SMART Letter #48b
November 2, 2000

!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*() ------------------------------------------------------------ SMART Letter #48b -- November 2, 2000 Copyright 2000 by David S. Isenberg -- "what snew" -- -- 1-888-isen-com ------------------------------------------------------------ !@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*() CONTENTS > Quotes of Note C. Michael Armstrong, Bernie Ebbers > More Streetside Chat with Scott Moritz, > Conferences on my Calendar, Copyright Notice, Administrivia ------- QUOTE OF NOTE: C. Michael Armstrong "Now we're creating four growth-oriented businesses. Each will be well-financed, well-led and well-stocked with the products and services its customers want and need. This is the next logical step in the transformation begun three years ago . . . The big change is in the exciting opportunity we gain by multiplying AT&T by the power of four." C. Michael Armstrong, CEO AT&T. in a letter to AT&T Employees, Oct. 25, 2000 QUOTE OF NOTE: Bernie Ebbers "We recognize that we, as a company, have let you down. I have let myself down. We certainly don't look at this as the best day of our life . . . [The attempt to acquire Sprint] ended up a mistake - and I am certainly accountable for that mistake . . . I'm sure with the recent performance of this stock, people have a legitimate right to ask if I have a right to lead this company." Bernie Ebbers, CEO WorldCom announcing WorldCom's restructuring, quoted in Financial Times, October 26, 2000 ------- The TSC Streetside Chat: Telecom Guru David Isenberg By Scott Moritz, Senior Writer, Originally posted at 8:00 AM ET 10/28/00 [This is a continuation of my conversation with that is documented (and snidely commented upon) in "Guru Wonders -- SMART Letter #47" -- David I] "Ma Bell (T:NYSE) always attracted some of the brightest minds in technology, but it also had a way of ignoring them. Among those ignored was David Isenberg. "As an in-house visionary, Isenberg's views (see his article, Rise of the Stupid Network) eventually got him ushered out of AT&T. His sin? He challenged the notion that there was continued value in a business built on controlling the network. New technologies such as the Internet, Ethernet and Optics were unleashing a radically abundant network capacity that would change all the previous rules about networks and how network equipment was designed. "Earlier this week, featured Isenberg's thoughts on AT&T's current breakup plans, which he had advocated for years. What follows picks up the conversation with Lucent (LU:NYSE - news) and its failure to adjust to these disruptive forces. Isenberg provides a glimpse of Lucent's arcane product-development practices that pit engineer against engineer and one command chain against another. "Isenberg's current role as an independent telecommunications consultant and strategist has brought some of the world's most provocative upstart networking companies to his door. He also reminds us that the Internet has unleashed some powers that need to be cultivated, and others that need to be challenged. ----- "TSC: [We discussed AT&T, but] Lucent, another company you probably feel you have some ties to, has also come upon some serious troubles. Have you been following that situation? "David Isenberg: Not as closely, but I know, in broad brush, what their problem is. "TSC: What tripped them up so badly? "David Isenberg They thought that the switch market would be forever. "TSC: That's the voice switch? "David Isenberg: Voice, yes, the circuit-switch market would be forever, and, in fact, the circuit-switch market is growing today, not shrinking. It's just that it's growing in new ways. One of the companies that's threatening to eat their lunch is Tachion. Tachion's a company in the old AT&T facility in West Long Branch, N.J., where former AT&T employees build telephone switches. And so the only thing that's changed is the name on the door and the symbol in the stock market. But it's an AT&T building, AT&T employees serving the telephone industry. "It was some engineers who left and literally worked in a basement for two years, developing something they couldn't have done at AT&T because ... well, it was AT&T at the time, but it was the part that became Lucent. "TSC: And they're developing circuit switch for voice? "David Isenberg: They're developing a generic platform for clecs [competitive local exchange carrier, or upstart local phone company], and the platform can do circuit [switch]; it can do frame [relay]; it can do ATM [Asynchronous Transfer Mode]; it can do IP [Internet protocol]. It can do all the things that a clec wants. "And in addition, in this one platform, which is like a third of a rack, it can do Muxing [a multiplexer, a device that merges several low-speed transmissions into one high- speed transmission] and Dacsing [DACS -- Digital Access and Cross Connect: Networks need one kind of DACS to cross- connect T1 lines, another to connect T3's, etc.] and echo cancellation, all of which were not only in a different department, but the vice presidents of Muxes and DACS and Echo Cancellers only talked to the vice presidents of Switches and Adjuncts in the office of the Presidents of Network systems. That was where it met, so there was just no way that Lucent could field a platform like that. "TSC: So you're using that to illustrate the problem... "David Isenberg: It's closer to the problem, but, also, there are these organizational barriers, that at Lucent came with history, that just aren't relevant. So these kids, they saw that the future was combining transmission functionality and several different kinds of switching functionality. I mean, imagine combining a router and a switch in the same box? In the same product? "Oh my God, I mean, think of the cross-organizational burdens that that would entail at a Lucent. Every time you put a different functionality into a product, you have to go up and down management chains, up and down product managers and project managers and marketing budgets and advertising budgets and development budgets and manufacturing and engineering. And they have to do these sensitive negotiations about how much of the manufacturing comes out of the router guys and how much comes out of the transmission guys and how much comes out of the switching guys and how much comes out of the adjunct guys... "I mean, fundamentally, it's an impossible problem to solve at a company like Lucent; you can't get there from here. "TSC: I'm getting a very ugly picture. So, basically, what you're saying is good riddance to that old structure? "David Isenberg: Well, it's hard to do an integrated product in an environment like that. It's really hard to cross organizational boundaries. Now, that doesn't mean that Lucent, that a division of Lucent that does optical fiber, can't do brilliant optical fiber. Or that a division of Lucent that does optical switching can't do a good optical switch. Or a division that does network protocols can't do good network protocols, or a division that does network management can't figure it out. "Because they can, and they have. But the legacy gets in the way, and in times of change, in times of rapid change, it gets in the way more. "TSC: So, no cooperation among those divisions... "David Isenberg: Well, yes. They have to compete for budget every year, and the whole idea of merit review is based on [that] ... This carries all the way up the chain. "And it means, basically, that your organization has to be better than the other organizations. So the idea of cooperating from one organization to another -- even though it's encouraged, top down -- there's not, at least in the company I knew as AT&T Network Systems, there was not enough motivation, structural motivation to make it happen. "TSC: So, same question then for Lucent. If they came to you for some advice, what would you tell them? "David Isenberg: What did I say about AT&T? Same thing. Plug it in. Break it up, spin it out, sell it off, reorganize it, reinvent yourself, get smaller, get leaner. "Lucent has one thing to keep it together that AT&T doesn't, and that's that it has the sales force, and the sales force, presumably, is where it all comes together. Where they can go in and sell an integrated solution, so there actually is still a reason for Lucent to be a company. "But maybe the right thing for Lucent would be to maintain this unified sales force, but be more like a distributor and solutions model, where what they're selling isn't necessarily stuff that's homegrown. And increasingly, I think they're moving that way. Just, are they moving that way fast enough and do they realize to what degree they're being hurt? "TSC: You were one of the first people to really champion Clay Christensen's book [the Harvard Business School professor who wrote The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail], and the more of these industry tech titans that fall into trouble and weakness ... well, I guess you would tend to think that Clayton was on to something there. "How do you, as a futurist and a strategist, incorporate the need to plan around disruption and failure when you talk to your clients and customers? "David Isenberg: Well, the incumbents don't hire me too much. [Laughs] But it's a problem, and, fundamentally, I don't think you do. I think companies kind of have a natural life cycle, and when you come to the end the few remnants of AT&T that are left are going to have to make like an old Eskimo some day and just take a walk in the snow. "I mean the average life of a corporation is 40 years. If you get past that, it means you've been either extremely lucky to have found yourself at the tail end of the distribution, or you've been exceedingly flexible at reinventing yourself to meet new times and new market imperatives. "TSC: And have we seen a dramatic change in that lifespan? Do you think it's coming down? "David Isenberg: If anything, it's coming down, given all the little companies that spring up and stay in existence for a few months or a couple of years, and then fail and go out of business. The cost of failure is lower when you're a small company. "TSC: Is that a good thing? "David Isenberg: Sure, why not? It's good because you don't keep making the same mistake. If you're a little company and you don't have a whiz-bang success, then you're not strong enough to survive the punishments of the marketplace. And so you go under. It doesn't mean that the people who are in that company go under; they find other jobs and other companies, and, in fact, they've learned something in the intervening times. "So they come back, and they're stronger, more experienced, able and willing to try again, and so another company springs up. The only thing that gets destroyed in a process like that is the investors' capital, and it's questionable whether that's a problem. I mean, presumably investors invest because they can afford to lose, and, second, they're paying salaries and driving the economy forward in general, and, third, they're increasing the expertise of the workforce in general by giving them more experience. "In fact, the firms that invest in early stage companies seem to do quite well, even though -- I don't know what the statistic is -- X out of 10 of them fail, where X is far greater than one. Maybe five out of 10 of them fail, and maybe only one becomes a big hit, but that one pays for the other nine. "TSC: Sure. In the three years since you've gone out on your own, has it been increasingly hard to stay the provocateur when you become more and more entrenched on advisory boards and in financial relationships with some of your customers? Are you at the risk of losing your edge? "David Isenberg: Always. "TSC: How do you prevent that from happening? "David Isenberg I don't have a strategy, I'm just flowing with it. If I had a strategy, which I don't, it would be to engage in business only with companies I think represent the future. And then by being part of those companies, I can help to create the future and I can be part of the learning stream that goes on. "TSC: And obviously part of the financial rewards should it succeed, right? "David Isenberg: You mean there are financial rewards? [Laughs] "TSC: I mean, we can't ignore that there would be some financial rewards should these companies become part of the future. "David Isenberg: Well, that's a nice hypothesis, and I would love it to come true. So far I have some paper with some writing on it. "TSC: Could you disclose who you work with? "David Isenberg: Let's see, for the purposes of this chat, let me give you a sampling: I have a business relationship, advisory relationship with Yipes! and Terabeam, two optical-services companies that I think represent different spaces in the future. "I have a relationship with Merrill Lynch (MER). They want to know what this future is, and they need to know. I have a relationship with two incumbents, Fujitsu (FJTSY) and Motorola (MOT), and they -- how can I put this delicately? -- they're desperately trying to understand the changes that are occurring and what they can do by way of corporate response. "TSC: Are you hired as a consultant to them or is it something else? [No, I'm a Prosultant(sm). Pro and Con are opposites. Why is this so hard for editors to grasp? Prosultant is a service mark of, inc., but if editors don't want to use a service mark to describe what I do, they can call me an independent observer, a troublemaker, a dissident, a pundit, a commentator, an advisor. I feel strongly about this because the CONsultants I encountered at AT&T were part of the pathologically codependent system that kept management detached from the company they were supposed to be running. They were the whores of the Patrimonial Bureaucracy Club. Ratbert says 'consult' derives from 'condescend' and 'insult'; this certainly jibes with my AT&T experience. -- David I] "David Isenberg: The relationship varies in every case. "TSC: But all of these have some sort of financial connection. "David Isenberg: Yes. Let me also mention, when I say Merrill Lynch, I can also say And MetaMarkets represents to me the future of this disintermediated financial-services industry. "TSC: OK, let's get to your message. What about this thing you talk about: abundance? Do people understand what you're talking about when you say the abundance of bandwidth changes the value structure, or their value assumptions about their particular niche in the network? "David Isenberg: The patterns of abundance and scarcities are the economy. When the abundance of land determined how rich you were, there was one kind of economy. When the abundance or scarcity of factory and machines determined how rich you were, there was another kind of economy. "And now it's the abundance of information that determines how rich or poor you are. And so, yes, that changes everything. "Now the second thing that changes everything is what I call the stupid network. This was originally articulated as the end-to-end principle, which basically means that the network is just an empty pipe, it's a utility, and that the value is created where the pipe comes out of the ground at the edge of the network. "That actually is a direct consequence of these other abundances, but it's a hugely democratizing influence. It lets people have control over their own network services. It lets people decide how their networks are going to create value for them, rather than letting companies decide how the network creates value. "TSC: And you also originally had thought that it would be a great fertile bed for a lot of innovation around the edge. Is that coming through? "David Isenberg: It's coming through. I mean, the email is at the edge, the Web browser is at the edge, MP3 is at the edge, peer-to-peer is at the edge, all the killer apps. TV over IP is at the edge; voice over IP is at the edge; all the killer apps of the last five years that ... let's face it, that's the history of the Internet that we know; all of these killer apps are edge-based applications. They weren't invented or sold by the owners of the wires and the switches. " TSC: As a consultant, David Isenberg is receiving payment in the form of cash or shares (or both) in the following companies mentioned in this column: Fujitsu, Merrill Lynch, MetaMarkets, Motorola, Terabeam and Yipes. Copyright 2000" [Ick, barf, gag -- I ain't no stinkin' consultant! -- David I] ------- CONFERENCES ON MY CALENDAR November 5-9, 2000. Rose Hall, Jamaica. Porter Stansberry's Pirate Investor's Ball, featuring Eric Raymond, Tom Petzinger, Porter's impressive research director David Lashmet, and yours truly. Porter is a big-picture guy, a cross between George Gilder and Tony Robbins, with a nose for leading edge values in infotech and biotech. Contact Andrea Shaw,, 410-223-2648. November 13-15, 2000. Hong Kong. Jeff Pulver's VON Asia. VON stands for Voice on the 'Net. It's the premiere Internet Telephony show in the U.S. and Europe; this is the first Asian VON. I'll be doing a panel called "XON, with X = unknown." THIS JUST IN: Dan Gillmor, the genius tech columnist for the San Jose Mercury News, will be my co-panelist! For more, see November 28-29, 2000. Montreal PQ. THE NETWORKED NATION: CANARIE's 6th Advanced Networks Workshop. I'll be speaking, and so will Francois Menard, Paul Hoffert and other (mostly Canadian) folks who are honing Canada's leading edge. SMART People will remember that last year the word from CANARIE was Ethernet (see CANARIE Sings -- SMART Letter #30, December 9, 1999). Months later the Ethernet story hit The New York Times and Business Communications Review. This year I hope to learn about grids -- watch this space. ------- COPYRIGHT NOTICE: Redistribution of this document, or any part of it, is permitted for non-commercial purposes, provided that the two lines below are reproduced with it: Copyright 2000 by David S. Isenberg -- -- 1-888-isen-com ------- [to subscribe to the SMART Letter, please send a brief, PERSONAL statement to (put "SMART" in the Subject field) saying who you are, what you do, maybe who you work for, maybe how you see your work connecting to mine, and why you are interested in joining the SMART List.] [to unsubscribe to the SMART List, send a brief unsubscribe message to] [for past SMART Letters, see] [Policy on reader contributions: Write to me. I won't quote you without your explicitly stated permission. If you're writing to me for inclusion in the SMART Letter, *please* say so. I'll probably edit your writing for brevity and clarity. If you ask for anonymity, you'll get it. ] ** David S. Isenberg, inc. 888-isen-com 908-654-0772 ** -- The brains behind the Stupid Network -- **