Investing in the Future of the Internet

Whether there are, as F. Scott Fitzgerald wrote, "no second acts in American lives," there are often second chances. One of the founding companies of the Internet and its chairman, a man who almost got the top job at IBM, are trying to turn a second chance into success in a business drama that teaches us much about the prospects and potential pitfalls of that phenomenon called the Internet.

George Conrades, 57, chairman and president of BBN Corp., is investing hugely to expand computer network services for BBN's corporate customers and increase his company's scale of operations.

The effort is costly in the short term for the company. BBN lost $56 million on $234 million in sales in the fiscal year ended in June and could lose that much again in fiscal 1997, although sales, growing rapidly, will be considerably higher.

"Those losses are investments in our expanding business," says Conrades, who reports that BBN, with 2,000 employees, is hiring 100 people a month.

The aim of the Cambridge, Mass.-based company is to scale up to meet competition. Under its original name of Bolt Beranek & Newman, BBN built a computer network in 1969 called the Arpanet that linked university research centers. It was the first of the many computer networks created in the United States and abroad that have become known collectively as the Internet.

The Internet has long since outgrown its origins and is about to become the world's largest commercial marketplace--for corporations, if not yet for consumers. Major companies, having spent billions of dollars to create internal computer networks, now want to connect those networks to others around the world through the medium of the Internet.

Those connections are made through Internet service providers, such as BBN, IBM, MCI--which is now combining with British Telecom and Microsoft for Internet services--Sprint and others.

BBN, though a relative midget among those companies, manages to attract impressive affiliates. AT&T; is a customer and partner, reselling BBN's Internet network while the big telephone company completes its own. BBN has just won a $340-million contract from America Online to expand that company's Internet service. Andersen Consulting recommends BBN when it counsels major corporations on Internet needs.

BBN attracts those partners because of its expertise built up over three decades. A new book, "Where Wizards Stay Up Late--The Origins of the Internet," is about the history of BBN.

Yet as the Internet became less about science and more about commerce, the wizards at BBN missed a beat. As other companies, such as Cisco Systems, grew to prominence in the computer networking industry, BBN stuck to government contract work for 80% of its revenue. And when government funding began to dry up, so did BBN's profit.

In 1993, when BBN lost $32 million, Conrades was brought in to reinvigorate the company. A physicist by education, Conrades had risen to command 200,000 employees as head of IBM's U.S. operations before losing out in that company's management shake-up in the early '90s.

At BBN, Conrades set up a new division to provide services such as data security--an essential if electronic commerce is really to take off--and network management. "We'll manage a customer's Internet operations, take the worry out of it," says Conrades, echoing IBM when it marketed computers to business long ago.

Conrades knows that U.S. business is investing more money in a shorter time on Internet technology than on any previous development. And he is not alone in that realization. Microsoft said last week that it plans to lose money for years on Internet applications to make sure it has services available as the marketplace grows.

The takeoff point could be next year, says Richard Drummond, a Fort Worth consultant who chairs the Internet Engineering Task Force. Data security will improve greatly, says Drummond, and more corporations than ever will be on the Internet.

Why all the enthusiasm? Because Internet operations offer cost reductions of 70% on communications and the promise of doing business in an entirely new way.

A San Francisco software company, Web Logic, offers an example. Founded in February, Web Logic developed a tool for applications with Sun Microsystems' Java language and put notice of that fact on the Internet in August. Now it has 3,000 customers without having used a sales force or formal advertising.

Sure, Web Logic is a specialized example, but the principle of eliminating so many steps in commercial transactions is attracting business and impressing economists, who credit the Internet with reducing inflation.

Even economist Alan Greenspan, the chairman of the Federal Reserve Board, is impressed. He mused in a recent speech about the inaccuracy of measurements of inflation or productivity in an economy of "concepts and ideas."

But the happy chaos that is business on the Internet today is threatened, says Bob Metcalfe, a pioneer of computer networking who founded 3Com Corp. Too many users are crowding onto the system and "Internet service providers are not organizing as an industry to protect that system," he says.

Indeed, in October, when BBN's Internet customers were cut off because a power outage knocked out the company's network, other providers saw it as a competitive advantage. "That's like an airline saying, 'Fly us, we don't crash,' " Metcalfe says. "If Internet providers don't watch out, they'll invite regulation."

Conrades admits there are problems of capacity and reliability but says they're being solved as investments are made in the Internet. And he suggests a perspective.

"The Internet industry is where computers were in the early 1960s, and it took 35 years to develop that industry," says Conrades. He should know. Conrades joined IBM in 1961 and helped build it over 30 years. Time will tell whether he'll have similar success at BBN.

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