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July 9, 1999

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Subject: AOL & the Future, TMF Puck and the Present
Author: Woodchuck1

My Fellow Fools,

Think not of the world as it is today, but, examine carefully what important companies are doing today, and project the future. The Wise can explain yesterday, and perhaps today, but it's the Fool who seeks tomorrow. And with all [due] respect to my fellow Fool, TMF Puck, an excellent journalist and analyst in her own right, it is here where she and Steve Case part, at least as it relates to the issues contained in the NY Times article.

In retrospect, it is not that difficult to identify times in history where organizations and/or people did not understand, or could not clearly define, the business they were in. Business school text books are rife with such examples; the railway of the late 19th Century perhaps being the most famous. More recently and applicable to this article, Marc Andressen (sp?), formally of Netscape and now of AOL fame, said that until very recently he thought he was in the browser business, but as it turned out, he now realizes he's in the portal business and has been all along. And this guy is at the very core, or close to it, of the Internet revolution.

Look at what C. Michael Armstrong, in representing the AT&T owners (shareholders) is doing with that company. He's on a buying spree. What is he buying? He's buying cable. He want's width. Think binary, my fellow Fools. Think digital. He wants to move digital information. He wants to bring it to your house, everyone's house, fast. Until I started really paying attention to what he was up to, I always thought AT&T was in the phone business. They're not. They never were. What are they in, then? AT&T provides an infrastructure to bring you information. To date, AT&T has brought you information via copper wiring. It was the best way, given the technology of the time, to bring you voice. Voice was the most profitable information of the time, and AT&T certainly profited from it. It is no longer the most profitable.

"AT&T is positioning itself to get information to your house or to your business. But, it's inside your house where the big battle is."

Lester Thurow, MIT economics professor and former dean of MIT's Sloan School of Management, said in his most recent book, Building Wealth, "Successful businesses must be willing to cannibalize themselves to save themselves. They must be willing to destroy the old while it is still successful if they wish to build the new before it is successful. If they won't destroy themselves, others will destroy them." Why does AT&T own a huge stake in Excite@Home? Why did they buy TCI? Why did they buy MediaOne? Armstrong is cannibalizing AT&T's copper network for a digital network. Why did Microsoft buy a 5% stake in AT&T and establish not an exclusive but a "friendly" contract, whereby AT&T will buy Microsoft's T.V. box top operating system software? Hmmmmmm, very interesting question. More on that in a moment.

AT&T is positioning itself to get information to your house or to your business. But, it's inside your house where the big battle is. Why does Bill Gates and Microsoft, an operating system and application software developer, want to be in your T.V.? Why does Scott McNealy and Sun Microsystems, a workstation and software developer, want the exact same thing. Why does Steve Case and AOL, an ISP and a Web portal, want the same thing?

Well, TMF Puck is in part correct, in my view. The T.V. is for "potatoing". It is a wonderful entertainment medium to enjoy in groups. The Web, via the computer, is definitely a solo trip. It can be very stimulating and thought provoking. And, of course, the phone is fun and a way to communicate directly in voice. Today, they are each exclusive of one another and TMF Puck has described them, quite accurately, as such. But what Gates, Case and McNealy are vying for is the day when they are not exclusive of one another. Indeed, you will never pick up the monitor to talk to a friend or watch a sitcom through a phone receiver. Nor are these things, the T.V. monitor, the phone receiver or the c.p.u. going to go entirely away. They are tools. You need them. But, they will not be entirely exclusive of one another either, as they are today. Why? Because the same thing will be coming into your house: DIGITAL DATA. Whether it's a digitized voice, digitized music, digitized television programming, digitized movies, digitized text, it doesn't matter, it's all binary. Look at what's already happening today. Phones have had digital signals for a long time. Who even remembers pulse? Digital T.V.s will be industry standard in eight years. Either you buy a digital T.V. in eight years or you'll need some type of converter mechanism. Computers have always been digital, unless as some do, you count the abacus as a computer.

Thurow also states in his book that he believes we are at the very conception, the absolute beginning, of the Information Age. This Internet revolution of the '90's is but a sparkler compared to the firework display ahead of us. He believes we are standing at the edge of what he calls, "the Third Industrial Revolution". The first two being catalyzed by the steam engine and electricity respectfully. Does a Lexus look like Henry Ford's Model T? Does a laptop look anything like ENIAC, by most accounts considered the first computer ever built? Does the Concorde look anything like Orville and Wilbur's Kittyhawk contraption? Do those Converse Low Tops that Bob Cousey wore look anything like the Nikes Michael Jordon wore on his last day on the job? Sure, we can see similarities, but really folks, today's version of these things are vastly different from their brainchild forebears. One day, in the not too distant future, we'll have things like today's P.C., T.V., phone, VCR, stereo, etc., but like these other examples, they'll be different. More important, they will be driven by a singular medium, whereas today they are all exclusive of one another. And it's of that medium that Steve Case speaks. It is this precious medium that Gates, Case, McNealy and others so covet.

"Notice how Microsoft is in a huge battle with the Justice Department over embedding its browser in its newer operating systems and arguing the two must coexist? Why? Because it's about getting in the home, as many homes as possible."

Picture, if you will, a mechanism that is directly connected to C. Michael Armstrong's digital cable coming into your house. This mechanism is not the T.V., to which your cable is currently connected. This mechanism is not the phone line, to which your computer's modem or your phone is currently connected. It is something that has not been invented yet. Here I ask Fools of vision to accept for the sake of argument, a mechanism not yet available on Amazon.com or anywhere else for that matter. What Gates, Case and McNealy want is control of that mechanism, in the same way Gates and Microsoft control about 90% of the world's P.C.'s with their Windows-based operating systems. Now, why do you think Microsoft bought 5% of AT&T and set up that box top operating system contract? Because the P.C. as we know it today will not be here tomorrow and Gates et. al. wants 90% of that new medium market as well. Gates is preparing for the day his company cannibalizes, to destroy itself, before others destroy it. In fact, one can argue that Microsoft's success has been in part driven by its ability to adapt, but that's for a different article. Why do you think Steve Case and all the Internet analysts count how many subscribers AOL accumulates each quarter? Why does it matter that Case et. al. has 17 million subscribers today and wants to double that in five years? Why did Microsoft and AOL at different times in their respective existences give their software away for free and promote the daylights out of it? Remember all those AOL CD's in the mail a few years ago? Remember how Microsoft severely damaged Netscape by giving Internet Explorer away? Notice how Microsoft is in a huge battle with the Justice Department over embedding its browser in its newer operating systems and arguing the two must coexist? Why? Because it's about getting in the home, as many homes as possible. AT&T gets information to the home. These guys want to control it once it's there. They want to own that medium in your home, and they are vying to get their foot in your door with their current respective mediums, knowing that customers are in general devoted to their products. Gates has 90% of world's P.C. users and Case has 17 million and counting. They want control of that yet invented mechanism.

Indeed, you will still talk to friends via a receiver, either like today's or perhaps little receiver bugs in or mounted on the walls of your home, so you can walk about and talk, just as people do today with cellular phones. Indeed, you will still watch T.V. with friends, in front of a monitor, and lounge with them. Indeed, you will still look at a monitor and crank away on a keyboard just as you do today when you surf the Web. But all the digitized information coming to your house, courtesy of Mr. Armstrong, will come via a single cable line. What Gates, Case, McNealy and others believe is that it will connect to a single, central unit, to which tools (phone receivers, T.V. monitors and computers) will all be connected. And the medium, or what we think of today as an operating system or a web page with links, will be your way of choosing which you use and when.

Indeed, Steve Case's ego may be approaching the absurd standard already set by Gates by saying AOL will be the next Microsoft. However, he is nevertheless accurate in stating that his company is in direct competition with Gate's company for entry into your home. Specifically for that medium of which he speaks. Listen to Gates and McNealy too. They want the same thing. They covet that medium. Things are evolving Fools. Think not of the tools you have today as they are today, but, examine carefully what those who bring you today's tools are doing, and project the future. Once you've done that, invest in your future and live Foolishly.