The Wild Ride’s Far From Over
The past year offered an ironic lesson for high tech. Microsoft Corp.’s oft-derided antitrust defense--that there are no locks on supremacy in this industry--holds a large measure of truth. High tech is all about churn.
In a spectacular legal comeuppance, U.S. District Judge Thomas Penfield Jackson found what the rest of the world had long since concluded: Microsoft operates as a predatory monopoly. Jackson has yet to rule on the penalties for such conduct, and it may be years before the case works its way to the Supreme Court if the company and the government fail to settle out of court. But the trial has already emboldened competitors and narrowed Microsoft’s latitude.
“If nothing else, the trial has uncovered so much top-level conniving at Microsoft that doing business in Redmond now looks like an invitation to a mugging,” the industry publication Soft-Letter noted.
Despite the stinging legal rebuke, in 1999 Microsoft’s refrain on the constancy of competition was proved right, at least conceptually. To be sure, the Redmond, Wash.-based behemoth earned record profit. But competitors--including Web-based software and services and non-Microsoft devices such as the Palm hand-held computer--are gradually gaining strength.
The most fascinating competitor to emerge is not so much a product or service as it is a grass-roots insurrection: the Linux operating system.
Linux is the brainchild of the “open-source movement.” Unlike proprietary software, volunteer programmers from around the world develop and improve Linux. Each has full access to its source code--the arcane computer-language commands that act as a kind of software DNA. No one owns Linux, which is available free on the Web.
Thousands of programmers have hardened Linux into one of the most capable and crash-resistant operating systems ever--ideal for running server computers that operate Web sites. This year major computer vendors began to offer Linux as a pre-installed alternative to Windows.
Open-source zealots have designs on capturing a large slice of the market for PC operating systems dominated by Windows. Although that goal looks distant, investors have embraced Linux with something close to euphoria.
When Red Hat Inc.--a company in Durham, N.C., that packages its own version of Linux and provides technical support for a fee--made its initial public stock offering in August, its share price tripled on the first trading day. In today’s world, it may go without saying that Red Hat loses money. What’s amazing is that a company based on a product that is given away free is now valued at more than $15 billion.
If that sounds like an aberration, consider another open-source company--Sunnyvale, Calif.-based VA Linux Systems Inc., which sells and services computers preloaded with Linux. Earlier this month, its IPO price rocketed 697.5%--the biggest first-day gain in market history.
Such astounding financial feats reflect another big surprise of 1999: The New Economy stock bubble again proved burst-proof, defying legions of expert doubters. A brief sell-off last summer had pundits proclaiming the bear market’s return. They ate their words by November when a new surge erased the losses.
Consider these eyebrow-raising 1999 factoids that, more significantly, reflect broader market trends about high tech’s role in the national economy:
* With a valuation of more than $180 billion, America Online this month eclipsed AT&T; as the nation’s largest communications company.
* Yahoo’s value now roughly equals that of General Motors and Ford combined.
* Microsoft (which became the first $600-billion company this year) and Intel were among companies that bumped Chevron, Goodyear Tire & Rubber and others from the list of 30 companies used to compile the Dow Jones industrial average, the leading stock market index.
* Daily Nasdaq record highs have become commonplace. The market’s composite index has risen about 80% this year, fed largely by Internet newcomers.
But Web-wealth mania bypassed some of the old guard of the tech world. Most notably, longtime PC king Compaq Computer was overtaken by more nimble, Web-oriented competitors, such as Dell Computer.
In April, Compaq Chief Executive Eckhard Pfeiffer, a silver-haired fixture on the PC scene for more than a decade, was unceremoniously forced out when the stumbling giant couldn’t find its footing in a world where PCs are given away “free” as come-ons to sell long-term contracts for Internet services.
In contrast, Apple Computer continued its improbable resurgence by delivering a raft of innovative products that followed its wildly successful, fruit-colored iMac line released in 1998. Macintosh OS 9 became the first PC operating system with built-in e-commerce search tools. Apple’s iBook notebook computer became a hot seller, and the company staked a new claim as maker of the fastest PC with its G4 model.
Compaq’s dive and Apple’s rise--largely based on missing and grasping the Web’s primacy, respectively--demonstrate a more fundamental industry shift this year: PCs and microprocessors have faded as the drivers of innovation. They have been replaced by the Internet and the hunger for faster online connections, or more “bandwidth.”
Two key developments marked that shift vividly:
First, Intel made a Houdini-like escape from its antitrust suit (settling with the Federal Trade Commission in March) only to be eclipsed in the fall by Cisco Systems as the largest hardware company. San Jose-based Cisco, the leading provider of devices that manage the Internet and corporate networks, more than doubled its value to over $350 billion this year--making it by far the nation’s largest manufacturing company. Amazingly, Cisco digested its many acquisitions with such finesse that Fortune magazine recently placed it among the best companies in the nation to work for.
Second, AT&T; and other cable TV providers--which have been upgrading their cable infrastructures to provide high-speed Internet service--rejected demands for access to those networks by AOL and other Internet providers. Battles between those forces have raged in court, in Washington, before municipal governments (which wield regulatory authority by overseeing the local monopolies enjoyed by cable providers) and in the media, so far to a standstill.
A few weeks ago AT&T; offered a compromise--allowing access to other providers beginning in mid-2002--a bargain sure to satisfy no one because it gives AT&T; plenty of time to consolidate market dominance. Look for the bandwidth battle to continue in earnest in 2000, especially as competition between cable and DSL--a high-speed alternative that works over standard phone lines--heats up.
Meanwhile another war has erupted, this one over the taxation of goods and services bought online. If buyers had to pay sales tax, would they shun Buy.com, Amazon.com and other big Web retailers, squelching e-commerce in its infancy? Most high-tech moguls--and the politicians whose campaign coffers they fill--say yes.
Web companies want a permanent tax ban. But brick-and-mortar dinosaurs are hardly facing the prospect of extinction willingly, and they have begun to mobilize for “tax fairness.” They see the federal moratorium on Internet sales tax as a dire threat to traditional retailers and the local communities that depend on them.
It’s one more sign that the Web’s wild and unpredictable ride is sure to continue in 2000.
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Times staff writer Charles Piller can be reached at charles.piller@latimes.com.
