period. These include the holdings of Jeff Bezos, creator of Amazon.com ($7.8 billion); David Filo and Jerry Yang, of Yahoo ($3.7 billion each); Jay Walker, of Priceline.com ($4.1 billion); Pierre Omidyar and Margaret Whitman, of eBay ($4.9 billion and $960 million, respectively); Joe Ricketts, of Ameritrade ($2.4 billion); Robert Glaser, of Real Networks ($2.4 billion); and Steve Case, Barry Schuler, Robert Pittman, and Ted Leonsis, of America Online ($1.5 billion, $750 million, $725 million, and $675 million, respectively). John Doerr and Vinod Khosla, two of the most influential Silicon Valley venture capitalists, have holdings of $1 billion each.
The only thing more remarkable than how quickly these fortunes have arisen is how inexplicable some of them seem. Only a few Internet ventures have anything quite as crude as a business model in which revenue exceeds expenses. America Online—which gives access to e-mail and the Internet—generates profits because it charges subscribers $21.95 a month. The on-line auction site eBay is also profitable, because it charges a commission each time buyers and sellers conclude a deal on its site. But most of today’s Internet companies have substantial short-term losses, which stock market investors typically assume will turn into profits in some never-quite-arriving “Year Three” of the business plan.
Theories vary about where these profits will come from. Perhaps from on-line advertising—if anyone can figure out how to make it as attractive as ads in glossy magazines, or as unavoidable as ads on TV. Perhaps from some system of “microroyalties,” which will overcome the marked reluctance of Web users to pay for information they retrieve. Perhaps by a new version of the Ponzi scheme, in which a money-losing site is kept going just long enough to be bought, for a high valuation, by some bigger company that wants to expand its audience rapidly. (I know three people running sites on just this principle.)
Thin as these rationales for profitability may ultimately prove to be, so far they’ve been sufficient to make many people very rich. Last year Amazon.com’s valuation by the stock market soared into the tens of billions as its annual loss exceeded $120 million. The IPO economy that is centered on the Internet has flattened somewhat this year, but it is still driven by two primal forces: the lottery-like knowledge that some of these bets will pay disproportionate returns, and the momentum of the wealth that’s already been amassed, and that must be invested somewhere.
Virtually all of this wealth consists of tech-company stock, and ten years from now some or much of it may have melted away. (One economist has said that the future statistic he most wishes he knew, in order to assess the health of the Internet economy, is the number of ex-billionaires in 2002.) But there is so much new wealth that some will remain. And there will be so much left over after even the wildest personal-consumption fantasies have been satisfied that it could eventually have great public impact. A few of the tech leaders feel confident enough in the performance of their wealth to have formed personal foundations and started making grants. (The Bill and Melinda Gates Foundation, for example, recently announced a very am-bitious program to support advanced scientific and technical educations for 20,000 Americans from minority groups.) But it is not yet clear whether the new Internet elite will choose to have the lasting legacy that earlier moguls did. Will the Internet billionaires do what it takes, through philanthropy, to be remembered the way Rockefeller, Carnegie, Mellon, Guggenheim, Morgan, and Ford are? Or will their model be Jay Gould?
No one has conveyed the atmosphere of the boom better than Michael Lewis. His book The New New Thing has some serious flaws, especially in explaining specifically how so much money could have been generated so fast. But page by page and scene by scene, it is full of fascinating, vivid reportage about the high-tech culture at a moment when all previous financial and technical constraints on it seem to have been removed. People will read this book years from now to know what the Internet boom was like—as they now read his first book, Liar’s Poker, to recapture the atmosphere of Wall Street during the bond-trading heyday of the 1980s. The same droll spirit and gift for observation that Lewis displayed in Liar’s Poker are here, too, from beginning to end.2
To test my hypothesis that any page of Lewis’s book would show his virtuosity, I turned back at random to page 196, where he introduces John Warden, who handled the actual courtroom defense for Microsoft during the antitrust trial. Warden, who was from Indiana, had graduated from Harvard Law School and become a partner in the grand New York law firm Sullivan and Cromwell. Lewis gives a telling, if not cruel, description of his courtroom manner.
Through it all he’d somehow preserved an accent that would have made a hillbilly blush. He was proud of it, too. He’d lean into his microphone in the well of the U.S. district courtroom and boom out his questions in the Voice of God, causing the fifty spectators in the back of the room to jolt upright on their hard wooden pews. He was a hick, or pretending to be a hick, probably out of some old-fashioned belief that hicks, even make-believe hicks, are more appealing to juries than $1,000-an-hour New York lawyers, which is what he actually was…. And it hadn’t taken him long to prove that high technology sounded far less impressive when discussed by a fat hick. He went on about “Web sahts” and “Netscayup” and “the Innernet” and “mode-ums,” and with every syllable he made the whole of the modern condition sound a little bit ridiculous.
The main subject of Lewis’s book is Jim Clark, a man in his mid-fifties who is worth about $1.8 billion and who has been present at several crucial moments in Silicon Valley history. Lewis says that Clark’s achievement is in fact unique in that he is the only person to have started three firms each eventually valued at more than $1 billion. The first was Silicon Graphics, a hardware firm that produces a lot of the gee-whiz computerized effects in movies. The second was Netscape, which, by producing the first commercially successful browser, essentially kicked off the Net economy. The third was Healtheon, a company that aspires to be the middleman of the entire health care economy, handling patient records, insurance claims, prescriptions, and other medical data. And now Clark is starting up a fourth, myCFO, which will provide an on-line money-management service for people worth several million dollars and up.
In telling the story of Clark’s involvement with these firms (mainly Netscape, which he had recently left when Lewis met him, and Healtheon, which he was in the middle of forming when he allowed Lewis to observe what he was doing, day by day), Lewis covers many cultural aspects of the modern boom. He vividly conveys the widespread sense that some new idea is about to make someone a fortune, and describes the frantic attempts to figure out what that idea will be. He writes of the often unexpected ways people react when an Internet deal suddenly makes them rich: some disappear to places like Guatemala, others trudge back to work as if nothing had changed. He describes the prominent role of immigrants, above all Indians, in Net startup firms; the willing suspension of critical thought about what is a “good” or “bad” idea for a startup, since so many crackpot schemes have paid off; and the pecking order in technology firms, in which those who have real technical skills, mainly in computer coding, can finally dominate the others.
Lewis captures many details, large and small. One I’d often noticed myself but had never previously seen mentioned in print is the way computer programmers answer questions. Almost invariably they begin with “So….” (“Where did you go last weekend?” “So…we went out on the lake.”) This is inconsequential in itself but will ring true to anyone who knows computer culture. A more important pattern is the ever-receding target high-tech officials set for how much money it would take to make them happy. People do this in all walks of life, but the scale is different in the boom economy. Before he started Silicon Graphics, Clark had told a friend that he’d be satisfied if he made $10 million. Before he founded Netscape, he told a different friend that his dream was to have $100 million. When his holdings were worth $600 million, he told Lewis that he wanted to have a billion dollars, after taxes. “Then I’ll be satisfied.” Prompted by Lewis, he finally admits, “You know, just for one moment, I would kind of like to have the most [in the world]. Just for one tiny moment.”
Clark grew up dirt-poor in rural Texas, and Lewis describes how hard Clark tries to escape reminders of that past. (“On the rare occasions Clark visits Plainview, Texas, he lands at the airfield on the outskirts of town, has lunch with his mother, and then flies off someplace else as quickly as he can. He seldom drives into town and never visits home.”) Lewis claims that it is this same restlessness that drives Clark to create an enterprise, grow bored nearly as soon as it succeeds, and then go on to “the new new thing.” His book is brilliant in conveying the land-rush mentality of the Internet economy at the moment. Everyone has antennas out to detect which new startup has what politicians call “Big Mo”—backing from the right venture capital firms, positive buzz from the analysts, a chance of quickly dominating its field as Amazon and eBay dominate theirs. Then people jump to the newly hot firm.
Lewis makes another fresh observation that also exemplifies the main problem with his book. The Internet culture has a high concentration of young men with windfall fortunes. It therefore also has a high concentration of men’s toys: exotic sports cars, quarter-million-dollar home theater systems, private jets, yachts. Lewis devotes nearly a third of his book, including its beginning and end, to Clark’s quest to design, build, and sail the perfect boat. This is a 157-foot yacht with a 189-foot mast and a computerized control system, designed by Clark himself, that would in theory let him sail the boat by remote control, via the Internet from his office in California. Lewis calls this “the Boat That Built Netscape.” Once Clark decided he wanted the boat, Lewis said, he needed to raise some money—and he happened to overshoot the target slightly, in the process creating Netscape and forcing it to an IPO as soon as possible. “All so that Jim Clark could pay for his boat!”
This is an amusing conceit—but not a convincing one, although Lewis wants us to accept that it is. For the boat has to seem important in order to justify so many chapters about it. As Lewis shows, with or without boats, Clark had been starting companies and then moving on for years.
The New New Thing has more by way of memorable scenes from corporate life than convincing analyses of how the new economy works. Perhaps Lewis is simply too gifted an observer. Whatever he happens to notice, he can make fascinating, but the interesting people and companies he chooses to write about are not always as revealing of underlying forces in the computer industry as he suggests they are.
The choice of Clark as a subject is itself open to question. Because of Clark’s record of starting three companies, Lewis argues that he is an absolutely central or symbolic figure in the Internet economy. It is true, as Lewis clearly points out, that Clark changed the tech economy with Netscape. He was trained as an engineer and shows the bias in Net companies toward real technical expertise, as opposed to business school polish. He perfected the art of what is called in Hollywood “high concept” entrepreneurship. That is, he presented a big idea to the venture capitalists—how about a Web company that runs the whole medical economy?—and then let others work out all the details. And through charm and skill he managed to get unusually good terms out of the venture capitalists, more of their money up front in exchange for a smaller ownership share than they’re accustomed to taking.
But if anyone in Silicon Valley carries within him the story of the modern industry, it would not be Clark (all of whose companies have encountered serious problems). It would probably be John Doerr, king of the venture capitalists. Doerr, the best-known partner of the best-known venture capitalist firm, Kleiner Perkins Caulfield & Byers, was involved in the formation of Netscape itself, Amazon, Sun, and dozens of others. He is seen as the person with the greatest current ability to make a startup successful, by putting his money behind it. The next likely candidate would be Bill Gates, because of his influence on every part of the technology world. But Gates and Doerr are probably much less colorful than Clark, and they would certainly be much harder to observe closely than Clark was for Lewis. Clark has made himself easily available to reporters for years.
Lewis’s choice of Clark strongly resembles his scintillating but quirky coverage of the 1996 presidential campaign for The New Republic. Lewis dutifully filed reports about Bill Clinton and Bob Dole, but the candidate who truly fascinated him was Morry Taylor. Taylor was a tire magnate with plain-spoken charm and with absolutely no chance of becoming the nominee. Lewis nonetheless filed dispatch after dispatch about him, producing articles far more interesting than most of the other political reports on the campaign but not particularly informative about its “real” issues.
Similarly, The New New Thing is an excellent book about Jim Clark, a vivid sample of Internet culture, and frequently hilarious. But it doesn’t attempt to analyze how the computer economy works. There is much, much more about the 157-foot boat, including Lewis and Clark’s trip across the Atlantic in it, than about the real operations of Silicon Graphics, Netscape, or Healtheon. (For instance: Silicon Graphics went into a terrible decline. Lewis presents this, with almost no critical distance, as the result of a conflict between the always wise and farseeing Clark and a short-sighted rival named Ed McCracken. Similarly, he emphasizes Clark’s importance in the rise of Netscape, but shifts the focus when Netscape’s problems begin.) In retrospect it seems clear that Liar’s Poker was more accurate about the junk bond economy of the 1980s, because Lewis had worked on the trading floor of Salomon Brothers and got an automatic education in its business realities.
The Liar’s Poker of the Internet economy could turn out to be Charles Ferguson’s High Stakes, No Prisoners. It is a wickedly funny book, in its way just as amusing as The New New Thing, but it is also more systematically informative about the technology business.
Ferguson, now in his early forties, grew up poor in California. He got a doctorate in political science from MIT, became a public policy writer for journals like Foreign Policy, and meanwhile paid the bills as a business consultant. In 1993, while consulting for Apple, Ferguson sensed that the just-developing Internet offered huge new opportunities for business formation. High Stakes is the story of how he successfully exploited one of these opportunities.
When Ferguson saw an early Web browser called Mosaic, the predecessor of Netscape’s Navigator, he thought that the Web would become wildly popular—but would have a limitation. People everywhere would want to create websites for their businesses, projects, and schools. But creating websites using Mosaic or other early tools was extremely tedious—it was as if, when using a word processor, you had to punch in a special code to tell it to move to the next line each time the current line was filled. So Ferguson explored the possibility of inventing and selling a new “Web tool,” a system that would make it as easy to create a Web page as it was to use a word processor.
This led to the creation of Vermeer Technologies (named for his favorite artist), based in Cambridge, Massachusetts, and to the hair’s-breadth escapes from failures described in his book. He fought with venture capital firms until he found one that offered terms he could accept. He worried constantly about industrial espionage. He recruited and exhorted a team of engineers, salesmen, and managers to create his product. They put it on the market, and then, after a bidding war, sold it to Microsoft in January 1996 for Microsoft stock that was worth $130 million at the time. It has grown in value to more than $1 billion now. Microsoft adapted the product, renamed it FrontPage, and included it in its suite of standard business software.
The delightful effect on Ferguson of being rich is to make him an indiscreet writer. Everyone who insulted him in a negotiation or generally got on his wrong side is in for it here. “By this time Maffei and I detested each other”—this about Greg Maffei, the still-powerful chief financial official at Microsoft. Nathan Myrhvold, until recently head of research at Micro-soft, “struck me as one of the most egotistical, self-important people I’d ever met…. He loved to hear himself talk, didn’t spend much time listening, and did not enjoy hearing that he might be wrong. This was particularly dangerous, because he was often wrong.” The public relations men he met at Microsoft and other companies “generally reminded me of my reaction to Clinton advisors like Dick Morris or David Gergen—greasy, overweight, amoral, somehow pathetic even when extremely successful.”
But in recounting Vermeer’s story of close calls and lucky breaks, Ferguson has much to say about the technical and business history of the Internet. He concludes with a chapter on the complications the Internet is likely to create. It may, for example, accelerate economic inequality within countries and throughout the world, as the people and small businesses who can’t afford to use computers fall behind those who can.
For those who can effectively use the Internet—who have the required skills, money, computers, intellectual flexibility, institutional support, information, and social approval—the Internet provides such enormous advantages that it will often make the difference between competitive success and failure.
This is not all bad. In many cases, this will enable the previously powerless to improve their situation relative to the previously privileged, in highly desirable ways. In situations ranging from political dissidence in controlled societies to the ability of E*Trade to challenge Merrill Lynch, the Internet will make the established and wealthy work harder for their privileges. Equally, however, the skilled, wealthy, computer-literate, flexible, and simply lucky will pull rapidly ahead of the uneducated, illiterate, innumerate, and those trapped in inflexible situations or societies that cannot adapt to the pace of Internet-driven change. Many organizations, people, and nations are not particularly well prepared to flourish in such an environment and will pay for it, both within nations and between them. The available statistical evidence, while not as reliable as one would like, suggests that this is already happening, both in the United States and elsewhere. My own impression is that neither the US government nor most foreign governments are reacting fast enough to mitigate the damage, which will primarily affect the poorest 25 percent of the population. Twenty-five percent of the US population is a lot of people, and 25 percent of the world population is even more.
Ferguson ridicules the prevailing assumption in the high-tech world that the current venture capital structure is a wise, flexible, prescient, or efficient way of directing resources to their optimal use. Maybe he is embittered by his own experience with obtuse or dishonest venture capitalists. But he also points out that the groundwork for today’s Internet boom was laid almost exclusively by nonprofit organizations (including CERN, the research center near Geneva, where Tim Berners-Lee worked), and that therefore the industry is wrong to claim that governments must not steer or influence it in any way:
It has become fashionable to argue that industrial policy isn’t possible in America and is inherently a bad idea. But the record of government-supported Internet development versus the commercial online services industry clearly demonstrates exactly the opposite. The established technology companies, the Silicon Valley geniuses, the online services industry, and the venture capitalists all missed it for twenty years or more. Every brilliant, important, technologically farsighted Internet development came either from government agencies or universities. In the meantime, decision making in the competitive marketplace was narrow, shortsighted, self-protective, and technically far inferior to its Internet equivalents.
Nor, Ferguson argues, have economists and other experts understood the historical process by which the Internet economy has emerged:
The US start-up system, for example, exists nowhere else in the world. Smaller versions of it exist only in Israel, Poland, and Taiwan—but not in Europe. The Silicon Valley system depends on a rich set of government policies, habits, and private institutions that have evolved over the last half century. Economics has had remarkably little to say about why this is so, or how the system could be replicated elsewhere. Nor has it been effective in coming to grips with the implications of information technology for globalization, or the determinants of growth in a technology-based era.
Ferguson offers an illuminating firsthand perspective on what he calls “the Microsoft question” which differs both from the company’s own claim “We just want to innovate!” and Judge Thomas Penfield’s recent “findings of fact” that Microsoft is a monopoly. The antitrust case originally turned on Microsoft’s attempts to get Netscape out of the browser market. On this point, Ferguson has surprisingly little sympathy for Netscape. Microsoft was indeed trying to crush it, he says, but even if it had not, Netscape had become so poorly managed that it would have failed anyway. The principal culprits, in his view, were Netscape founder Marc Andreesen, who at twenty-two was too inexperienced to manage even an Internet company, and the president, James Barksdale, who came from Federal Express and was used to competing against the US Postal Service rather than against Microsoft. But he also blames Jim Clark for inattention and crucially wrong choices about who should manage the company. (The management problem, he writes, “seems to have started with Jim Clark, who made Netscape’s early hiring and organizational decisions.”)
The problem with Microsoft, Ferguson says, is that it enjoys not one monopoly but two. The first is in its operating systems—Windows, in all its varieties. The second is the Office “suite” of programs—Word for word processing, Outlook for e-mail, etc. These have a larger market share than Windows (which must still compete with the Macintosh operating system and others) and are a source of enormous cash flow.
Of major concern is the fact that monopolistic profits from the two core monopolies can be, and have been, used to fund scorched-earth attacks on innovative new entrants…. Microsoft’s style also, I think, further lowers ethical standards throughout an already brutal, competitive, ruthless industry.
But the worst is yet to come, he says, pointing to a problem
that over the long run could prove more important than Microsoft as an efficient and brutal monopolist. That is the prospect of Microsoft as an inefficient, declining, politicized monopolist, in the manner of General Motors, pre-divestiture AT&T, or pre-1993 IBM…. Monopolists with captive customers inevitably succumb to the temptations of laziness and decline, and when they do, they impose enormous costs upon the economy.
Ferguson’s solution to the problem is to split the operating system (Windows) and applications (Office) branches of Microsoft into separate companies—“two monopolies, each desirous of reducing the other’s power—and probably divesting Web services into a third.” He makes the case that any other remedy, such as government supervision of Microsoft acquisitions, or forcing the company to publish part of its proprietary Windows code, would be less effective and more intrusive.
Ferguson ends the book saying that that yet another monopoly will prove to be even more important than the Microsoft case—and he takes Microsoft seriously indeed. This is the “local telcom monopoly”—the fact that Bell Atlantic, or US West, or other providers have no competition in providing local telephone service. Until the 1990s, local telephone lines were the classic natural monopoly. The costs of duplicate phone networks were so great that it made no sense to allow competition. But wireless technology, fiber optics, cable systems, and other delivery means, Ferguson says, have changed that situation. While the supply of long-distance service has soared in the last decade, and its cost has plummeted, the monopoly local networks have been stagnant. So the Internet carries data at 10 million bits per second, but it gets into most houses only at the 56,000-bits-per-second rate permitted on current phone lines. “This condition is just on the verge of becoming dangerous,” he writes, “because the Internet now requires major advances in communications services.”
The books by Lewis and Ferguson are among the most informative we have had so far about the technology industry at this moment of its growth. The growth can only accelerate, and Ferguson in particular suggests that we have hardly begun to understand its impact on politics, culture, and the disparities of income distribution in the US and the world.
December 16, 1999
Harper San Francisco, 1999. ↩
A disclosure: I have met Lewis four or five times in the last dozen years. I first met him for lunch in Tokyo, when he’d just quit the investment banking business and was unknown as a writer. A few months later, Liar’s Poker came out, and he became rich and famous. As it happens, I have also met Charles Ferguson, but only once—also for lunch, in the early 1990s, in Washington, D.C. A few months later, he founded the company that, as he explains in his book, he ultimately sold to Microsoft for $130 million. ↩