Cordelia

Letís start with some reflections on time and technology.

The fundamental truth about new technology is that you can live without it, you can always live without it. You are living without Play Station 5, the nascent quantum computing, bandwidth guzzling games platform that is so fast you have already played it. You are living without 4G telephones, and hydrogen-powered cars. For business, technology is the evolutionary engine that drives competitive edge, but, like evolution, technological adoption is always slower than one thinks and always blind to where itís going.

As an illustration, its 1947 and the jet engine has arrived powering planes to new speeds and heights. Only one problem - the planes canít stop, they hit that runway and keep going. So Lockheed develops a state of the art retardation device, that is tax dollar aviation development at its rarefied best, the disc brake, and it is far too precious for mere cars.

Its 1953 Ferraris powered by beautiful Lampredi designed V12s hurtle round Le Mans desperately trying to catch six cylinder C-type Jaguars. As night falls, standing at the end of the Mulsanne straight you can see the glowing discs of the Jaguars that enable them to slow down later than the drum braked Ferraris. Discs have made it to state-of-the-art racing cars, Jaguar wins the race, but discs are still too esoteric for mere road use.

By the late fifties, sports cars that only 1% of the population can afford have disc brakes. By the mid 60s they were on upper level executive cars. By 70ís they were on motorcycle exotica, by the mid-80s disc brakes were the preferred form of braking for most cars and motorbikes. By the late 90s, $4000 mountain bikes had disc brakes and today you can find disc brakes on sub $200 kidsí bikes.

This is not a story about disc brakes; it is a story about how technology is losing its ability to command a premium. Fifty years from discovery to ubiquity, fifty years of technology cascading down a pyramid, getting ever broader ever cheaper.

If you had built a disc brake factory in 1952 you probably would have been too early and gone bust, and in 1980 too late. In both economics and comedy, success is about timing, and it is an interesting question whether you can be a great economist if you are not a great comedian.

Technology moves in cycles and the question is constantly when does it become ubiquitous and at what price, and it always takes longer than you think. As an example, letís take that foundation of the modern telecom industry, the transistor.

The need for the transistor lay in the fact that the vacuum tubes, which amplified transcontinental telephone signal, consumed prodigious quantities of power. The recipe for the transistor came from Bohr and Hisenbergís work on Quantum mechanics in 1926. Twenty one years later, in December 1947 at Bell Labs, John Bardeen and Walter Shockley stuck two electrodes into a piece of germanium and measured the electrical power coming out was 100 times more than that going in. The transistor as a low power amplifier was born.

By the mid 50s the transistor as amplifier laid the foundations for ubiquitous radio and TV. But it was the transistorís collateral capability of being a switch that created modern computing. The first all transistor computer was built in January 1954. It would be another 30 years before it became a common appliance.

30 years is a second of utterance, but itís the time it takes to go from graduation to grandparent. These things all take longer than we think. It took the VCR almost 20 years to be part of most peopleís lives, the Internet was at least 15 years, as was the mobile phone.

However, itís not just the time it takes but the unforeseen collateral effects of technology that are really interesting. It took the transistor as integrated circuit 45 years before it found its true metier in human development with the creation of the singing greeting card.

It was the collateral effect of sticking a telephone line into a PC that created the biggest economic bubble of all time. In Europe it was the collateral function of Ďtxtí that really drove the adoption of mobile handsets among the young.

My favourite story about the unforeseen side effects of technology is that the trade in powdered Rhino horn has dramatically fallen because of Viagra. Viagra saves the Rhino by being cheaper than Rhino horn, and unlike Rhino horn it visibly works.

So technology looses its premium over time, it takes longer than you think to become ubiquitous, and goes off in unforeseen directions. This is exactly what has happened in telecoms, itís lost its premium, and is waiting for the next unforeseen service like txt or picture messaging to save it from the slough of overcapacity.

As auditors advise companies that are tech dependent, how does one enter the debate, and with what language?

Technology advances in ways we canít envisage. We canít envisage it because we donít have the language for it, and are reduced to banal descriptions, thus Mankind advances by the technological metaphors of yesterday.

For example, in the 1930s the only way Alan Touring - father of the modern computer -could describe the laptop you now carry, was through metaphors derived from 19th century technology. He described what you call a computer as Ďa typewriter programmed by punch cards from a Jacquard loomí.

Thatís a pretty poor description of the wi-fi enabled spreadsheet generating, e mail sending terminal that contains your interactive Sim world.

Coping with technical change is brain ache, and no wonder monopolies are attractive not just because of economic power, but because they can slow the constant enervating exhaustion of change.

Using market power to control change is an acquisition that has been levelled at Microsoft, but a less controversial example can be found in Australia. When FM radio arrived, the broadcasters saw that FM meant more competition, and as a monopolistic cartel they successfully lobbied the government to delay FM by 10 years. Which was a little tough on the consumer.

Australian broadcasters may be unique in their ability to stall technical development but their attitude is common the world over. It is tech denial, and it is how ITV in the UK and the main US networks reacted to satellite and cable. It is also how BT initially reacted to ADSL.

So an important non balance sheet question when auditing any coms or TV Company, should be, ĎIs my client in tech denial?í

Tech denial is a terminal disease, as the US vacuum tube industry (once the biggest in the world) discovered as it underwent death by transistor. But as we know from the dot bubble, techuphoria is equally bad.

Tech denial, tech neurosis, technophrenia, this could be the basis for a whole new set of fees to be had from psychiatric accountancy. You would be like the medical profession realising that physical disease is not enough, and there are better margins to be had from manias.

But the serious question is, how does one evaluate technology, who is qualified, and why does this matter? Here is the sting in the tail, and as Hollywood would say it is loosely based on a true story.

Letís say there was a nameless telephone company that borrowed many billion of dollars. The plan was classic hockey stick, with major return generated in the outer years by video on demand and interactive shopping revenues.

This plan showed VOD revenues greater than any previous Pay Per View experience warranted, and inter active shopping revenues based on never been done before aspirations. This management plan was signed off by the auditors, and then presented to the board and the banks.

Some time later the company is suffering death by debt, with no sign of those cavalry-rescuing revenues. Who should have said at the beginning your growth projections are barking? Who had the knowledge to test those assumptions? Should there have been a debate that would have applied to many a cable businesses, along the lines that you might have a worthwhile plan but only if you donít fund it by debt? Who should ask these questions? For as you know there is no one in greater denial than a money raising management.

Traditionally auditors see themselves as Doctors who tell patients not to smoke but canít order them to stop. I wonder if there has been a shift and auditors now risk being the same as the psychiatrist with the patient who becomes an axe murderer. It was not your fault, you are not guilty, you didnít wield the axe, but will that be a sufficient defence?

This is a difficult debate. Take ITV digital. In the early 90s ITV, the UKís largest commercial network, coped with the threat of multi-channel TV by saying nobody would want it. ITV then decided to launch a third digital PAY-TV platform in the UK. No country in the world had three successful competing pay platforms, not even the US, and that alone should have set off alarum bells.

ITV used their own weak libraries to fill channel space and did not carry recognised audience getting brands like Discovery. Worst of all it was an over the air digital platform with less bandwidth and thus less channels than cable and satellite. So this was like sticking a small 7/11 in the parking lot next to Walmart.

That combined with all the problems of making a new technology work and the cost of call centres meant it failed, losing over $1.5 billion. In a nutshell, ITV starting a new transmission platform was like Ford going into the road building business.

Itís worth noting that ITV Digital did not have to succeed to harm its rivals. ITV Digitalís failure also destroyed the value in UK cable as ITV Digital took a million customers away from cable and satellite when cable needed them most to pay for its transition from analogue to digital.

These comments are not hindsight, a number of people questioned ITV Digital at the beginning. I asked John Malone back then should we merge Flextech, our UK programming company, into ITV digital, and as he said, ĎSo, I sell my real asset to get 50% of a worthless government licence that allows them to lose money for ever - help me understand that.í

Of course one couldnít, and more to the point there wasnít any one around to help Michael Green and Charles Allen understand it either.

I have gone on about ITV Digital because it is a good case study, and less parochial than you might think as I could have told a similar story about Wow Wow and DTH satellite in Japan. How ever the chilling point is this; ITV digital failed in 2002, but the first crucial decisions that created this situation were made by ITV back in 1992. The lead times in technical decisions are long, and technical change is like an action scene from a Sam Peckinpah movie, very bloody, very violent, and in very slow motion.

These things are not clear cut, you could have said something similar about Sky at the beginning, when it came close to destroying Newscorp, but Sky is now a major success. Or Orange, which was the third mobile platform in the UK, but it too has done well.

These investments - early Sky, Carlton and Granadaís ITV Digital, and most of all UK cable - were all by public companies. I always felt that like cigarettes, once one was into the carcinogens of high-risk technology there should be a warning on the packet, especially for widows and orphans who stray into these stocks by accident.

You could argue that in the recent past, none of the European cable companies or telcoes were adequately labelled in terms of their debt and risks they were running.

The two things still driving the telecommunications and television industry are the falling cost of bandwidth and memory. We are still reeling from Mooreís law, and it hasnít finished with us yet.

Take Personal Video Recorders, i.e Tivo and their ilk. They exist as a direct result of falling memory costs. They allow you to record programmes with no videotapes, no winding through, and no accidental erasure. The programmes stored on the PVR become ones default channel. The channel I make for myself on PVR is a better Documentary Channel than Discovery can ever be or a better drama channel than NBC or BBC can ever be, as I store my favourite shows from every channel, and I skip past the commercials. What does the TV world look like, if you can buy PVRs a hundred hours of recording for under a hundred dollars? With the supplemental question, when can you do this?

In Tokyo Sony has lunched a PVR with 160 gig or one hundred hour recording capability, twin tuners and an Ethernet port and the ability to record from broadband internet.

You can buy Tivo in the UK at under £100 and IBM have just announced a four inch by five inch cartridge that can store a terabyte. Suddenly TV channels are meaningless, they are just streams competing for storage time on your PVR.

Future babble, maybe, but itís already happened. PVR is the TV equivalent of MP3, and the falling cost of hard discs has already damaged the music business.

Feature films face the same threat as music, in fact the same threat as any digitally stored, file transferable content. Unless the studios understand that piracy is not best solved through technology but economics. In the late 18th century Britain, Pitt the Younger, after years of futile deployment of soldiers, musket, and cannon to halt brandy smuggling - the drug running of the day - stopped it overnight by cutting duty to a level where smuggling was no longer a viable criminal occupation.

Tough choice for the studio executive; deploy ever-defeatable technology or give up the black BMW, lunch at the Heavily Bills Polo Lounge, and reduce margin to protect the product. As the truth maybe that there are not enough lawyers in the world to stamp out file sharing.í

But at least software in whatever guise has the chance to be unique, but the software transport companies, ATT Broadband, Duetsch Telecom, NTL, Telewest, face an interesting question. What is the difference between an electricity company, and a telephone company?

I suspect the answer is none.

Electricity companies get no added value for what their watt does. Itís the same price for that watt whether itís driving the fridge or the TV. The only question is the quantity. With electricity you just plug in the device and pay for what you consume. Is not information supply the same; what is the difference between a watt and a byte?

A recent controversial article postulated that cable companies run into the wall in ten years time, as every time they sell a high speed modem they lose their ability to premium price different types of information product.

In other words as compression technology allows movies to be transmitted at 128K and bandwidth to the home increases, so the cable modem destroys the traditional cable network role of gatekeeper.

Content owners will send their product in packets straight to the consumerís broadband terminal, with the cable companies being merely a phone version of Fedex or DHL.

That modem will be built into a range of products, starting with X-box and Playstation. What does the fact that you can play your X-box against others over a broadband network and talk to them simultaneously do to classic voice telephone revenues?

Let alone plugging in to the network by wi-fi. What happens to these large networks if and when cheap wi-fi overbuilds them?

In the end you just plug in your information consuming device, and pay the network provider a transportation charge, and it will the IPR owner of those bytes that get that the premium.

This is the issue at the heart of the debate, Telcos, are doomed to be infotilities, but they are financed on the basis that they can still supply premium products. In the long term they canít.

UK cable sells the triple play of TV phone and broadband. No single product makes money, they only work in aggregate. Telewest with just 1.7 million phone and TV customers needs to spend a minimum of $300million per year just to maintain the network, and that ignores upgrading the network to provide better service. NTL and Telewest are regional businesses overbuilt by national competitors. Their multi channel cable TV business was overbuilt by a cheaper national wireless service in the guise of Sky. Their voice telephony business is moving quite quickly to mobile phone, and the broadband business will soon face wireless competition.

So the question for a Telewest or NTL is how when you are stretched for cash and restructuring do you stay competitive? The frightening answer is maybe you canít and you donít.

All networks face the inevitable entropy of commiditization. Before then there is a time when they can be successful, but is that window long enough to get sufficient returns? It is all about timing.

We will hear much talk about moving up the value chain, but telecom networks become like water companies, and itís interesting to note that water companies have not moved up the chain into high value water based products and bought breweries.

Fixed wire networks are commodities, the technological premium has moved to the wireless networks.

Wireless in the guise of 3G also faces a conundrum. The consumer will buy 3G for the additional services it provides, and certainly not for voice telephony.

The conundrum will lie in the amount the network tries to take from the software providers whose products will make 3G attractive. The more open they make the networks the more software will be attracted and the more software you have the more people will connect to you. The evidence can be seen for this in the open architecture both technical and economic of 2.5 G operated by DoCoMo in Japan.

Thatís easy to do when you are a de facto monopoly like DoCoMo, but for competing 3G networks in the US or Europe the self destructive lure of high margin exclusive software will be tempting, especially when they have to repay the price of spectrum auctions.

Fixed wire businesses are burdened with overcapacity, and the current down turn is because we are in the trough between technological waves. The next wave that will drive us forward will be wireless, but it will not be 3G as it is currently envisaged that is to prosaic, it will beÖ well if you know the answer to that then my only advice is donít use debt to get yourself started.

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