If the lawsuit filed by the Justice Department this week kills the proposed merger between AT&T and T-Mobile, some analysts say it could leave T-Mobile in a much worse position than it was before the deal was announced in March, reports The New York Times. READ MORE
Faster than a speeding bullet! Or at least, faster than Time Warner. Google’s new 1 Gbps network so far appears to be more than 35 times faster for downloads than average U.S. broadband speeds, but Google’s ambition is to provide 100 times faster speeds, especially to homes and small offices where entrepreneurs are creating start-up companies. READ MORE
Over the past two or three years, the nation’s top cable firms have made a concerted effort to target small and mid-size businesses for voice telephone service. As a result, the business has gone from zero to more than five million subscribers and the prospects for future growth are bullish, says Elroy Jopling, an analyst with Gartner, the Stamford, Conn. research firm. “It’s growing at a rate that’s probably even astounding to cable companies,” Jopling says. The traditional telephone companies still have a lot of the pie left, though. According to The Yankee Group, of Boston, the top cable companies — Comcast, Cablevision, Time Warner and Cox Communications — have a total of six percent of the small business market versus 31 percent for the top telecom vendor, AT&T. Advantages of cable The cable firms have a big advantage over telecoms for now though: While the latter have refrained from promoting their cheaper voice over Internet Protocol (VoIP) service for fear of cannibalizing sales, the cable firms are all about promoting VoIP as an add-on to broadband service. Why? For the cable firms, voice revenues are seen as an additional source of income while phone companies see VoIP as a threat to their bottom line. Either way, however, VoIP is a cheaper option. Small businesses that opt to go with cable firms for their voice service find their monthly bills are about 10 to 15 percent cheaper than with plain old telephone service a/k/a “POTS.” Moreover, few take any issue with the voice quality, especially Mike Arden, principal analyst with ABI Research, of Oyster Bay, N.Y. Arden says that quality is mainly a problem when you contract with third parties. “The really inexpensive services can’t control the quality,” he says. There are two ways to get VoIP service. One is to get a hosted service. The other is to install a PBX router over a broadband line. Arden says in each case, the grade of voice reception depends on the amount of bandwidth. Arden added that his research showed that small businesses often gravitated to cable-based VoIP so they can get more features for the same price as basic POTS, not necessarily because they wanted to save money. Such features include things like unified messaging that let employees keep voicemails on their desktop PCs as audio files. Voice as an add-on to a broadband buy Cablevision, the Bethpage, N.Y., cable operator, began offering voice service in 2005. Joe Varello, vice president of product management for Optimum voice in the consumer and business markets for Cablevision, says it’s digital, cable-based voice service is better than POTS. “You don’t experience some audio anomalies like static and hum,” he says. Varello says voice is most often an add-on service to a broadband buy. With such service, voice usually costs about $30 a line per month and customers usually opt for features like voice mail, Caller ID, call waiting and a feature called VIP Ringing, which emits a special ring for notable callers (like a respondent to a sales pitch). Most customers also usually have a PBX box in house to handle the call routing. Gerard Cerniglia, co-owner of Rolling Thunder Cycles, a Hempstead, N.Y., motorcycle dealership, signed up with Cablevision about a year ago for his voice service. His impetus was buying broadband from the cable, after he tried DSL from a telephone company but found it too slow. He thought cable was too expensive, but when he found out he could get voice as part of the package, he was sold. Now he gets all his voice calls for $35 a month and is thinking of adding a line for the seven-person operation. Cernigilia said the voice quality is great. “I’ve never had a problem with it,” he says. On the other hand, Jopling points out that the telecoms have a tremendous asset in their favor: inertia. “If you’re starting from scratch, you’d probably go for cable,” says Jopling, “but if not it’s a case of ‘if it’s not broken, why fix it’?”
It looks like a large Styrofoam takeout container. The 14-pound box would fit into a backpack were it not for the two antennas, set well apart. It can withstand subfreezing temperatures and 165-mph winds; it’s even lightningproof. With the lid bolted down tightly, the box offers no clue as to what’s inside. But disassembled, it reveals intricate innards that look like nothing so much as a city viewed from a plane: A million tiny wires crisscross like streets and weave among square parks the size of your thumbnail. The magic of the box occurs when you mount it on the horizontal arm of a city lamppost, so that its long ears reach up to the sky. Install 30 of them per square mile (which isn’t hard, since an installer using a single tool can put up a unit in 15 minutes) and they immediately begin communicating with one another via radio waves. Data, the same information that flows through the wired Internet, begins traveling between them. Establish some hub connections to usher the data back onto the Net and you’ve created a wireless network that can transmit signals all over real, life-size cities–into parks, schools, juice joints, bars, offices, playgrounds, and homes. The boxes, known as routers or nodes, are made by Tropos Networks, a Silicon Valley upstart that’s landed in the middle of a burgeoning movement among U.S. cities to create municipal wireless networks, or metroscale Wi-Fi–essentially, an effort to deliver wireless bandwidth to the masses. Since Tropos began selling its equipment in 2002, dozens of municipalities have signed up. The Twin Cities suburb of Chaska, Minnesota, built a wireless network to cover its 16 square miles and serve all 18,000 of its residents. Corpus Christi, Texas, bought 300 Tropos nodes to cover 24 square miles and has since decided to expand to 147 square miles. As it rebuilds in the wake of Hurricane Katrina, New Orleans plans to cover the whole town with a Tropos network. This summer, Anaheim, California, will hit the switch, giving 325,000 citizens across 50 square miles ubiquitous broadband Internet access. Tropos-powered networks also are in the offing in Philadelphia and San Francisco. Launched with what Bill Gurley, a Silicon Valley venture capitalist and early Tropos investor, calls “four guys under 30 and an algorithm,” the Sunnyvale-based company spent less than $3 million getting its first product to market. Since then, it has grown into the leading equipment provider in this incipient market, with more than $15 million in revenue in 2005 and a projected $45 million in 2006. It has had roughly 350 customers to date–including some in far-flung locales such as Bangkok, Kuala Lumpur, and Doha, Qatar–and partnerships with EarthLink, Google, Motorola, IBM, and others. Given its recent contracts, the company is well ahead of competing equipment makers. Yet Tropos faces some difficult tests before it can realize its vision. The new, large-scale projects in San Francisco and Philadelphia will get the technology out of dress rehearsal and in front of a major audience. These launches will be key to the company’s fate. As hundreds of other cities look on, contemplating whether to install their own cheap broadband, and as a phalanx of massive data carriers like Verizon and Comcast glower over what may be a new threat, Tropos will march out onstage. Says CEO Ron Sege: “The best thing we can do is make sure the big cities do well, for everyone to say, ‘Oh, my God, it works.” “What Stops the Internet From Being Everywhere?” In San Francisco, there is a new café every year that has “the best coffee in town.” At the moment, it’s Ritual, a chic place in the Mission District with leather couches, wireless Internet, and PowerBooks on every table. The two founding engineers of Tropos–Narasimha Chari, who goes by “Chari,” and Devabhaktuni “Sri” Srikrishna–are sitting at a small table, drinking lattes and reflecting on recent news. About a year ago, the mayor of San Francisco put out a request for proposals, looking for the optimum plan for “unwiring” the city–that is, for creating a citywide Wi-Fi network. Just the day before, out of a half-dozen contenders, the selection had been announced–and Sri and Chari’s list of big wins had gotten one municipal contract longer. But the two men, both 32, scarcely stopped to rest. That’s because each successive contract brings them closer to answering a question that’s intrigued them since they met as undergraduates at Caltech about 15 years ago: “What stops the Internet from being everywhere?” The magic of the box occurs when you mount it on a lamppost. Install 30 of them per square mile, and you’ve created a wireless network that can transmit data all over a city. The inquiry arose out of mutual concerns about India and other developing countries. As a brainy boy growing up in Calcutta, Chari would take long excursions through the city searching for textbooks containing just the kind of math and science materials you can download in seconds today from the Internet; he knew that connecting people in poor and remote regions could be a profound form of change. Sri, for his part, had a deep desire to be useful and an appetite for solving engineering problems. So while attending graduate school in the late 1990s (Sri at MIT, Chari at Harvard), the two men would hang out in the bars around Cambridge and talk about how to get the Internet everywhere on the planet. The intellectual challenge soon became as enticing as the moral one. It was a problem of cost efficiency: How could you bring the power of computer networks to villages hundreds of miles from the nearest cable TV, places where people can’t even afford phones? It was a technical problem, of bouncing signals around in the air over large areas and then back to the nearest data wires. And finally it was a problem of overcoming natural physical limitations: the distance transmitted signals could travel, for one, and the amount of stuff that can be sent simultaneously. “It’s just a very fascinating subject,” says Sri. “We never really set out to start a company.” Any solution had to be dirt cheap. Even in the United States, broadband is so expensive, both to provide and to purchase, that its growth has not kept up with consumer appetites. Today many rural areas around the country have no high-speed data services, simply because it costs so much to dig up the streets and lay wire. Jupiter Research, a market research firm, estimates that 35 percent of Internet users in exurban or rural areas can get only dial-up connections. In some cases, the necessary conduits reach town, but jackhammering the last bit of pavement to serve a smattering of houses is more of a burden than it’s worth. “There are some places where the economics are prohibitively expensive,” says Brian Blevins, a Verizon spokesperson. For Chari and Sri, the alternative to digging would have to be radio, and while drinking beer and poring over dense technical books, they came across a radio technology developed in the 1970s for military uses. The technology worked on battlefields, but its inventors and the engineers who came after assumed that it wouldn’t scale. Sri and Chari thought otherwise. They suspected that if you could program the nodes of these radio networks cleverly enough, teaching them to move information around quickly, you could make the network as big as you wanted. Their idea was a variation on the principle of the bucket brigade or steppingstones. If you can’t get the signal to reach all the way to the wired Internet, make it hop from one transmitter to another until it does. And give it some basic rules for finding the most efficient pathway there. Here at Ritual, for instance, e-mail data comes in over wires to a base station or router somewhere in the room and then heads through the air to the nearby laptop. Everyone in the café is just one hop from the wired Net. This configuration requires every user to be within about 100 feet of the device that’s plugged in, and it’s why wireless broadband is generally limited to offices and cafés. But what if you told that router to select another router for passing along its message, and told that router to select yet another after that? If you taught those routers to make efficient choices that wouldn’t require arduous processing, eventually the Internet would spill out into the streets. Sri and Chari got hold of some Wi-Fi gear–a cheap type of radio technology recently introduced to the enterprise market for office environments–and started playing with their routing ideas. They mounted antennas on cars and tooled around Cambridge, testing the performance of nodes programmed to obey their new steppingstone rules. “When we started doing this,” Chari says, “people laughed at us, saying Wi-Fi is an indoor technology. But our approach has always been, don’t take anyone’s word for it.” The two men soon realized that they were no longer solving a math problem: They were developing a product. So they picked up and left Boston for northern California. They hooked up with two friends of friends who understood finance and formed a company. It was not a particularly opportune time. “In 2001, we were out there looking for funding. It was awful,” says Chari. But Bill Gurley, whose firm, Benchmark Capital, invested early in companies such as eBay and Red Hat, liked their ideas. “I don’t think anyone at that time was thinking about municipal wireless,” Gurley recalls. “But what was keeping Wi-Fi from going outside?” Even in the united states, More than a third of Internet users in exurban or rural areas can get only dial-up connections. Well, nothing. In the United States, most towns already own the infrastructure for suspending 14-pound boxes in the sky: lampposts, traffic lights, telephone poles, city buildings. The Tropos routers themselves cost only about $3,500 each. So with 30 per square mile installed in a city like San Francisco, you’d spend about $5 million on boxes to serve more than 700,000 citizens. According to a report by PricewaterhouseCoopers, building a fiber network costs $2,000 “per home passed,” in the industry’s argot; providing DSL costs a few hundred dollars. Compare both with Philadelphia’s estimate that the cost per home passed of its Wi-Fi network will be $30. On the user end of the equation, the hardware economics look even better. The Wi-Fi cards that early adopters were sliding into their laptops in 1999 went for about $2,000 apiece. Today the devices are preloaded into nearly all new computers and cost less than $10 each. Right now, as Chari and Sri drain their lattes at Ritual, there are an estimated 50 million Wi-Fi-ready computers out there. So Bill Gurley got onboard. He liked the open standards of Wi-Fi technology and how quickly the price on the user’s side was dropping. He loved Chari and Sri’s vision of teaching routers with limited range and capacity how to build bucket brigades and choose the most promising pathways, based on the condition of the network. “It’s very elegant,” Gurley says. He also liked the growth potential of the market and the focus on software. “As a venture capitalist, I love everything about the Tropos model,” he says. In January 2002, Benchmark Capital ponied up $2.2 million for the young company to work with. Other VC firms followed, including the Intel Communications Fund and Siemens Venture Capital. And so did Ron Sege. Good Enough Beats Best Ron Sege (pronounced seh-gee) is a tall stick of a guy with blue eyes and blond eyelashes, whose elaborately stitched jeans were meant for a younger man. At 49, he is on his second wife, his second batch of kids, and the fourth small company he intends to make large. In a sense, Sege is a Web 2.0 guy all around, bringing hard-earned experience to a young company with a still-unproven business model. As he puts it, “I’ve seen this movie before.” Sege began working in technology in the 1980s, but really hit his stride in the ’90s, as a manager at 3Com, the company that spawned Ethernet technology. 3Com had a few hundred employees when he perspective, good enough beats best,” he says. Ethernet, the protocol that allows office PCs to share databases and printers and storage in a small local network, was far from perfect. “But it was inexpensive, easy to use, and anybody could design to it.” Sege learned the beauty of this approach to business–float a quick and dirty product, let users and other product developers improve on it, and push it as a dominant shared platform. “Wi-Fi has many of the same attributes,” he says. After 3Com, Sege took a job as executive vice president of Lycos, one of the first Internet portals, where he helped engineer an Internet-bubble buying spree that included acquisitions of Matchmaker.com, Quote.com, and Wired Digital. “That was my media mogul period,” Sege says with a laugh. He left Lycos in 2001 and joined Ellacoya Networks, a company based in Merrimack, New Hampshire, that creates software to help broadband providers ease congestion in their networks. Bill Gurley, tipped off by a Benchmark partner who’d worked with Sege in the past, saw in the Ellacoya CEO someone who’d ridden small companies through significant growth and who understood a good deal about data networks. He contacted Sege and told him about Tropos. The company made sense to Sege. Taking off-the-shelf indoor base stations and sticking them up on power poles–that was a formula he understood. Sri and Chari had already come up with the tricks, the proprietary algorithms for handling data traffic and monitoring the system from one main PC, which would set Tropos apart from its direct competitors. (The company has 30 software patents and patents pending.) In 2004, Sege came onboard–”to do all the stuff not involved with writing software.” At first, that meant selling Tropos boxes and software to a small but eager market the start-up had identified: police and fire departments. After September 11, the consequences of poor emergency communications became painfully clear to city leaders nationwide, and many municipalities were attempting to do something about it. What few civilians realize is that their heroes with hoses and their men and women in blue have always relied on only one of their senses for passing information: their ears. They use the same two-way radio technology today that police departments adopted in the 1930s. Some forces have introduced computers into their cruisers for searching DMV or criminal databases, but these hookups are as slow as your first dial-up modem. Forget about downloading a mug shot. Maps, surveillance videos, traffic updates, real-time messaging? Impossible. What emergency responders need is broadband. And it has to be broadband that’s everywhere, broadband that moves. Tropos could deliver that. Sege traveled the country, giving presentations to police and fire departments, steadily signing up customers. Oklahoma City bought Tropos technology to build a network for its police department covering 620 square miles. In Milpitas, California, about 10 miles from the Tropos headquarters, a 40-node Tropos mesh allows police to look up DMV photos and monitor video surveillance of high-crime areas. So Sege and his team were surprised in the spring of 2004 when they got an order from Chaska, Minnesota, a Twin Cities suburb that wasn’t looking to serve its police force. The town’s city council wanted cheaper connectivity–for all of its residents, who were stuck paying $45 per month for high-speed access from Sprint and Time-Warner Cable. The goal was to provide broadband access for all of its citizens for no more than $20 a month. “Tropos was selling a system for public safety departments. Our IT guys thought, ‘Why couldn’t you do 3,000 connections instead of 300?” says Chaska’s city administrator, Dave Pokorney. For Tropos, this was exhilarating. Chaska had come up with this plan on its own, with no help from Tropos, which was focusing its efforts on public safety. The company had helped create networks designed to serve the general public, but only in parks or other circumscribed areas. Chaska was out ahead of them–and within three months, the city had a real-life metroscale network available to anyone in town. Sleeping Giants Everyone at Tropos agrees on what made the company take off. It happened in August of 2004, when Philadelphia, the largest municipality to date to do so, announced plans to blanket the city with Wi-Fi. The idea was to deliver cheap, and possibly free, broadband Internet access to the 1.5 million souls–digital haves and have-nots alike–who lived within the city’s 135 square miles. This was a bold, pioneering step, lauded by civic groups and techies around the country. But the news hit one party particularly hard: Verizon. At the time, the vast majority of Philadelphians who wanted fast connections to the Web had been coming to Verizon for DSL. Now the company would have a new competitor. The proverbial sleeping giant was caught off guard. It’s one thing to build a wireless network for 8,000 households in the suburbs of Minnesota. But it’s something else entirely to do so in one of the nation’s biggest metros. Verizon’s lobbyists marched straight to state lawmakers in Harrisburg and demanded action. And they got it. A telecommunications bill that had been lingering around the capital for more than a year suddenly came up for a vote, and it had a brand-new provision attached to it. The measure said that Pennsylvania cities intending to create high-speed data networks must give the dominant local phone company the right to build first. If the incumbent proceeded within 14 months, the city would be required to drop its plans. For the leaders of Philadelphia, that meant doing nothing for more than a year before getting their project under way. It also meant that cheaper service–some subsidized for the poor–would happen only at the whim of Verizon. But the prospect of an Internet cloud floating through every park and into the city’s overlooked neighborhoods had already intrigued many Philadelphians, and the state legislature’s intervention galvanized people to protect the idea. “The school district, the nonprofits that wanted to serve poor neighborhoods, even our tourism organizations saw the potential,” says Dianah Neff, Philadelphia’s chief information officer and a 14-year veteran of Silicon Valley businesses. “When the legislation came up, we put the pressure on. We had 3,000 people call, write, and e-mail the governor.” Tropos, which already had been tapped to install two pilot projects in public parks, watched the events unfold. Sege hired a Washington lobbying firm, which showed up in Harrisburg, attempting to sway leaders to spare local governments from restrictions. In late November 2004, just as the bill was approved, Philly’s Wi-Fi enthusiasts got a break. “It was almost like diving to get the catch in the end zone,” says Sege. The state agreed to exempt Philadelphia from the requirements. (All other Pennsylvania municipalities remain bound by it.) The way Sege sees it, Verizon’s in-your-face tactics were the best thing that had ever happened to the start-up. The giant telecom’s reaction made dozens of other cities take notice. If Verizon was so ruffled, people seemed to think, then Philadelphia must have been on to something interesting; the technology’s potential must be real. “The phone was ringing off the hook,” says Sege. Cities around the country, from Minneapolis to Tempe, Arizona, began announcing plans for wireless networks. Several months later, the technology was validated by another waking giant when Cisco announced it would begin building routers for muni Wi-Fi. Tropos sales went from 90 municipal clients in all of 2004 to 75 in just the first half of 2005. The next step in the Philadelphia project was to respond to the city’s RFP, and Tropos now had to get down to details. The company had the gear and the software for monitoring and troubleshooting the network, but there was a lot the small company was lacking. Customer service for one thing. And billing. And consumer sales. Rather than build those capabilities in-house, Sege began searching for an established Internet service provider with which to partner. EarthLink fit the bill. The ISP, based in Atlanta, had thrived as a middleman, buying wholesale dial tone, wrapping it up in an attractive brand, and selling it to Internet surfers. But as the world shifted to faster wires and fiber optics, EarthLink had little to offer. Unlike the phone companies, it owned no connections into the home. In January 2005, Bill Gurley paid a visit to EarthLink’s board of directors. He presented his case for a partnership, in which Tropos would provide infrastructure–the actual broadband network–and EarthLink would handle customer support and sales. In response to Gurley’s presentation, EarthLink sent a team to visit Chaska to see for themselves if the new technology worked. The group toured the town and climbed under tables testing the network’s reliability. They interviewed folks in bars. And they were sold on it. “Municipal Wi-Fi is really important for us,” says Donald Berryman, EarthLink’s president of municipal networks. “It’s one of the top three investments we’re making in future products. It can help us control our destiny because we’ll own the network.” Tropos and EarthLink have since landed deals with five cities and have proposals out to five more. But Will It Really Work? Not surprisingly, the Bells and other data-access providers haven’t backed down. Since the maneuver in Pennsylvania, giants like BellSouth and Comcast have fueled a fight against muni Wi-Fi across the country. Lawmakers in Ohio, Virginia, Kansas, and Oregon, among others, have proposed legislation to keep local governments from building their own networks or at least make it more difficult for them to do so. Fourteen states, including Florida and Colorado, have already passed restrictions. “We have not supported a ban on municipal networks,” says Verizon’s Brian Blevins. “But we’ve felt where there’s vibrant competition, the networks can undercut and disrupt a market that’s working very well.” Critics of muni Wi-Fi argue that if local governments participate in building broadband networks, they’ll exploit unfair tax and regulatory advantages, irresponsibly drain public coffers, and mismanage the services. To counter the legislative gambit, Sege and others have taken to evangelizing in Washington, D.C., and state capitals. They’ve made some progress. In June 2005, Republican Senator John McCain of Arizona and Democratic Senator Frank Lautenberg of New Jersey introduced a federal bill in answer to the activity in the states. The Community Broadband Act of 2005, still in committee, would “preserve and protect the ability of local governments to provide broadband capability and services.” Says one Lautenberg staffer: “The senator doesn’t think there should be obstacles–we’re 16th in the world in terms of broadband penetration.” A bill awaiting a vote by the House, on the other hand, would create barriers–for instance, requiring cities to partner with a private company. A restriction like that, though seemingly innocuous, would have prevented Chaska from building its network. These policy struggles are not the only hurdles Tropos is facing as it lunges for profitability in 2007. There are big technical questions. It’s one thing to build a wireless network for 8,000 households in the suburbs of Minnesota. But it’s something else entirely to do so in one of the nation’s biggest metros. “Nobody’s demonstrated that you can have 135 miles of Wi-Fi,” says Julie Ask, a research director at Jupiter Research. Radio signal is notoriously unpredictable. When your cell phone drops out every time you round the corner of Elm Street, that’s because the mobile provider didn’t predict a problem there. Home devices from cordless phones to baby monitors might cause interference. Tempe, Arizona, where Tropos competitor Strix Systems provided 500 wireless routers, discovered that signal wasn’t getting through house walls beyond 150 yards from the routers. Many Tempe users found they needed an additional $100 device to receive and send data from indoors. Tropos could face similar problems. Dozens of municipalities have joined in, but there is not much of a record. “As a mayor, why wouldn’t you say, ‘I want to bridge the digital divide’?” says Ask. “EarthLink wants to point to Philadelphia and say, ‘Hey, it works,’ but until there’s proof…” After a city government invests $20 million, no users will be happy if their connections go down or their webpages load slowly. The last thing Tropos needs is for annoyed customers to head back to Verizon. Another looming question is what business models will work. Will consortia like the EarthLink-Tropos team for San Francisco prove easy for cities and profitable for the participating companies? Will the Bells hedge their bets and start offering their own systems? Will cities build their own public Internet utilities, just as many today deliver power without the help of private entities? In any of these scenarios, Tropos’ business doesn’t change. The Bells, the city governments, the ISPs–they’ll all need to buy boxes from someone. As experiments are made and the best models emerge, Sege insists that Tropos will stay relevant. First, of course, he has to deal with Philadelphia, which is building its 15-square-mile test area this summer and plans to roll out the full network in 2007. “I honestly believe that a lot of people are waiting to say, ‘We told you it wouldn’t work,” Sege says. Philadelphia CIO Dianah Neff doesn’t seem to mind that tension. “There’s a lot of pressure on Tropos and EarthLink. But that’s to our benefit because they’re trying really hard,” she says. “It’s like you live in a fishbowl. It’s not just other cities, but the world that’s watching.” Martha Baer is co-author of Safe: The Race to Protect Ourselves in a Newly Dangerous World. This is her first story for Inc.
I got a letter the other day from Time Warner, where I briefly worked some years ago. It was a sincere-enough-sounding note just to let me know that the guys in the data center may have inadvertently let my Social Security number and other private information fall into unknown hands. No need for me to take it personally—the company had done the same thing to some 600,000 present and past employees when it lost a boxful of backup tapes from a truck. Companies seem to be surrendering a lot of valuable data these days to hackers and other miscreants, at least when they’re not busy fending off the latest crippling virus or worm. What can you do about it? I’m not going to give you the standard lecture on the importance of protecting your computers. I bet you’re a little tired of hearing that sort of thing. Instead, I’m going tell you something different about computer security—something you won’t hear from vendors, IT whizzes, or even security professionals. You’re not going to like it, but you need to understand it. First, a little background: In 1992, a troubled, profoundly untalented young hacker known as Phantom D managed to tear through at least 1,000 computer systems over the course of a year, including those at military weapons research laboratories, leading computer vendors, and ATM networks. I know a thing or two about the case because journalist Charles C. Mann and I wrote a book about Phantom D in 1997. What we learned at the time from some of the world’s leading security experts was that breaking into even the most sensitive sites on the Internet was a cinch—so easy that anyone with time on his hands could do it. Our prediction: The situation wasn’t going to get better. Indeed, it would probably get worse—no matter how much effort people made to stem the tide. This is not the sort of thing that Web surfers and corporations want to hear, and the computer-security community all but conspires to oblige them. Think about it: If you’re a security consultant, a corporate IT honcho, or a law enforcement official paid to make computing safe, how quick are you going to be to shout from the rooftops that there’s no way to get the job done? For that matter, how willing are you to accept this fact yourself? Which brings me back to Time Warner. There’s no need to pick on the media giant; it’s been in great company in recent months, most recently CardSystems Solutions, where a hacker attack in June exposed 40 million credit cardholders to a risk of fraud. Bank of America, Wachovia, ChoicePoint, and LexisNexis also have been stung recently. People read these stories and shake their heads over the lax security at the target companies. It may even make you think about calling up your IT director and beefing up your own company’s computer security. But that reaction is part of the problem. The fact is, companies like Time Warner and Bank of America have been doing a pretty good job of meeting or exceeding industry standards for protecting their computer systems and data. And it’s not like IT bosses everywhere else are asleep at the wheel. Barry MacQuarrie, the CIO for Xpitax, a tax outsourcing firm in Braintree, Mass., notes that security consistently ranks as the top priority in surveys of accounting industry CIOs. “We have three levels of passwords, we filter all e-mail twice before it reaches our firewall, and we run antivirus on everything internally, MacQuarrie says. So do plenty of other firms. And yet the hackers keep getting inside, the viruses continue to rage, and data disappears. What’s the problem? The world’s faith in the holy trinity of computer security—firewalls, intrusion-detection systems, and antivirus software—is misplaced. Jim Settle, the former head of the FBI computer-crime squad and now a computer-security consultant in Haymarket, Va., offers this assessment: “They don’t work. Duh. Sure, they’ll keep out casual hackers who get discouraged easily or don’t have the latest tools, but that’s about it. Settle is often hired to test computer-security systems by trying to break in, usually just after a few million dollars’ worth of state-of-the-art security software has been installed. In nearly 50 efforts, he’s never failed to get inside, and only once was he even detected. Managers ask the question: Is our data safe? Any honest expert can give you the answer—without knowing a thing about your systems. No, your data is not safe. Managers ask the question: Is our data safe? In fact, there’s really no need to wonder about that. Any savvy, experienced, and honest security expert can give you the answer—without knowing a thing about your company’s systems. No, your data is not safe. And here’s that thing I promised you wouldn’t want to hear: There’s nothing you can do about it. Why? First of all, the very thing that makes the Internet so useful, exciting, and transformational—it connects everyone to everyone else, it’s anonymous, and it’s controlled by no one—is what makes it so easy for some jerk in Latvia to hook into your PC in Topeka. Completely protecting a network would require anticipating an essentially infinite number of techniques that might be used to break in; hackers, on the other hand, need to discover only one. What’s more, when security experts discover a new vulnerability, they usually try to keep it a secret, for obvious reasons, which hampers the development and distribution of fixes. Hackers, by contrast, not only share information freely, they also widely and immediately distribute tools that automate the hacking process so any of a vast army can join in on the fun. You could hardly design a more hospitable environment for hackers if you tried. That’s not to say you can’t lower your risks slightly. One cheap and easy technique is to encrypt everything on your network. It will slow performance, and it won’t keep hackers from stealing your data, but any lost data will be scrambled and worthless. Another technique is to enforce a draconian password policy—reject any password that’s a name or a word, even if spelled backwards; force password changes every 30 days; make it a serious offense to write down a password in the workplace. Of course, even if you did all this and more, someone in your company could still cough up a password in response to an e-mail from a skilled “phisher, or take work home on a disk and get hacked on his home computer, or simply lose a laptop computer full of sensitive data—like the laptop lost by a Virginia travel agency in May containing account information on 80,000 Justice Department employees. I think the smartest move is simply to accept the excellent chances of getting hit, no matter how safe anyone tells you your network is. That will get you thinking about what kind of data you collect, how long you keep it, and what you’ll say to employees and customers if it’s lost. If your computers contain any account information, documents, or e-mail that could, in the wrong hands, bring down your company, then you’re sitting on a time bomb. Unless, that is, you’re pretty sure you can do a much better job of protecting data than the U.S. government has in protecting the top-secret nuclear weapons information on its computers. Meanwhile, do me a favor, will you? If someone whispers to you that he wants to sell you something that fell off the back of a truck, let me know—it could be my Social Security number.
Attacks on corporate information systems by hackers, viruses, worms, and the occasional disgruntled employee are increasing dramatically — and costing companies a fortune. Last year, US businesses reported 53,000 system break-ins — a 150 percent increase over 2000 (Exhibit 1). Indeed, the true number of security breaches is likely to have been much higher because concerns about negative publicity mean that almost two-thirds of all incidents actually go unreported.1 Although information security has traditionally been the responsibility of IT departments, some companies have made it a business issue as well as a technological one. This year we studied security best practices at Fortune 500 companies, particularly 30 that had recently appointed a senior business executive to oversee information security. (According to an April 2001 estimate by Gartner, half of the Global 2000 are likely to create similar positions by 2004.) A handful of these Fortune 500 companies are now adding strategic, operational, and organizational safeguards to the technological measures they currently employ to protect corporate information. But most companies continue to view information security as a technological problem calling for technological solutions — even though technology managers concede that today’s networks cannot be made impenetrable and that new security technologies have a short life span as hackers quickly devise ways around them. Delegating security to technologists also ignores fundamental questions that only business managers can answer. Not all of a company’s varied information assets have equal value, for instance; some require more attention than others. One on-line retailer, Egghead.com, lost 25 percent of its stock market value in December 2000, when hackers struck its customer information systems and gained access to 3.7 million credit card numbers. Egghead, of course, had security systems in place and claimed that no data were actually stolen, but it lacked the kind of coordinated organizational response necessary to convince customers and shareholders that their sensitive data were actually secure. AOL Time Warner, Merrill Lynch, Microsoft, Travelers Property Casualty, and Visa International are among the organizations in our study that consider security more than just a technical responsibility: in each of them, a chief security officer (CSO) works with business leaders and IT managers to assess the business risks of losing key systems and to target security spending at business priorities. The CSO’s decisions are informed by a deep understanding of the business and of the nature and degree of risk it is willing to accept. Besides having a broader perspective on information security than IT managers do, CSOs at best-practice companies have the clout to make operational changes; the CSO at the personal-banking unit of a large European bank, for example, has the authority to halt the launch of a new product, branch, or system if it is thought to pose a security threat to the organization. Only the CEO can overrule the CSO — and rarely does. In the typical company, by contrast, a security manager in the information technology unit has responsibility for security but little power to effect broader change in the system. In addition, CSOs at best-practice companies conduct rigorous security audits, ensure that employees have been properly trained in appropriate security measures, and define procedures for managing access to corporate information. When a decision is made to lay off or dismiss an employee, for instance, it is simultaneously entered into the human-resources system, thereby restricting that person’s access to the company’s premises, to e-mail, and to documents. The role of information security, and of the chief security officer, varies by industry, the value of a company’s data, and the intensity of the regulatory requirements it faces (Exhibit 2). At a health care organization, to give just one of many examples, the loss or alteration of records about patients could cause injury or death — an avoidable and therefore absolutely intolerable risk. Today, most business leaders currently pay as little attention to the issue of information security as they once did to technology. But just as technology now stands higher on the chief executive officer’s agenda and gets a lot of attention in annual corporate strategic-planning reviews, so too will information security increasingly demand the attention of the top team. In a networked world, when hackers steal proprietary information and damage data, the companies at risk can no longer afford to dismiss such people as merely pesky trespassers who can be kept at bay by technological means alone. Notes: Dan Lohmeyer and Sofya Pogreb are consultants in McKinsey’s Silicon Valley office, where Jim McCrory is an associate principal. 1Computer Emergency Response Team Coordination Center, Carnegie Mellon University, Pittsburgh, 2002. Copyright © 1992 – 2002 McKinsey & Co. Inc.
Newspaper headlines are filled with reports describing the demise of dot-com firms. The rapid reversal of fortunes, however, has not been limited to pure-play Internet companies. Some of the largest losses on the Internet have occurred on the books of Fortune 500 companies. Consider this: Disney recently reported that it would take a charge of more than $790 million related to restructurings within its Internet group. This amount was dwarfed, however, by an even greater icon of U.S. business. AT& T reported that it would take a noncash charge totaling $2.7 billion related to its investment and control of Excite@Home. Both Disney and AT& T are seasoned companies that have weathered numerous business cycles. It would be easy to believe that their management teams were caught up in Internet hype, which led to these massive losses. A deeper examination, however, shows a more subtle cause. In both cases, high executive turnover combined with hand-waving business plans that had a high assumption-to-knowledge ratio led to faulty decision-making at both companies. Business plans for new ventures involve many assumptions; that comes with the territory. Creating a vision of the future and then working backwards to assess how to achieve it requires educated guesswork. Inevitably, many guesses turn out to have been wrong. That is why companies entering unfamiliar markets must continually test assumptions, adjust their tactics, and then readjust their assumptions in a never-ending forward march. That, in part, was where things went awry at AT& T and Disney: A prolonged game of musical chairs in the executive corridors led to translation errors in the business plan. Just as in the childhood game of telephone, where a message is passed between a number of people and the ultimate message is grossly distorted from the original message, assumptions in the business plan were translated into certainties. Take Disney first. In 1995 the company was looking to enter the brave new World Wide Web arena. The depth of Disney’ s ambitions was widely noted. Jim Cramer, founder of TheStreet.com, a financial news and analysis website, reported that “there was a period of a couple of years where Disney acted as if it were the king of the web.” Despite its ambitions, Disney’ s online operations began in a modest manner. The first version was called Disney Online and consisted of interactive websites for Disney properties. Some of these were instant hits. ABCNews.com, ESPN.com, Mr. Showbiz, and Disney.com were all considered niche successes. Disney then decided to create a broad-based portal. The reasons were clear. Although the Disney stock was in a mild upward trend, it did not have the explosive growth of broad portals such as Yahoo or AOL. The Disney management saw this move as a way to rapidly create shareholder value. In addition, it allowed Michael Eisner to convey a clear, simple Internet strategy. It was easy for executives to rally around this strategy, and Disney had the media assets to make it plausible. Moreover, by 1996 the only metric of significance to portal performance was Media Metrix – a website that measures online traffic. By themselves, the focused Disney media sites would never be able to achieve enough traffic to register on this rating. In 1998 Disney created the Buena Vista Internet Group by merging its assets sites with a search engine, Infoseek. The deal was structured so that Infoseek got $70 million in cash, a $139 million five-year note, at least $165 million in promotion, and Starwave (a web-development outfit valued at approximately $350 million). Disney got 43% of Infoseek’ s shares, along with warrants, that when exercised would give Disney a 50.5% stake. However, the success of this new venture hinged on one critical assumption – that at this time in the portal wars, Disney’ s ability to promote across its “offline” network was sufficient to leverage itself into a new brand, Go.com At that time, this seemed a plausible assumption. Most portals had grown without any advertising simply as a result of word-of-mouth, or as some might say, word-of-mouse. Although Yahoo had the fastest growth rate among portals, absolute traffic numbers for Excite.com, Lycos, Yahoo, and Infoseek weren’ t that far apart. In comparison to pure-play portals, Disney also had another huge advantage: It was a bricks-and-mortar company with a vast arsenal of off-line promotion possibilities including theme parks, cruise ships, and retail stores. A member of a prominent strategy consulting firm that evaluated Disney’ s Internet operations says it just wasn’ t known how off-line promotion would deliver Internet traffic but that there was no logical reason it couldn’ t. That was one of Disney’ s most significant assumptions. Disney acted on its strategy cautiously, seemingly testing its assumptions. The Go.com portal rolled out slowly with only a small number of features. Some observers saw the slow rollout as a mistake, considering the immense growth rates of its competitors – but it did show that Disney was going through initial testing of product features. Harry Motro, CEO of Infoseek, told consulting firm Forrester Research that heavy offline promotion wouldn’ t start until the following year. Disney was not planning a major media blitz for more than six months as it tested various product/promotion bundles. The Go.com portal was making progress. Forrester reported that “offline media helped boost GO Networks’ reach from 25% of online users in December 1998 to 33% in June 1999.” At the same time, Disney executives were rapidly defecting. With a stagnant stock price, especially in comparison to pure-play Internet companies, and the scarcity of experienced media executives, Disney was ground-zero for recruiters. Jim Cramer recently described his experience with Disney at that time. “People kept getting deposed and new rulers were installed with regularity.” Akther Ahmed, president of Xavient Technologies, said “having Disney on your resume was all you needed for an offer.” Michael Eisner, CEO of Disney, acted to stop the defections. He bought the remainder of Infoseek and created a tracking stock in order to create Internet-style options-based compensation. Disney then began to marshal its massive “offline” assets to promote Go.com. The assumption that this would be effective had become a truism around the company. One former NBCi executive claims that the web-marketing notion that companies should “use offline assets to build online traffic” originated at Disney. By this time, however, the data was available to test this assumption. Go.com was getting some 50 million pageviews a day while Yahoo was getting more than 300 million daily pageviews and more. In addition, most of the Go.com traffic was coming from the Infoseek search engine, which was itself getting new competition from rivals such as Google.com and Dogpile.com. “If the slowdown in growth was known, Disney likely would have chosen a different organization of its assets and might have succeeded,” says Wharton marketing professor Peter Fader. “It likely wouldn’ t have stayed with the alternate (GO) brand.” Disney took another year to come to that realization. After months of heavy advertising, Go.com had little to show except for a $242 million operating loss. Following one last attempt to reposition Go.com into an “entertainment and leisure” destination site, Disney shut it down. Go.com continued to exist as a website, though in a much tamer form that primarily offered links to other Disney sites. On January 29, Disney announced that it would dissolve its online tracking stock, Disney Internet Group, converting its shares into common stock on the parent company as of March 20. Each outstanding share of the tracking stock was to be converted into a 0.19353 of a share of Disney common stock. As a result of the restructurings, a charge of $790 million was related to the write-off of intangible assets. Another $25-50 million in charges were attributed to severance and the write-off of fixed assets. Just as Disney’ s Go.com went astray, AT& T ran into serious trouble with Excite@Home. The company’ s long-standing profits from long-distance services were rapidly disintegrating, and it was looking for ways to capture a greater share of the consumer’ s wallet. One way to do this was to deliver both voice and Net access to consumers. Regulation prevented AT& T from getting direct access customers without going through the regional Bell companies, which still dominated the local phone services business. Cable access seemed like a promising way to reach the end consumer, and AT& T began a massive buying spree of cable properties. One of AT& T’ s most significant cable acquisitions was TCI, which owned a significant stake in Excite@Home and also used its exclusive high-speed Internet service by contract. By acquiring TCI, AT& T inherited the relationship. AT& T’ s management was primarily interested in gaining access to consumers and the Excite@Home assets just added value to the deal. AT& T made the assumption that this strategy would allow the company to create a content-access bundle that could get premium pricing. This was a foray into unknown territory for AT& T. According to Wharton professor G. Anandalingam, “It’ s okay to be opportunistic, but it’ s a very different matter to make the opportunism work.” AT& T repeatedly said that it did not want to be in the content business. Immediately, the assumption was put to a test on all these issues. Numerous counties, including Oregon’ s Multnomah County and Broward County in Florida, refused to transfer their local cable franchises over to AT& T. The accusation was the bundling of access-content, and the communities – and America Online – demanded that AT& T open its access channels to other content providers. AT& T, however, had a solid management team that understood this issue, led by Leo Hindery. A vice president at a large cable company who requests anonymity says that “TCI’ s CEO John Malone and Leo Hindery understood this assumption and how to navigate through it.” Hindery even made a speech at Stanford Graduate School of Business entitled “The Future of Content.” Through a variety of actions, Hindery made it known that AT& T would be better off selling access to its pipes to whatever content providers were willing to pay, rather than bundling proprietary content with access. The most plausible strategy seemed to be to divest the stake in Excite, a content portal, in order to allow open access to other content providers. Hindery then resigned to pursue personal interests. Malone was busy running Liberty Media and wasn’ t operationally near these issues. Also, the top leaders at Excite – Tom Jermoulak, followed soon after by George Bell – resigned. These events were followed by a continual departure of executives from AT& T and Excite@Home. The new management executed a plan that was based on a premium priced content-access bundle. Responding to America Online’ s acquisition of Time Warner, AT& T began to assemble its own broadband Internet service. It was as if an assumption that had already been proven wrong now was suddenly being acted upon, as if it were a given in the plan. AT& T offered to buy out the stakes of two minority partners in @Home, Comcast and Cox, at a 27% premium. AT& T also took over 74% of Excite@Home voting stock and consolidated financial statements which diluted its 2000 earnings by 20 cents a share. In addition, AT& T extended its own non-exclusive carriage of @Home to 2008, six years past the expiration of its exclusive carriage of @Home in June 2002. At the same time, it was stated that after June 2002, other Internet service providers and portals would share that space. Initial deals were struck with Mindspring and Earthlink. Not surprisingly, the value of Excite, already at a 52-week low, plummeted which showed up in AT& T’ s books. Ironically, Excite@Home took a $4.6 billion write-down of its assets from its content acquisitions. AT& T’ s 23% share of the noncash charge equaled $1.1 billion. Also, AT& T took another noncash charge of $1.6 billion because of the plummeting valuation of Excite@Home. A recent report in BusinessWeek Online offers a final footnote. “The end may be near for the once-mighty Excite Internet portal,” the publication writes. “Patti S. Hart, appointed chairman and CEO of Excite@Home on April 23, already is exploring opportunities to sell the money-losing Excite business and may shut it down in the next several months if no buyers emerge.” What overall conclusions may be drawn from these twin disaster stories? At Disney and AT& T, the companies began a careful process of entering unfamiliar territory by working their way through assumptions about the future. It appears, however, that accelerating executive departures led to translation errors in the operational plans. Assumptions were treated as realities, a formula that has often been known to lead to massive losses. The take-home lesson: Watch out for business plans with a high assumptions-to-knowledge ratio. They can get distorted as they pass through a rotating set of executives, and get you into a lot of trouble. All materials copyright © 2001 of the Wharton School of the University of Pennsylvania.
THIS PLACE Washington society adjusts to a new breed: the fast-moving, different-thinking, so very dot-com riche In a blaze of lights at the MCI Center Arena, the nouveau Madison Square Garden of Washington, D.C., basketball superstar Michael Jordan made his announcement. He was acquiring an ownership stake in the Washington Wizards and would serve as the team’s president of basketball operations. The news, widely anticipated because of leaks prior to Jordan’s January 19 appearance, played well in the capital. Neighbors couldn’t stop talking about it. Pundits had a field day. It was the knell that signaled an end to the district’s darkest days. There was a new Washington now, with a new, can-do mayor, Anthony Williams. The city’s financial crisis was over. Real estate was rebounding. And now Michael Jordan, with that perennial movie-star grin, had arrived. Only one way to go, everyone seemed to be saying — up — a direction particularly well suited to His Airness (and the loss-ridden Wizards, too). It hasn’t been that long since D.C. — besides being the seat of the most powerful government in the free world — was a ranking murder capital with a standing mayor who was an international embarrassment. The city government was so mismanaged that stories of payroll checks being issued to dead or nonexistent employees were daily fodder for the Washington Post. “We’ve taken such a bruising in the past 10 years,” says John Tydings, president of the Greater Washington Board of Trade, sort of a chamber of commerce for the Beltway. Now, though, the new mayor, the city’s comeback, and Michael Jordan — hell, even the Washington Redskins’ finally making the NFL playoffs — were like manna from heaven. But Jordan’s entrance was eye-popping in another, more significant way. The deal that brought him to town was done without any help from the usual suspects — the cabinet officials, career politicians, lobbyists, media stars, Georgetown Brahmins, society hostesses, policy heads, real estate barons, and well-connected lawyers who have made the town what it is for decades, if not centuries. No, the people who landed Jordan were outsiders, like Wizards part-owner Ted Leonsis, who helped build a local company called America Online Inc. into, arguably, the first dot-com Goliath. These new big-city players did the Jordan deal in their off-hours with play money, much of it from tech fortunes. They made a huge splash for guys who five years before hadn’t even been on the radar screen, let alone on society-party lists. But this is a new day, and not only in Washington. Now politicians are no longer the role models they used to be, especially when compared with the strike-it-rich business stars. On March 9 the Wall Street Journal likened the new era to the turn of the last century, when industrialists with names like Carnegie and Rockefeller led the first entrepreneurial revolution. “It was an era when the economy — with wildcat prosperity, businessmen as media superstars — was shifting like tectonic plates; an era when Wall Street, not the White House, drove events,” the Journal reported. The first big wake-up call for Olde Washington had come only a week before the Jordan deal went down. That’s when America Online — a once unknown speck of a company dabbling in that Internet thing from offices in the distant suburbs — announced it was buying Time Warner Inc. for upwards of $166 billion. The establishment movers and shakers were caught off guard by the hordes of tech millionaires making waves in “our city.” “They don’t know who these people are. They don’t know anything about them. They don’t even know enough to be suspicious,” says Sally Quinn, the Georgetown high-society hostess who offers a window on the elite and also helps shape its outlook through her writings in the pages of the Post. “The first moment anyone ever thought about it was the AOL thing, and they said, ‘Oh, my God! That’s what they do over there.” None of those people were bred in Georgetown. Nor did they attend St. Albans, the elite private school in northwest Washington. Most don’t even have degrees from Yale or Harvard. Worse, they couldn’t care less about the society way of life. They trade neither on their social connections nor on their pedigree but rather on their business exploits, which might include a flaming dot-com failure (it seems to give them credibility, of all things) as easily as a stunning success. Instead of considering social standing in the good old-fashioned meaning of the term, they measure one another by the growth curve of their companies, the size of their paper fortunes, and the global impact of their businesses. Washington, to put it politely, has always been defined by power and access — who’s got it, who wants it, who lost it. Money has never been a part of the equation; certainly not in the way it is in, say, New York. But now money is a force to be reckoned with, big-time, and it’s here to stay. Politics has always supplied Washington with a new crop of movers and shakers, who tended to assimilate into the standing social fabric, refreshing their own ranks with each election. But this new group of tech-fortune youngsters isn’t leaving with the next election. “The way I view it, this is the biggest thing to happen to this city since Washington was made the capital of the nation,” says Quinn, who notes that the recent arrivals are infusing much-needed new blood into a town where the old money kind of “dried up.” And she enthusiastically welcomes the transfusion. “It’s going to have a big impact in every way,” she predicts. Washington used to be quaint, run by a stable circle of friends. Not anymore. To understand how all that is playing out, you need to look at the people who made the Jordan deal happen. The aforementioned Ted Leonsis, now president of AOL Interactive Properties Group and worth an estimated $1 billion, came up with the idea. Originally, he’d been a marketing guy with a company of his own, whose operations were folded into AOL when the larger company bought him out, in 1994. The then-unproven online service paid $45 million, mostly in stock, for Leonsis’s CD-ROM catalog company. That brought Leonsis on board for practically the whole AOL ride, all the way from obscurity to megagiant. Now he’s using the resources he gained to have some real fun. In May 1999, Leonsis and two partners plunked down $200 million for the Washington Capitals hockey team and a stake in the holding company, which counts the Wizards basketball team among its multiple properties. Leonsis figured that snagging Jordan would be the ultimate buzz card, elevating the profile of both teams. He and his group took a meeting with Jordan at his Chicago restaurant. Under the deal they eventually cut, the one that was announced at the MCI Center, Jordan got the front office of the basketball team, a stake in the partnership, and a chance to play with the dot-com boys. ( Boys is not a casual term; modern as dot-coms may be, there are few women among their ranks in Washington.) The way Leonsis tells it, the Capitals’ Web site will be the foundation for building an “Internet distribution channel” for the team in the same way that Ted Turner used cable TV to promote the Atlanta Braves. Right now the Capitals are red-hot. If Jordan also manages a comeback for the Wizards in the next few years, it isn’t hard to figure the upside: valuable teams, Web channel, and then the eventual acquisition of the entire basketball franchise when its current owner, Abe Pollin, 76, retires. No doubt, this was a value investment for all concerned. Six days before Jordan made his role official, Leonsis brought in a partner, Raul Fernandez, to help design the sports-team-cum-Web vision. Fernandez immediately took a place on the roster of Washington’s new power players. Just 33, he is a card-carrying member of the current crop of dot-com millionaires. He is the founder and CEO of Proxicom Inc., a fast-growing Internet-consulting firm based in Reston, Va., that serves clients like General Electric Capital Corp., Mobil Corp., and Mercedes-Benz Credit Corp. And he’s a big sports fan. “I told Ted last summer, ‘If you ever need another partner, I’m in,” he says. Fernandez has gotten a lot of ink lately, being featured in the Wall Street Journal and on the cover of Fortune, where he appeared right next to Jordan (“America’s 40 Richest under 40″). His background speaks volumes about how diverse the new A-list in D.C. can be. Fernandez is the son of a Cuban immigrant who came to this country with $100. He grew up outside Washington, D.C., attended the University of Maryland, and then worked on Capitol Hill for Congressman Jack Kemp. In 1991, with $40,000 in savings, he formed his own company. It grew like crazy and went public in April 1999. Since then Proxicom has grown so rapidly that Fernandez’s 28% stake is now worth about $600 million. With that kind of money, he can afford to indulge his “love of competition, in any form.” Although he jets around the world all the time — Proxicom is steadily expanding — Fernandez calls the sports team his “night job.” It has raised his profile, as have his other local activities. Fernandez talks passionately about the importance of community service and appears on philanthropic panels. He is conscious of being a role model for his employees, many of whom are already millionaires in their late twenties and early thirties — the coming shock troops for the new establishment. The rise of a figure like Fernandez is just another signal that times are changing inside the Beltway. Talk to one of the society veterans, like real estate power broker Robert Linowes, about the Washington business world of the 1960s and 1970s. You’ll get a picture of a quaint, provincial town, run mostly by developers, bank managers, and retail executives, who would welcome the other power players — the pols and their minions — in full knowledge that eventually most would return to wherever it was they came from. By contrast, the old Washington hands Linowes recalls knew one another: they sat on the same corporate and philanthropic boards. In the evenings they hobnobbed with the ever-changing political-cultural elite. “It was incestuous, but no one even thought about it,” Linowes says, recalling the days when the landscape could be altered by a few words over dinner at the Willard Hotel. “Conflict of interest? If you didn’t have a conflict, you didn’t have any interest.” It was a cozy little community in those days. But that community has long faded away. The local retail chains were bought out or folded. The banks were gobbled up, the CEOs with community ties replaced by professional managers. And while Washington’s business world was devolving, the federal government was seeding a vast and entirely new industry outside the city’s borders. So-called Beltway bandits grew by feeding an insatiable demand for information technology, supplying all the computers, software, telecommunications services, and training that could fit into the budgets of federal agencies. The defense buildup and deregulation of the telecommunications industry during the 1980s fueled the growth of high tech so well, it now has more employees in the D.C. area than the federal government itself. By the mid-1990s, the local versions of Silicon Valley-style growth companies were primed like a tinderbox ready to explode. The technology, the communications, and the workforce were all in place. All that was needed was the economic spark — and then came the Internet. Mike Daniels, chairman of the Internet-domain-registration company Network Solutions Inc., based in Herndon, Va., is a prime example of a player who was brought into the game by the dot-com revolution and the explosion in Web businesses. He’s one of the “new” breed that was actually in the area all along, one of the tech executives who had worked for decades in obscurity under the shadow of the military- industrial complex. He started out as a naval research officer at ARPA (the Defense Department’s Advanced Research Projects Agency, which invented the Internet — first known as the ARPANET) and then formed his own technology-consulting company. He sold it in 1987 to Science Applications International Corp. (SAIC), an employee-owned company and one of the Beltway bandits. “We were very typical of what went on here in the Washington technology community, especially in the northern Virginia side, until the Internet revolution began,” says Daniels. In 1995 he convinced SAIC that it should buy Network Solutions for $4.8 million. Network Solutions was as close to being a world-dominating organization as there ever was, if you consider cyberspace to be the world. The company was the registrar for the Internet, the keeper of domain names on the Web. Daniels became chairman of the subsidiary and led its initial public offering. In March, VeriSign Inc. agreed to buy Network Solutions for $21 billion. Obscure no longer, Daniels is a made man. Now he appears with the Steve Cases and Michael Dells of the world on panels such as Governor Jim Gilmore’s 2000 Global Internet Summit, which was held in March in Fairfax, Va. The pace at which this new world has emerged isn’t lost on traditional power brokers like Linowes. In the past, he says, if he wanted to raise money quickly on behalf of some philanthropy, all he had to do was get on the phone. With calls to 20 close friends from the city’s business community, he could complete a fund drive. That’s all changed now. Trudging out to northern Virginia recently to seek funds for the Smithsonian’s National Air and Space Museum, Linowes met with a number of the new-wealth class of greater Washington: high-tech executives. “But I had to be introduced. No one knew me,” Linowes said afterward, briefly interrupting the interview to take a call from the governor of Maryland. And what of the old crowd in the Washington business world? Where are they now? “Either dead or out of business or both,” he said, laughing. Anthony Kennedy Shriver (a member of two of the “best” families in town) started the nonprofit organization Best Buddies in 1987, when he was a student at Georgetown University. His organization offers social and employment opportunities for the mentally retarded. In the early days, he says, he relied on his family’s circle of friends — Washington’s political and cultural elite — for the donations he needed. That all changed in 1995, when Shriver was introduced to Leonsis. The AOL honcho decided to make Best Buddies his charity of choice. Leonsis came aboard as cochairman of the Best Buddies ball, the nonprofit’s fund-raising event, and one that drew many famous names. But not the names Leonsis could draw. He brought in his contacts from the high-tech world. “Honestly, in those days no one had heard of Ted Leonsis, and when I told my mother, she was like, ‘Fine, whatever. It’s your thing,” Shriver recalls. “But Ted was willing to work and get involved, and that’s what we were looking for.” Now Shriver talks about the “pre-Ted” and “post-Ted” eras at his charity. “I try to avoid remembering the pre-Ted days, because they were very unpleasant,” he says. In those early days the charity typically raised anywhere from $200,000 to $300,000 from the establishment. But with Leonsis working the phones — or rather, E-mail — the northern Virginia tech crowd began to show up in force at the Best Buddies ball and to give generously. Last year, with Leonsis’s Wizards partner Fernandez serving as cochairman of the event, tickets went as fast as shares in a dot-com IPO. With the ball oversubscribed, Shriver expanded the tent at his aunt Ethel Kennedy’s Virginia estate, and then he sold out again. When the black-tie event took place, in October, limos got stuck in the driveway. Muhammad Ali posed for pictures. The Pointer Sisters sang. The Kennedys welcomed guests. “People showed up from my family, but they didn’t know anyone, which from my perspective was a great sign,” Shriver says. Best Buddies raised a record $1.1 million that night. “When we hold events in Hollywood with a good number of celebrities, or in Houston, Palm Beach, Miami, or New York on the Forbes yacht, we raise maybe $300,000 to $400,000 a night,” Shriver says. “Washington just blows them away.” He is calling the upcoming 2000 event the “dot-com ball.” And this year he plans to raise $2 million. It will be a real A-list event, especially in the tech community — a party “where anybody who is anybody in the Internet world will be,” he says. That example hasn’t been lost on the region’s cultural institutions, ones that have been at the heart of the Washington social circuit for ages but that have been at a loss to capture much of the new wealth. “In the 1990s, at almost every board meeting I attended, the question was always raised, ‘How are we going to get those people interested?” Linowes recalls. “Almost every major foundation and charity had a committee aimed at doing just that.” “Is it a conscious strategy to get those new people involved? Yes. Is it organized? No,” says David Levy. The disconnect makes sense when you think about it. Many of the new paper millionaires are young and simply haven’t had the time that the older crowd has had to focus on how to give money away. And many of the philanthropies have never had ties to a class of people who lived on the wrong side of the Potomac River. But that’s changing. The Corcoran Gallery of Art, which as the largest privately funded art museum in the capital also runs a college of art, recently lured Bob Pittman, president and chief operating officer of AOL, to its board; he’s the first major figure from the tech community to join at that high level. Why, you might say that Pittman — the New Yorker credited with creating the massive MTV phenomenon before making his high-profile move to start shaping the world in AOL’s image — had finally arrived. But you’d better have your tongue firmly in your cheek, because in this case it seems that Pittman brings as much cachet to the Corcoran and the society it represents as they give to him. “Is it a conscious strategy to get those people involved? Yes. Is it organized? No,” says David Levy, the Corcoran’s president and director. The way he sees it, people give money for two reasons: to support the arts and education and to gain access to social and cultural circles in Washington. “We provide that access, and they provide the support,” Levy says. What’s not clear, however, is whether access to society is something the dot-com crowd wants. Where a charity-board seat might have been de rigueur for the well-bred, it’s more of a fun option for the newly minted. As Linowes says, “We had a certain way of giving and a certain level of giving. These people want to do things in new ways.” Remember, many high-tech fortunes were spawned by battling the establishment business world. These start-ups exploited small niches and built new entities by going against the grain. The late Bill McGowan, founder of MCI, is a perfect example. In fact, he’s something of an Ôber role model for many of the established entrepreneurs in the region, because his Washington-based company battled giant AT&T for years. McGowan used to exhort his troops, Whatever AT&T does, do the opposite. That rattle-the-gates strategy worked for all who followed, and they prospered by it. Why change any of those attitudes now? Already, there are strong indications that Washington’s technology elite is treating philanthropy in a very different way from that of the establishment. Many even take umbrage at the word philanthropy, since it suggests a handout rather than an attempt at producing fundamental change in people’s lives. Mario Morino, chairman of the nonprofit Morino Institute, in Reston, Va., for example, speaks in no uncertain terms of the need for “social change” to correct the huge disparities in wealth and opportunity for youth in the region. He’s not going by Karl Marx; quite the opposite. He’s repeating lessons learned by virtue of his entrepreneurial experience, which some would term ultimate capitalism. Morino earned his first entrepreneurial merit badge building Legent Corp., a software company that was sold to Computer Associates International Inc. in 1995 for $1.8 billion. By then Morino had stepped back from day-to-day business affairs and embarked on an eight-year odyssey to figure out how to give some of his $140 million away. Oddly, he found it harder to properly give his wealth away than it was to build it in the first place. [In the interests of full disclosure, the writer of this article worked on speeches for Morino a couple of years ago.] “We took [MicroStrategy founder Michael Saylor] to lunch, and over the course of that lunch his net worth went up by $145 million.” –Lloyd Grove, society columnist fpr the Washington Post
