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With stock prices crashing down around him, Vulcan Ventures Inc. President William Savoy can be forgiven for being a little frustrated these days.
As "Wired World" billionaire Paul Allen's right-hand man and chief investment advisor, he has seen first-hand the recent spectacular plummets among technology stocks. When he recently sat down with Broadband Week associate editor Karen Brown, he was candid about what is going wrong, but it is clear his passion for the future of the Wired World has not been disconnected.
BBW: To help build the wired world, what are your investment priorities for broadband? What pieces of technology are you particularly interested in? What is Vulcan missing in its portfolio?
Savoy: I don't feel like we are missing any components. I think from time to time we are always challenged by people with business ideas that are outside of the box and those are the kinds of entrepreneurs we really like. You can learn a lot from them even if their idea doesn't make it all of the way because they kind of break the mold of the old paradigms. I think given the current environment we are more focused on infrastructure today than we are on the end-consumer focused business opportunities. That's probably more related to the fact that those business plans that are focused on the consumer, probably the CEO had some inflated expectations as to their value. We try to be pretty judicious about the capital we deploy. But infrastructure components are very interesting to us now because finally, for the first time, we've almost got critical mass of consumers able to connect to the network.
BBW: Is there any particular segment that you are looking at now within infrastructure?
Savoy: I would say the area where we spend the most amount of time is, what's the device between the television and two-way connectivity? We spend a lot of time on set-top box design and ask question like, is the DVR a feature or a product? What's the value of DOCSIS versus some other way to manage that data flow that comes in and out? So we are really focused on the end device that hangs off the network, because only when you have two devices that connect to the network do you have a communications infrastructure.
BBW: Is that where Digeo is focused then?
Savoy: One of Digeo's efforts is to try to take existing hardware and build portal services on top of that, but also to try to understand what is missing in the current hardware and find a way to influence the development of next-generation to include those components.
BBW: Are there any exceptionally cheap or overpriced broadband stocks right now?
Savoy: Nothing's undervalued-everything's overvalued. That's kind of a flip answer, but I would wager that some period of time from now it's cheaper whatever it is. It's less expensive than whatever it is. I think that the general slow downward pressure in the market continues for some period of time. Therefore, I think everything is under pressure.
BBW: Investing in the Internet and new technology has shown itself a risky proposition.
Savoy: I think people forgot the risk part of the equation. Reward and risk go hand in hand-the higher the potential for reward, the greater the risk. And because the rewards appeared to be so great, so quick, people forgot about the risk elements of those investments to the point where smart, smart investors blew up. I mean big time disasters that are very public.
BBW: I sense that you are a little impatient with the whole idea that people are so surprised with the stock market correction and the downturn in prices.
Savoy: I would say I am disappointed that they got it as inflated as it did, because it did us all a great disservice. We would have been far better off if it had been like the PC industry that took a long time to get off the ground, that took a long time to raise capital for companies like Dell and Gateway and Micron-where they worked hard and long to build real businesses, because they have something that can survive and sustain itself. When the equity markets lead the charge, what's left behind usually doesn't have the same strong infrastructure that supports the business.
BBW: Where are the rocks right now, and how does Vulcan Ventures avoid them?
Savoy: There's a presumption that a lot more money can be raised behind this round-whatever size this round is-and I'm not sure that is really the case. I think that people may have had too lofty of a goal of what they could do in the early stage of building. It used to be you go raise a couple million dollars, build a prototype, raise a few million more, get beta sites out there and then you would kind of roll with your business up from there. That process took three to five years. In recent history you can go public in three to five months. You've never had a chance to really build a strong management team (???) conviction about your business model and be able to fully articulate its value because waves of cash poured in the front door. But that's not going to happen any more going forward. The challenge is you have a conservative, fiscally responsible management team that can go through three to four or five rounds of private equity raising before they try to become a public company. That discipline has been lost in the last three or four years.
BBW: So the idea of people going ahead and getting out there and then deciding on a business plan is going to have to turn around again.
Savoy: It's ended. For new people, the game is over. For the existing companies they have a little bit of time and in some cases some cash to potentially save their situation. But if you're not a public company today with a lot of cash, you're not going to become one any time soon.
BBW: Streaming video is both darling and devil on the Internet right now. How much of a role do you think it will play in the future of broadband? Is it going to be the killer app?
Savoy: Well, I don't know if it is the killer app. Broadband assumes tremendous amounts of streaming media. Now what I tried to allude to earlier was I think most of that true media comes from the user community, not from entertainment companies. I think entertainment companies have a cost structure that forces them into a channel model, where the consumer can throw whatever five-minute vignette out there that they want because they have no cost structure to maintain that. So those are kind of the two bookends, and somewhere in between is a pretty big opportunity for some creative smart, entrepreneurial entertainment guys who are kind of willing to bend the old model and learn from the user community itself. But that's an assumption. I don't know that for a fact, but I see if I just look at the waves kind of coming together, that's where we're going to end up, because 200 channels on your cable television cannot be supported using the existing model. It will break.
BBW: We've seen recently that major content sites including Pop.com failed. What issues are these sites facing? Why do you think some are failing?
Savoy: I'm going to be a little defensive about Pop. Pop didn't fail before it got started - Pop didn't get started because in the final analysis, we weren't convinced that there was a business model that could support building it. Maybe in the traditional Hollywood way we talked about it a little too early and tried to get a little froth in the marketplace around the notion, but the responsible thing was done there when we sat down and had a hard conversation with the team that was being put together there when there was not a credible revenue model to support trying to launch that business.
BBW: So it was kind of a trial balloon and you decided it wasn't going to fly?
Savoy: I'm not sure it was a trial balloon. There was good work and there were good people there, but not a lot of money got spent against the idea when it became clear that today there is not a definable business model for that. Now, we are investors in iFilm, as are all of the principals at Dreamworks, partly because we believe we can learn a lot about the space looking over the shoulder of that team down there. There's a lot of good stuff in that site. That business model will have to evolve to be a long term, viable business, but they are a good management team, they are credible in what they do, they understand the challenges and we're comfortable kind of being where we are, watching what's happening down there.
I can't speak to the other sites, because until there is a real model to build a business, we're going to kind of stay where we are.
BBW: Much is made of Paul Allen's wired world philosophy, but what about wireless? What role will it play in broadband? Will he have to change his motto to simply "connected World?"
Savoy: I think "wired world" is a metaphor as opposed to a specific. Clearly broadband wireless is of keen interest to us. Narrowband wireless will have a role but probably not be a critical part of the wired world.
BBW: What kind of role will broadband wireless play? Will it be the last-mile connection to get around some of these bottlenecks?
Savoy: I think it will be an alternative access opportunity. I also think there are a class of people and devices that don't naturally lend themselves to being tethered. So it's more about being utilitarian in your approach to wireless than it is about pursuing wireless for the sake of wireless.
BBW: Where should investors be focusing their attention on when it comes to the wired world? Is it the platforms, is it the networks or is it the content? Where's the real value going to be?
Savoy: The value is that it is a platform. Devices that contain microprocessors that are connected in one way or another to a broadband infrastructure represent as significant of a paradigm shift to communications that the microprocessor represented to computing, and we don't know what the apps are yet. We're not even sure we know what the operating system is, if you will. But we know that it is a platform. We know that when people get the ability to have those communications-centric relationships, they want to keep them. We see it more in teenagers than we do in adults.
BBW: What if this all works? What if broadband finally takes off and everybody has a broadband connection?
Savoy: Well, that would be a good problem to have. I think that the thing we hang our hat on is the implications of that are very powerful. The world gets smaller, it's more difficult for individuals or organizations of ill repute to operate under the cloak of secrecy. It's probably good for democracy, and I think the social benefits of it far outweigh whatever your concerns might be if that happens. I think the reality is it follows the path of every other technology, which is it takes longer for the consumers to accept it in mass, but when they do the business opportunity is bigger than you ever thought.
BBW: Is there something that you think the industry is overlooking-something you think is important?
Savoy: I don't know about the industry, because I'm not sure how to define what the industry is. I think the flaw in people's thinking that I experience in the first hand is that many people are doing this to make money, not to build a business. If your goal is to make a lot of money, you won't do it here, because I think the bloom is already off that rose. I think this is going to go back to being an enabling technology that you have to work hard at to build, you have to fail more times than you succeed, and that's not a way to make a lot of money.
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