Cover story
When famed computer company founder Rick Inatome took the CEO’s chair at an Internet upstart, he faced an immediate, unspoken, and infuriating question: Do you get it, Rick?
They seemed like perfectly appropriate choices. For his first day as CEO at Internet education company ZapMe Corp., Rick Inatome wore his finest blue pinstriped suit and his favorite Hermès tie. Addressing most of the company’s 111 staffers for the first time, he felt comfortable and confident, calmly happy to describe for their benefit how he had founded Inacomp Computer Centers back in the 1970s, led the company, based in Troy, Mich., through a successful initial public offering and merger, and eventually built it, as Inacom, into a $7 billion Fortune 500 business. Good stuff, he figured. But as Inatome surveyed the crowd, he realized with a shudder that everyone was eyeing him suspiciously. Worse, when he opened the floor to questions, the room fell silent. “Come on,” Inatome implored. “Ask me one question.” At last, a lone voice called out, “Why are you wearing a tie?”
It would be, it turns out, only the first of many not-so-subtle messages sent Inatome’s way. Having abandoned the trappings of a luxurious executive lifestyle, 46-year-old Inatome suddenly saw himself as a stranger in a very strange land. “In this new Internet economy, it doesn’t mean anything — what you’ve done, where you’ve been, what your old network is,” he now says. “What matters is whether you ‘get it.’ ” And to his skeptical new charges, the tie screamed that, no, he didn’t.
A week later, as Inatome embarked on a road show for ZapMe’s October 20, 1999, IPO, he became painfully aware that “getting it” — understanding on a gut level how the Internet economy works — would turn his world inside out. Inatome’s induction into the new new economy would require changes both superficial and profound. He overhauled his wardrobe, replacing suits with neutral-toned polos and khaki slacks (which could still stand to lose some crease), and he overhauled his head, rethinking his position on some of the most fundamental aspects of business.
On the road with his investment bankers from Merrill Lynch, Inatome recalls, “I would walk around literally shaking my head and saying to myself, ‘I just can’t believe what I’m seeing here. I can’t fathom it. How can we go out and say that for the next 36 months we’re going to lose $80 million and still ask anybody to give us any money? How can we raise a hundred million in an IPO?’ To me it was just so outrageous. It was like I had stepped into the Twilight Zone.”
The specific ways in which all this was shocking to Inatome are almost less interesting than the fact that someone like Inatome could be shocked at all. He was, after all, a lifelong entrepreneur and digital sophisticate, not some old-line corporate manager. He was among the tech industry’s original whiz kids, one of the twentysomething geeks jumping on the trampoline in Bill Gates’s backyard during Microsoft’s early days. He had been raised on the cutting edge of technology. While other boys and their dads had tossed around footballs in the backyard, Inatome’s father — relocated to Michigan upon release from a U.S. Japanese-internment camp — set his 10-year-old son to work assembling an analog computer. “The proclivity to take hold of new things, new technologies, was sort of ingrained in me from the very beginning,” he says. In addition to cofounding Inacomp with his father, Inatome started up Computer City and helped turn around American Speedy Printing Centers Inc. He helped invent the new economy; how could he — of all people — be disoriented by it?
It didn’t take long for ZapMe to show him how. Described by Inatome as an “Internet media channel,” ZapMe offers satellite-speed access to exclusive advertising-accompanied content aimed at 13- to 19-year-old students; hot links to thousands of prescreened Internet education sites; and the tech infrastructure to connect parents, teachers, and students in an online communication loop that, in theory, can involve parents in schoolwork in an unprecedented way. Launched in 1996 by Lance Mortensen, whose Monterey Pasta Co. ranked #43 on the 1994 Inc. 500, ZapMe now has 1,200 schools signed up for its Internet programming. Its service comes with the enticement of free hardware — servers, computers, and printers — and incentive-based buying programs through which teachers and students can find bargains on school supplies, clothes, and “cool stuff.”
When Mortensen lured Inatome to ZapMe’s helm, last fall, the company was days away from its pre-IPO road show and projecting losses of $80 million over the next three years against expected annual revenues of $760,000. (It plans to make money by getting content providers to pay for having their material posted on ZapMe’s service, by selling on-screen advertising, and by renting computer labs outside school hours to test-prep companies and others.) For Inatome, arriving at ZapMe was like stepping through the looking glass. He may have been a recognized leader in what he now terms the “old” information technology world, but here he was a novice.
What’s it like for a bona fide entrepreneurial star to find himself in Internet wonderland? In interviews conducted less than 90 days into his new role, Inatome tried to tell us. Not surprisingly, some of his disorientation has been very personal, the result of circumstantial changes that have challenged his sense of who he really is. His hard-earned social status and cherished club memberships among the Michigan elite, his prestigious board work with 30 companies and organizations, and even his celebrated inclusion in the Computer Resellers’ “Hall of Fame” at the 1999 Comdex trade show have suddenly been rendered meaningless. Instead of working in an executive suite with a private washroom, Inatome spent his first weeks at ZapMe, based in San Ramon, Calif., perched on a box in a six-by-six-foot cubicle. One day a boisterous young Web designer thrust out his hand and casually inquired of the CEO, “So, what do you do here?”
“All the old rules of hierarchy had been shattered,” says Inatome, adding, “people were all working so hard around here, they didn’t have time to figure out what was going on.”
Jetting between time zones because of continued though limited involvement at his old companies, alternating between the solemnity and refinement of Michigan board meetings (where some of his colleagues wear hearing aids) and the spontaneity and chaos of California powwows (where just about everyone packs two or three digital devices), Inatome has had a hard time keeping things straight, he admits. Though he appears physically fit and energetic, he confides concerns about his stamina in a job for which he’s had to pull more than a few all-nighters. Once, he jolted awake during a conference call. (He still hopes that he wasn’t snoring.) Twice, he lost his car keys and had to phone for help. He’s become a morning regular at the San Ramon Jamba Juice. Inatome’s preferred elixir? “Wheat grass, carrot, and orange juice, and a shot of ginkgo” — a purported memory enhancer. In the most confidence-shaking ways, Inatome sometimes wonders whether he can keep up.
Of course, he’s concluded that he can. And then some. And he’s surprised himself by embracing some of the Internet economy’s values and “rules” — ones he first dismissed as impossibly wrongheaded. Still, Inatome remains for now an old-world thinker at core, one whose fresh perspective on the Internet economy is instructive not only for executives who, as Net businesses mature, will likely make moves similar to his, but also for Internet hotshots who think they already know the score.
OLD WORLD Established rules of hierarchy. NEW WORLD The cult of speed and the Holy Grail of partnerships.
In today’s Internet economy, market value comes not from earnings or returns on tangible assets (as in Inatome’s old world) but rather according to the importance assigned to “partnerships” — often vaguely defined alliances that purport to attract more eyeballs to a Web site. So, Inatome has had to learn what he calls “swap economics,” whereby start-ups exchange bundles of new money and build value through partnerships.
“There’s more beef in announcing a new partnership, and the sort of swap economics that’s associated with that, than there is in landing a contract with General Motors for $100 million,” says Inatome. “In the old world, people would say, ‘That General Motors contract will move your stock price by half a point.’ In the new world, you could move your stock price just by announcing some new partnership — by 30% or 40%.”
Indeed, news of a partnership with Yahoo, announced just a week after ZapMe’s October IPO, buoyed the company’s stock price up 17%. As part of the so-called cobranding deal, all the people in the ZapMe network — students and teachers at some 1,200 middle schools and high schools — will receive specially tailored Yahoo content on their ZapMe opening page. Had ZapMe disclosed news of its arrangement with Yahoo just a week earlier, it might have altered the course of its IPO. Offered at $11 a share, ZapMe opened at $9.40 and closed its first day of trading at $7.40.
In the days leading up to the IPO, Inatome recalls, his investment bankers’ analysts were “calling me every day, saying, ‘Put out more releases (announcing new partnerships or alliances). We know you have them.’ We did have them. But I wanted to be sure that the technology was rock solid. I wanted to make sure that the links worked and were live to any investor who came to them.”
Within two months of completing the IPO, however, Inatome says, he realized his reluctance to rush the release of the Yahoo news — reluctance grounded in a well-intentioned, old-world mentality — may have “victimized the company.” “It’s like I’m blindsided by my own biases. I have this hesitation factor that really no one can afford in Internet time, because competition is so tough,” he says. “I see how that’s hurt me. I see how I didn’t get that instantaneous market value in that scenario.
“But,” Inatome continues, “in the old world you just didn’t bang out things to bang up the stock. And so it’s a business issue I’m still dealing with.” For now, Inatome has come to accept that seemingly intangible partnerships — even the agreement to form such partnerships — in fact connote genuine value. “Because there isn’t a lot of real business in the Internet world, you’re talking about validating a future landgrab, and so these partnerships — what I’ll call proxies for momentum — are the things that assess the size of the landgrab. And so when you do these alliances, what you’re really saying is, those people who have understood landgrab economics are validating our space, and that’s what is creating value. What I learned in the first 60 days is that what Wall Street wants to see in this world is building momentum.”
During the IPO road show, Inatome was stunned to hear prospective shareholders question whether he personally had enough at stake in the company. A week before he took on the CEO post, Inatome had negotiated for options on a million shares and felt satisfied that he’d secured a fine chunk of equity — roughly 3% of the company. So it was “shocking,” he says, that prospective investors deemed his allotment deficient. Several informed Inatome that they typically would not invest in an Internet start-up unless the CEO held a 5% or 6% equity stake. “In the old world, shareholders would be questioning, ‘Why do you have so many stock options?’ In the new world, they’re implying that they won’t invest in you unless you have a lot more skin in the game.
“What’s interesting is, it has nothing to do with shares or money. It has to do with the psychological dynamic. Momentum of the stock price is everything, and you have to be perfectly aligned with that notion.
“In the Internet world at this unique time, it is really about whether you have a big enough space and whether or not you have the moxie, you have the intuition and the skills set to execute. Investors are looking at the power of an idea and looking you in the eye and at whether or not you can move quickly enough with that idea to give you the money. You’re being assessed from that different standard as opposed to do you really understand a business model, and can you paint a very compelling picture of that business model fitting in.”
That proving process has been made even more difficult for Inatome because many of the people who command the gates to the money are half his age. “A couple of times, I talked with kids who were my son’s age,” he recalls. “It was hard to be patient and stay cool. And it was hard to be grilled about whether you’re with it enough to execute.”
Rather than inquiring about earnings or past track record, the young investors asked about “eyeball stickiness” and demanded that Inatome quantify terms such as “cost per thousand impressions” and “minutes that a subscriber stays logged on,” the CEO says. “They’re really trying to drill you to see if you’re schooled in Internet economics. You really have to have the numbers right on the top of your head. If you flinch at all, they sense that you can’t move at the kind of pace they’re looking for. They sense that you’re an impostor.”
In the super-reactive Internet world, where even the giants are in a state of perpetual reinvention, old-fashioned phrases like “strategic, long-range planning” sound like gobbledygook. “The equivalent change that a traditional company has to go through in two years is the kind of change that a company in the Internet world has to go through in 90 days,” notes Inatome. “It’s the difference between turning an aircraft carrier and turning a Jet Ski.”
As a result, Internet managers risk wasting valuable hours if they spend time plotting concrete plans. “In the old world, market value accrued when you did the right things,” Inatome remarks. “In the new world, market value accrues when you do the instantaneous thing. It’s an instantaneous economy.”
On that score, Inatome has tried to craft a management approach that aims to make the right decisions instantaneously — as opposed to making instantaneous decisions. Toward that end, he’s striving to gain swift consensus on ZapMe’s direction. “What you have to do if you want to get up to speed is put together a disciplined, consolidated process where you think very strategically and set some priorities. And even though that seems like a bureaucratic, old-world approach, getting consensus on our strategic direction as an Internet company — and weeding out the things that are really only going to be noise — is going to speed up our execution.”
Yet even as Inatome has tried to mobilize consensus, constant time pressures have frustrated his efforts. “People will say to me, ‘Look, Rick, this thing has got to move so fast, we can’t take that kind of time to agree on strategic platforms. This is just the way the Valley works.’ They want instant gratification.
“But we have a lot of moving parts to this company. We have a complexity of integration, and we can’t just have a bunch of guys from the Valley come in and design a bunch of things without a process. The lesson here is that you have to have a broader understanding, through organizational effectiveness and strategic consistency — which you get from old-world values — and that will speed this whole process up.”
OLD WORLD A big sale could move your stock price by half a point. NEW WORLD Stock prices move when you announce some new partnership.
Roughly 60 days into his “Internet mind warp,” the unnerving feeling that had haunted Inatome’s early weeks at ZapMe — the sense that all his business principles had been violently upended — suddenly changed. “I made this discovery that Internet economics, this strange and foreign set of understandings, are probably more right than they are wrong,” Inatome recalls. “I started to say, ‘Oh my God, this really does have a compelling economics logic trail.’ “
For the first time Inatome grasped the tangible value of a virtual landgrab. He understood that the Net companies that secure a first-mover or preemptive-strike position in their chosen niche will be positioned at a huge advantage.
And so Inatome the Internet convert has set out to advance the model to its next stage. “The first generation of Internet economics was really first-mover advantage, because they were trying to lock up virtual space. Anything that’s that efficient is quick to establish, but it’s also easy to lose. That’s why the next wave of Internet companies with super market valuations have got to combine the preemption of that old Internet business model with some of the protection of tangible assets.
“We’re sort of inventing what we think is going to be the next generation of the Internet business model. Moving past the stymie of the old economics, past the frailties of the first-mover model, and into a first-to-scale model.” In other words, a virtual landgrab consolidated by a quantifiable audience grab, which, in the case of ZapMe, can be measured by the number of students in schools that accept free computers and high-speed Internet access through the ZapMe network. “If you don’t own a piece of what I’ll call physical assets in the virtual world to protect your position, you’re probably not going to have an Internet model that’s in the long run sustainable,” wagers Inatome.
Like Amazon.com and the online grocer and drugstore Webvan, which are both rapidly expanding their distribution centers, ZapMe will become a company that enables users to obtain goods and services via the virtual world but relies on real-world assets — warehouses, trucks, hardware — for customer fulfillment. “The Internet in its next incarnation will not be the virtual model of last year but a virtual model tied to physical assets that allows companies to erect higher walls against competition,” he says.
But has Inatome simply learned to play the Internet business game? “Your first intuition, because of the magnitude of the shift, is to think this is all about gamesmanship,” he responds. “But then when you get into it a little bit more in depth, you begin to be more sure that there’s something to that old adage that if you build it, they will come. The trick is to strip away your bias of tying economic values to traditional tangible assets — warehouses, inventories.
“The old economic rules are always the rules, and if you break away those rules from old-world assets, then you start to realize that all these things — the partnerships and whatnot — are actually critical assets for momentum.”
OLD WORLD Market value accrues to those who do the right things. NEW WORLD Market value accrues to those who do the instantaneous thing.
Even as Inatome has begun to pride himself on forward-thinking ideas about Internet business models, his entrenched old-world ways are clashing with the younger set at ZapMe. As this article went to press, for example, Inatome was still grappling with how to define ZapMe’s core business. He wanted to promote ZapMe primarily as an education company — a decidedly wholesome, old-fashioned concept. In Inatome’s scheme, ZapMe, through its free computer systems, can help “fix what’s broken in education.” A computer interface that links parents, students, and teachers can function as an online “reinforcement loop,” enabling an unprecedented and supremely important degree of parent participation in teenagers’ schoolwork, Inatome explains. But until recently, the majority on the ZapMe team favored packaging the service as a hip new media offering — a mélange of “edutainment” programming; dynamic, learning-oriented advertising; and cool products geared toward the “Gen Y” audience. “The stuff that’s hot all in one spot: music, sports, fashion, travel,” a recent print promo stated enthusiastically.
It’s not that Inatome sees no value in getting a pulse point on the Internet generation. On the contrary, he challenges executives of all stripes to surf the Net and absorb its culture. “Anybody can become an expert on the Internet, because it’s no longer about technology. It’s about this new realm of science that’s somewhere between technological enabling and sociology,” he says. “If you have Internet angst, you’ve got to immerse yourself in the Internet environment and extrapolate.”
Indeed, total immersion has been key to Inatome’s getting it. “I’m starting to realize it isn’t a static science,” he says. “It isn’t the Internet world and the old world. It’s this huge continuum. Once you jump into that twilight zone, you just keep right on going.”
D. M. Osborne is a senior writer at Inc.
ADVERTISEMENT
