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from Gilder Publishing THE FRIDAY LETTER e-mailed weekly, for friends and subscribers ====================================================== | http://www.gilder.com | Issue 6.0/May 4, 2001 HEADLINES: * The Week/Too Much of A Good Thing? * Digital Power Report/The New New Chip * In The American Spectator/Microstuck * Storewidth 2001/No Bandwidth Bottleneck! * Friday Letter Bonus/Neal Stephenson * Letters to the Friday Letter * Readings * Conference Calendar =-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-= THE WEEK/Too Much of a Good Thing? The specter of "overinvestment" is haunting Wall Street like a bad hangover on the morning after. A recent Business Week special report entitled "Telecom Meltdown" describes the likely ripple effects--none of them good--from too much capital chasing too few opportunities. A Barron's piece on analyst Susan Kalla, the "Dr. Doom" of telecommunications, warns investors away from the industry because of "too much capacity and collapsing prices." And then there's any number of financial-page feature articles, in newspapers running the gamut from the Sunday New York Times to USA Today, with headlines borrowed from the obituary section. The telecom overinvestment thesis implies that the capital markets badly misjudged the size of the opportunity, and supplied crazed technologists (we're being charitable) with too much money. The underlying premise is that growth in demand for telecom services, which is driven by the growth in network data traffic, will be much smaller than the companies, their financiers, and their investors had originally anticipated. Kalla, for example, expects annual growth in data traffic of 50% to 70% over the next few years; industry bulls--us decidedly among them--see traffic doubling every three to four months. The bears' projections are based on historic growth rates--the pre-Internet, pre-optical world. But the pace of technological change has been staggering, both costs and prices are dropping precipitously, and extrapolations based on previously-experienced patterns of demand will prove well off the mark. As more and more enterprises adopt Internet-based technologies that significantly lower the cost of moving data, the growth in network traffic--and the demand for supporting services--will, as Epoch Partners puts it, "spur previously undetectable demand //and// unleash massive amounts of data." On Wall Street, though, the pessimists are winning. Spurred on by the well-publicized failures of Northpoint and Winstar, two widely--followed-and hugely leveraged--new-era telecom providers, investors have fled the whole new telecom sector. Prices stocks and bonds alike are stuck in distressed territory. Consider that an opportunity. Because at crunch times like now, market dynamics cause the good to be lumped indiscriminately with the bad and the ugly. When bond and stock mutual funds are hit with panic-mode redemptions---as they have been for much of the past year or so--portfolio managers don't have the luxury of drawing fine distinctions between, say, flawed-business-plan CLECs on the one hand, and aggressive, well-managed next generation IP carriers--say, Global Crossing--on the other. They sell what they can, and prices fall across an entire sector. That's when opportunity knocks. ~~~~~~~~~~~~~~~~~~~~ FROM THE DIGITAL POWER REPORT/The New New Chip "Despite forty-plus years of post-transistor history, new semiconductors and new applications for quantum technologies are often greeted with deep skepticism by engineers and companies rooted in more traditional materials and devices. There were gallium arsenide skeptics in the 1980s too-the material seemed exotic, difficult, and daring, and it was. But today GaAs is ubiquitous. In the early stages, every new semiconductor always seems too difficult to work with, impossible to grow into defect-free crystals, just not worth all the trouble. Then it's not quite impossible, but too expensive. And then it gets cheap." Peter Huber and Mark Mills see a new wave rising in May's Digital Power Report, available online Friday. Subscribers log in at http://www.powercosm.com. ~~~~~~~~~~~~~~~~~~~~ IN THE AMERICAN SPECTATOR/Microstuck "Judge Judy, please don't break up Microsoft. We have them just where we want them, stuck in a corner with wet paint drying around them. Clinton's antitrust pinstripes may have sought their place in history by making history of Microsoft. But strange as this may sound, an intact Microsoft may well have done more than venture capital to create a continuum of value in the technology world. "I have never cashed a check from Microsoft, never owned the stock, could care less if they like me or hate me. I do believe that the way they have structured the PC and software market, rather than stifling innovation, stimulates it. I also believe that a divided Microsoft is a dangerous, hungry beast, while an intact Microsoft is stuck in a position where it can do little harm and significant good." Andy Kessler, our favorite California money manager, argues "Don't Break Up Microstuck" in May's American Spectator. Read the full text at http://www.gilder.com And subscribe at 50% off the cover price at http://www.gilder.com/AmSpecSub.asp ~~~~~~~~~~~~~~~~~~~~~ STOREWIDTH 2001/No Bandwidth Bottleneck! In response to technical troubles with the Webcast of Storewidth 2001, the networking geeks at iBEAM have been working overtime. As a result, original morning and afternoon segments have now been re-edited by individual speech and panel, meaning smaller, more manageable files. In addition, the 56k version has been adjusted to run more smoothly over AOL dial-ups. Unfortunately, Mac users are out of luck; we've made the notice on the registration page more emphatic to head off any further confusion. For other problems, please call iBEAM tech support directly, at 800-773-3371. Now the really good news: the Storewidth 2001 Webcast has been extended through May. Passwords for unlimited viewing are available at $50 each, at 800-261-5307. ~~~~~~~~~~~~~~~~~~~~~~~~ FRIDAY LETTER BONUS/Neal Stephenson on Code "A person who went into a coma before Microsoft was founded, and woke up now, could pick up this morning's New York Times and understand everything in it--almost: "Item: the richest man in the world made his fortune from-what? Railways? Shipping? Oil? No, operating systems. Item: the Department of Justice is tackling Microsoft's supposed OS monopoly with legal tools that were invented to restrain the power of Nineteenth-Century robber barons. Item: a woman friend of mine recently told me that she'd broken off a (hitherto) stimulating exchange of e-mail with a young man. At first he had seemed like such an intelligent and interesting guy, she said, but then "he started going all PC-versus-Mac on me." "What the hell is going on here? And does the operating system business have a future, or only a past?" From "In the Beginning was the Command Line" by Neal Stephenson, whose epic Telecosmic novels include "Snowcrash" and "Cryptomnicon." Read the his essay on software at http://www.cryptonomicon.com/beginning.html ~~~~~~~~~ LETTERS TO THE FRIDAY LETTER To The Editors: Blaming the Fed for the recent revaluation of our markets is not overly insightful. Too much capital was chasing too few investment opportunities, supply and demand-Economics 101 remember? The Fed's actions allowed us to descend in reasonably orderly fashion (it didn't happen in 21 days), giving markets time to adjust, adapt and survive a monster that could have destroyed our capital markets. Blaming the Fed for deflating the market is as ludicrous as blaming people like George for inflating it. There was a lot more to it. Bruce R Lindahl To the Editors: Thank you for the true "bonus" of Ray Kurzweil's pr?cis. My first response was awe at the disruptive paradigms shaping our future. But I also realized that such explosive change disrupts predictability in general, and thus the continued dominance of any one company. For someone holding Telecosm stars such as JDSU, Kurzweil's piece is frightening. My question: is there a way to involve subscribers such as me, so that we all can all profit? Kurzweil's introduction states, "You will get $40 trillion just by reading this." I believe in that promise, but I cannot see the opportunity! A Gilder mutual fund? A venture capital operation comfortable for small investors? Otherwise, I benefit intellectually, but the frustration is strong. Harry Taylor (Eds: We've certainly thought about it, but there's a built-in conflict between independently analyzing companies-our stock in trade--and directing investments. Look no further than the big Wall Street brokerage houses. There are, however, a number of high-quality independent brokers who offer Gilder-oriented advice. Our subscriber-services staff will be happy to refer you to them.) ~~~~~~~~~~~~~~~ THIS JUST IN/Gilder.com Poll Results Question: Will the Fed's rate cuts save the economy? Yes! The bear market is dead--40% No! We haven't hit bottom-32%. Greenspan doesn't know what he is doing-28% New question each week-weigh in at http://www.gilder.com =-=-=-=-=-=-==-=-=-=-=advertisement =-=-=-=-=-=-=-=-=-=-= Special Online Offer - a FREE Trial Issue of Forbes Magazine! Click on the URL below to order today. https://commerce.cdsfulfillment.com/FRB/subscriptions.cgi?IN_Code=IK03FTA =-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- READINGS Raising $5 billion in 12 Hours http://news.ft.com/ft/gx.cgi/ftc?pagename=View&;c=Article&cid=FT3K3BIH9MC&live=true King Kong Vs Godzilla http://news.cnet.com/news/0-1005-200-5729530.html Information Wants to Be Free http://www.zdnet.com/zdnn/stories/news/0,4586,2713742,00.html Stealth Platforms http://dailynews.yahoo.com/h/nm/20010430/wr/media_web_piracy_dc_1.html Chips Are Down http://famulus.msnbc.com/famuluscom/reuters05-01-211256.asp?sym=JDSU#body Gig E Rules http://www.internetweek.com/indepth01/indepth050101.htm Get Ready For .Biz http://www.washtech.com/news/netarch/9406-1.html Congress Wrestles With Net Taxes http://www.wired.com/news/business/0,1367,43426,00.html The Productivity Debate http://abcnews.go.com/sections/business/DailyNews/WORK_productivity.html DVD Busters http://www.internetworld.com/news/archive/05022001c.jsp FCC's Kennard Goes Private http://www.thestandard.com/article/0,1902,24173,00.html?nl=mg Between the Lines of Cisco's Class-Action Suit http://www.zdii.com/industry_list.asp?mode=news&doc_id=ZE508316&pic=Y Just Say Yes to Reg FD? http://www.thestreet.com/comment/siliconstreet/1403517.html Tax Havens Shelter Everyone http://news.ft.com/ft/gx.cgi/ftc?pagename=View&;c=Article&cid=FT3OUSFJ6MC&live=true Can the Media Make a Recession? http://www.mediabistro.com/spotlight/archives/01/04/06/ =-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- GET THE GILDER TECHNOLOGY REPORT Monthly, From the Heart of the Telecosm http://www.gildertech.com ~~~~~~~~~~~~~~~~ GET NEW ECONOMY WATCH Reshaping the Competitive Landscape http://www.neweconomywatch.com ~~~~~~~~~~~~~~~~ GET THE DIGITAL POWER REPORT Electrons Matter http://www.digitalpowerreport.com ~~~~~~~~~~~~~~~~ GET DYNAMIC SILICON Linking the Microcosm and the Telecosm http://www.dynamicsilicon.com ~~~~~~~~~~~~~~~~ GET THE AMERICAN SPECTATOR Online special--50% off cover price! http://www.gilder.com/AmSpecSub.asp =-=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- GILDER CONFERENCE CALENDAR September 12-14, Telecosm V, Squaw Creek Resort, Lake Tahoe CA. The one and only. Produced by Forbes Inc and Gilder Publishing. Details and registration at http://www.forbes.com/conf/telecosm/agenda1.shtml October 22-24, Powercosm 2001, Featuring Peter Huber and Mark Mills, The Fairmont Hotel, San Francisco, CA Digital Power in the Silicon Age. Register now at http://www.gilder.com/powercosm_forms/Conference.asp October 24-26, New Economy 2001, The Millennium Broadway, NYC. A front-row seat on the transformation of corporate value. Produced by Forbes Inc and Gilder Publishing. Details and registration at http://www.forbes.com/conf/neweconomy/agenda1.shtml -=-=-=-=-=-=-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- The Friday Letter is published weekly for subscribers and friends of Gilder Publishing. If someone you know would enjoy it, please feel free to forward a copy. SUBSCRIBE and UNSUBSCRIBE information can be found at the bottom of this email. FRIDAY LETTER STAFF ~~~~~~~~~~~~~~~~~~~~~~~ John Hammill (jhammill@gildertech.com) Jorin Hawley (jhawley@gildertech.com) E-Mail Wizard Dave Dortman Contributors to this week's issue: Charlie Burger, Dave Dortman, Keri Geiger, John Hammill, Spencer Reiss, Jeff Stambovsky ADVERTISING INFORMATION ~~~~~~~~~~~~~~~~~~~~~~~ The Friday Letter is mailed each week to more than 60,000 subscribers and friends of Gilder Publishing. For information about advertising, contact Brian Cole, VP Business Development at bcole@gildertech.com, tel 860-434-0614. 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