Strategic Management Society's 21st Annual International Conference

ANDREW S. GROVE KEYNOTE
Tuesday, October 23, 2001

To view foilset for this keynote click here.

Andy Grove spoke about the need for a new approach to Broadband deployment for the United States. Andy spoke at the Strategic Management Society's 21st Annual International conference in San Francisco on October 23rd. The event was held at the St. Francis Hotel. Les Vadasz also spoke about Intel's strategies in venture investing through Intel Capital. Both Andy and Les were keynote speakers and featured prominently in the program. Andy received a life time achievement award from the Society for his career accomplishments as an industry leader, teacher and strategist.

DEREK: Good afternoon. It gives me great pleasure to introduce Andy Grove. Dr. Grove was one of the founders of Intel Corporation in July 1968. He became president in 1979, and chief executive officer in 1987. And in May 1997, he was named chairman of the board.

Dr. Grove is in some ways the ideal speaker for this conference as his contributions span both business and academia.

For six years he taught a graduate course at the University of California at Berkeley on semiconductor physics. He is currently a lecturer at the Stanford graduate school of business, teaching a course entitled "Strategy and Action in the Information Processing Industry."

Dr. Grove has written over 40 technical papers and holds several patents on semiconductor devices and technology. And he is the author of five books, including "One on One with Andy Grove," "Only the Paranoid Survive," and his most recent, a personal memoir, entitled "Swimming Across."

He has received too many awards to list, but to give you a flavor, let me mention four that he received in just one year, 1997: the IEEE Computer Entrepreneur Award, the CEO of the Year Award from CEO Magazine, the Technology Leader of the Year Award from Industry Week, and as you all know, Time Magazine named him Man of the Year.

Please join me in welcoming Dr. Andy Grove.

(Applause.)

ANDREW GROVE: Thank you, Derek. Listening to your introduction makes me think that old adage that "when your investment portfolio is on the cover of Time Magazine, you should sell", that may have some measure of truth in it.

(Laughter.)

ANDREW GROVE: I want to talk to you about a strategic issue today, and it's sort of a bit of a strategic analysis, but it's a strategy issue not at the organizational level, not at a firm level, but at a national level. It's a strategic issue that involves, has an impact on the U.S. economy, U.S. security, and the growth potential of the U.S. economy.

To set the background for this, I don't think I need to remind you that we are in the middle of a very sluggish economic period of time, but I just want to bring it a little closer to my subject and indicate to you what that really means.

Semiconductor production, semiconductor sales into the computing segment of the equipment industry, has declined substantially. It is, easily down 24 percent. I think by the end of the year, that may turn out to be not aggressive enough of a drop.

When you look at the communication sector and the consumption of semiconductors into this sector, which is a proxy of the deployment rate of equipment of communications, telecommunications, and data communications equipment, that drop is even higher. When you look at the U.S. segment of it, it's even higher than that.

Interestingly, even while the deployment rates as measured by semiconductor consumption are dropping, innovation rates continue on. Almost every week there's a new communication technology-related technology being described. The problem is not the innovation fervor, even though most companies in this business have been severely cutting back R & D, but the problem has to do with deployment. And I showed you a measure of deployment using semiconductor consumption as one proxy for that. Let me show you another one, which is deployment in terms of capital expenditures by the various constituents of the industry. And you see that these are quarterly numbers, and the highest bar, fourth quarter 2000, peaked, and it has come down very severely since then.

But what it also shows is the makeup of this capital expenditure between incumbent local exchange carriers, or ILECs, and competitive local exchange carriers, or CLECs. These are the companies that were funded and founded to compete with the incumbents, to provide access services to consumers and businesses alike. These are the companies who were funded and founded as a result of the hope ushered in by the Telecommunications Act of 1996. They were supposed to invigorate this industry by providing competitive alternatives and by spurring the incumbents into faster deployment of technology.

What has happened as we hit the tougher economic climates is that these companies ran out of money. A lot of them went out of business. All of rest of them have cut back deployment rates, as you can see in the orange portion of this chart, to almost nothing, from a $9 billion quarterly rate to a $2 billion quarterly rate in the second quarter of 2001 with the trends heading downward.

So not only do we have an industry wide slowdown; we have a development in the structure of the industry that's indicative of the deployment of new technology. Meanwhile, the market opportunity for the products and services that are brought about by the deployment of broadband technology is -- I don't want to say limitless, but it's huge. There are various analyses abounding to address this issue, but suffice it to say that the market benefits by most of them are measured in the several hundred billion dollars per year rate. These are the consequential benefits attributable to the deployment of broadband that is not happening, and, therefore, the market is deprived of these benefits.

So, in a way, when we can recently listen to Alan Greenspan hold forth about talking about a step down in the productivity growth that has been brought about by technology in the last decade and has fueled the U.S. economy and, actually, the worldwide economy for the last decade, the deployment of this technology would provide a very significant up tick in that curve and a recovery in that curve.

So much for the market. Let's talk a little bit about the environment.

As is well known to everybody in this room, the environment changed dramatically on September 11th.

It is interesting to go back and take a look at the New York Times front page of September 11th and look at the issues that were qualified -- were judged deemed to be significant enough on the front page of the New York Times that day. They range from the tax cut and deals having to do with the tax cut, stem cell research, protecting sharks from predators, the California energy crisis, that Mrs. Dole is about to confirm her race for the senate, and commentaries about the assassination of the Afghan leader that was killed in the week before that.

The agenda of the nation has changed dramatically since that period of time from the items that I listed on that New York Times list, some of which I included on the left side of this chart, to war on terrorism, homeland defense, airline security, and the economy.

These changes are very profound. Probably as profound as onset of war has had on the history, and they eminently qualify what I like to describe as a 10x change or an inflection point affecting not just our economy but our culture.

But I want to talk about a much narrower aspect of this change and the affect this change has had on the need for telecommunication services; particularly, broadband telecommunications services.

September 11th demonstrated that computations, computing, and communications, are essential. And of the various infrastructure that have been challenged by the attacks on Washington and New York, technology has survived the attack; particularly, newer branches of wireless and Internet-related technologies, predominantly. Let me give you a few observations on this.

Within the first two hours after the attack on the World Trade Center, 1.2 billion instant messages were exchanged at AOL. To put that in context, an ordinary day typically sees 650 million or one-half of that number.

The volume on Yahoo! News went up forty fold. Yahoo!'s Internet-based PC phone services went up by 59 percent. At CNN.com there were 9 million page views in that first two hours, which compares with 11 million page views per day at a normal rate. And on and on and on. And notably, I want to call attention to the Blackberry, which is a wireless data communication device and service, volume was up by 57 percent in that period of time. And that really doesn't tell the full story, because Blackberry turned out to be one of the most reliable services, telecommunication services, in the downtown, in the Wall Street area after the attack.

All of these have demonstrated that telecommunications and computing, in a combined fashion, represent an essential infrastructure in keeping our society and the economy connected. And all of that underlines the requirements for a ubiquitous broadband access to this network.

The vital industries in the past have included the railroad structures, the highway infrastructure, and the airline industry. In an era in which this version of activities has become more necessary than ever, where communications, exchange of information has become as important, if not more important, than exchange of goods, video communications takes its place as an essential infrastructure for the country.

We've got a major problem having to do with this industry, having to do with the deployment of modern technologies in this industry. And I am going to contrast the behavior of the technology deployment in the communications industry with that in the computing industry.

The contrast looks like this. The laws of the computing industry economics indicate that cost follows price. All you have to do is pick up the Sunday newspaper, take a look at personal computer prices, and watch the mergers and acquisitions and scaling and technology activities in this industry, which respond to the incredible prices that are necessary to move the products. We see how this works in front of our eyes every day.

In the communication industry, price follows cost. Cost-based pricing has been the tradition. That tradition is alive and well and permeates the thinking of the decision-makers in the industry.

There are more differences than that. One difference is the value chain, the structure of the industry. In the personal computing industry, the fundamental technologies of software and semiconductors are delivered to the end users by a plethora of original equipment manufacturers, ranging from companies like Dell, Compaq, HP, IBM and the like, but less obviously there are of the order of 50,000 independent companies that do the same service and delivery, customizing products and bonding them to services for small businesses.

The end user is at the tail end of this very simple structure, and the end user's desire for new product, new technology, new services is the determinant of the rate with which technology flows from the left to the right.

So the characteristics of this structure are competitive technology development coming from the large number of competing OEMs, common standards coming from a common use of software and semiconductor standard products throughout the industry, incentives by the manufacturer to push technology, but most importantly, consumers pulling technology through that structure, aligning and resulting in rapid innovation and deployment in this industry.

By contrast, the communications industry value chain is very much more complex. I'm not going to walk you through all of that, but they include in that telecommunication block the ILECs that we talked about, the CLECs that we talked about, the Internet exchange carriers, the Internet service providers, cable companies, and from the side, a very important force coming from government regulations and legal and political considerations impact it.

The ability of end users to pull technology through this structure is virtually non-existent. There is an exception in the communications industry where the computing economic dynamic has been followed for decades, and although it is not germane to the broadband access that we are talking about, at least not at the moment, it is instructive to look at it because it shows what is possible technologically when the industry structure is friendly to technology and deployment.

And that is the story of the Ethernet standard and Ethernet standard-based products, which are the communication scheme with which computers communicate with each other when they are connected to a local-area network, and increasingly, it is the basis of communications for a billion computers and wide-area networks that is at an earlier stage.

In the 20-year period of time that Ethernet technology has been around, the power -- the capacity of the standard Internet capability went from 10 million bits per second, 10 megabits per second, to 1 gigabit per second, corresponding to a two order of magnitude improvement in capacity in the 20-year period of time.

Ethernet has become a worldwide standard technology, worldwide standard protocol. And because it drew the investments and development efforts and deployment efforts of the multiple suppliers in the value chain, just the same ones, in fact, that supply the computing industry, Ethernet shot by a variety of proprietary technologies that are listed there and rendered them either nix technologies or obsolete technologies because they couldn't keep up with the progress of the Ethernet machine.

To illustrate what this means to a user in terms of cost, on this chart, which I'm going to call your attention to, the semi-log chart, the left axis as well as the right axis, are logarithmic. This shows the cost on the left chart of the delivery of a megabit by Ethernet technology, and you can see the two orders of magnitude going into the third decade, third order of magnitude, development.

And for comparison, the blue line is the corresponding progress, or lack of progress, of a DSL connection, a consumer connection in terms of cost per month. I think the chart speaks fairly eloquently to the different cost dynamics of the two industries.

When you look at the value chains and the characteristics of the value chains in the communications industry and the computing industry, you notice dramatic differences. Although competitive technology development takes place in the communications industry, also, as you remember, one of my first charts indicated the rate of innovation by a bunch of newspaper clips. Development is fervent, and it is not the problem when you go down and look at the fourth bullet head. Whereas consumers are able to pull technology through in the computing industry, the deliverers of technology are blocks or, at the minimum, restraints on the rate of technology deployment in the communications half of the chart.

Now, I have to be fair and I have to indicate that there are slow but definite improvements in the behavior and the technology deployment, friendliness of the communications industry. This industry is adhering more and more to industry wide standards. It is beginning to use global sources for its manufacturing of products, which in turn is only made possible and it necessitates the use of industry wide standards. Incentives from the legacy of cost?-ased pricing are shifting increasingly toward profit and cash-flow-based methods of operation, which in turn puts more emphasis on cost, which in turn puts more emphasis on the use of standard products and the deployment of newer technologies.

But to illustrate to you how far we have to go, let me show you a postcard that someone I know received recently in response to a DSL order that she placed with her local carrier. I don't know if you can read this in the back. It says, "Dear Customer, it is our understanding that you can only have DSL if you dig a trench so new cable can be laid." In other words, dig your trench; we'll take care of the rest.

(Laughter.)

ANDREW GROVE: Interestingly enough, what you're missing on this postcard is the name of the sender. I guess it is understandable that the sender did not want to put its brand name on this postcard, but I personally verified by calling that number.

(Laughter.)

ANDREW GROVE: The deployment challenges that this infrastructure faces are humongous. There are 100 million households in the United States, and something difficult to count, but 20 to 30 million small businesses.

Estimates of what it would cost with today's technology to deploy any, or any combination, of first mile broadband access range from $100 to $400 billion, and I think the peak of the curve, the distribution of the numbers peaks around $200 billion, working out to be about $2,000 per household on average. I don't know if that's with or without change.

What you get for that money is typically, due to one limitation or another, 150 kilobits per second, thousand bits per second, of bandwidth. To put that in context, the current DSL rate, which is the 150K to 300K range, corresponds to something between VHS quality video and -- actually, that's a high end of the range, the 300 to 380 range corresponds to a VHS quality video, and maybe a little bit better than that.

There are various advanced forms of DSL that are being promised to come sometime in the indefinite future. They come closer to DVD quality. In the meanwhile, broadcast technology is capable of developing, delivering HDTV quality, which is an order of magnitude higher than bandwidth -- brings an order of magnitude higher bandwidth requirement.

So this is the problem statement. And when you examine the strategic options that we, as a society, face in accelerating the deployment of this technology whose importance has been here before September 11th, but has been demonstrated in spades during that period of time, the options basically fit into three categories.

The first category is to bank on the incumbent local access carriers, or their equivalents in the cable industry, and reduce the (inaudible), uncertainty, and reduce the limitations in the cap that pretty well exist today on what kind of return they can get on their investment. Theory being if you remove those barriers, the attractiveness of high returns on the investment will spur these companies into action to a much higher level than their somewhat limited returns allow them to do today.

Second alternative is to say this is essential infrastructure, like the railroad, like the highway system. In the past the government has taken an active role as an investor and organizer of the deployment of essential infrastructure. Let the government come into this and participate in deploying and financing the deployment of this infrastructure.

The third one is to search for disruptive technologies, invest in the development and early deployment prototyping of the disruptive technologies with disruptive technologies of a particular type, particular kind. The criterion being that those disruptive technologies would provide a shunt, a bypass around the current structure of the industry, which has proven itself incapable or unwilling to adopt to the needs of mass deployment of broadband technologies.

What basically this amounts to is an idea or a proposal to fund a technology horse race; the goal being to respond to the 10x problem with a 10x change in technology effectiveness, cost effectiveness. Instead of $200 billion to deploy to every household in the United States, let's firmly and insistently look for technology that is capable of reducing that cost by an order of magnitude to $20 billion; $200 instead of $2,000 per household.

In terms of capacity, let's borrow the starting point of the Ethernet technology 20 years ago, which was 10 megabits per second, and let's drive a stake in the ground that that's the minimal acceptable broadband level, bandwidth level, that a technology that we fund should match.

And let the U.S. government not fund the deployment of old technologies by the old infrastructure, but let the U.S. government fund the development of technologies that are deployable around the old structure with exquisite focus on what is -- the vernacular says the last mile, but I think we need to call it the first mile, because it's the first order of business before a consumer sees the wonders of the well-established backbone of the Internet. Aim it totally on the first-mile deployment for small businesses and consumers.

Rewards for the winners in a government-funded race like this would be an IP license that would allow them, or maybe require the developer to broadly license the technology, and through that broad licensing means develop an industry structure that has a lot of competing players, similar to the structure that prevails among original equipment manufacturers in the computing industry who compete with each other and allow cost to follow price and allow price to be set by the pull of the consumer who has been so eager to pull technology through the computing industry and is restrained from doing that in the current structure of the telecommunications industry.

I asked some of our technical people at Intel who are probably not the most capable group of people in terms of telecommunications technologies -- that's not our prime business -- to come up with a list of candidates, and in a few days a group of them came up with a list that is this long. A couple of these on the list do not meet my criterion because they use the existing copper infrastructure, and therefore they get shunted back -- They have to be deployed by the existing ILEC infrastructure. But all the rest of them do.

Let me single just three of these technologies and give you a brief description to illustrate that at least a couple of them are way beyond science fiction state.

Free Space Optics operates using pulse laser light between fixed locations, and using the pulse laser light, generate a carrier with incredibly high bandwidth for the signals that are necessary for high bandwidth data communications.

There are several companies that are in the process of deploying these. The technology itself is 30 years old. And in the aftermath of the World Trade Center tragedy, the deployment of this technology allowed Merrill Lynch to communicate between Manhattan and New Jersey when the terrestrial communications were all destroyed. Fiber lines were knocked out. High-pulsed laser technology took their place.

Another technology that has gotten a big boost from the terrorism attacks is portable broadcasting. All of a sudden news from far-flung places that even under the best of circumstances would be poorly equipped telecommunications, but under their operating regimes would be deprived of the telecommunications services that exist, had to require the deployment of new technology that does not depend on the existing infrastructure or the existing controls on the infrastructure.

Satellite-based portable videophones came to the rescue. Using ISDN rate -- ISDN is a digital technology that is even older than DSL and very sparsely deployed by the ILECs -- has been very sparsely deployed by the ILECs starting the '70s. It corresponds to about 64 to 128 kilobits per second. Sufficient for poor quality, jerky video transmission through portable instruments not much bigger than portable computers and satellite communications.

The cost of these is something in the vicinity of $8,000. The volume that one company that manufactures this operates on, they were very excited that their backlog reached 100 units. 100 units. And if 100 units, this private company can deliver this system for $8,000 to the customer, just imagine what this technology would be capable of doing if the volume production would be corresponding to those of personal computers; not 100 units but 100 million units a year. What would happen to that $8,000? And it can be deployed almost instantly on the most hostile environments.

An ironic choice which has been around for a while -- I'll tell you why it's ironic in a moment -- is fixed wireless broadband. It requires line-of-sight communication to deploy between fixed infrastructure. The first-mile connections. Licensed spectrum will become available as UHF licenses expire. Plentiful licenses are available. AT&T, at one point -- here is where the irony comes in -- based its last-mile approach on this area. It so happened just today, they pulled the plug on their effort on it and indicated a sizable write-off having to do with technology efforts.

I don't know the full story behind them, but the technology works. The technology clearly ran into deployment difficulties.

And last, and this is -- sounds like it's in the domain of science fiction but it really isn't, space platform communications. Unmanned high-flying planes acting in the place of low-flying satellites, positioned to circle over metropolitan area, high-density populations, serving as a satellite point for line-of-sight communications from a metropolitan area that can be seen from that platform.

Most likely, no single technology among the ones that I indicated or among the ones that I did not indicate would be able to service rural, suburban and high-density population, metropolitan areas, at the same time. But by using common technology protocol, these different approaches can be made to interoperate flawlessly, just like mainframes, minicomputers, personal computers, even Macintoshes can communicate with each other on the Internet.

That's what standard protocols can do. Standard protocols could apply to seamlessly tie together these different technologies, deployed by an entrepreneurial stratum, under license by this government development technology program, to areas where they are the most commercially attractive.

So summing up, digital communications, obvious to all of us, is essential infrastructure. Its utility is limited by the first-mile bottleneck. The events of September 11th bring forth the need to accelerate the deployment of telecommunications and the removal of bottlenecks. Viable technological alternatives exist; at least, technically viable technological alternatives exist. And it is a perfect place for disruptive technologies to do their magical things because most of the technologies -- all of the technologies I talked about today and most of the technologies people have been working on, involve going around the existing infrastructure.

I don't think we have a whole lot of choice. It's either embracing one of the three options, the one I favored or the other two that I mentioned earlier, or else we're going to be stuck in a situation that's captured in this New Yorker cartoon.

(Laughter.)

ANDREW GROVE: I guess you can read it. Thank you very much.

(Applause.)

DEREK: Before you all leave, I'd like to ask Andy if he could remain with us for just a couple of minutes, and I'd like to invite Dan Shendell, executive director of the SMS up to the stage.

DAN: Thank you very much, Derek. I have the privilege and the honor this afternoon to represent the members of the Strategic Management Society as well as its board of directors in presenting what is for us, a new award for sustained achievement and contribution to the field of strategic management, which is, of course, our interest and what we are dedicated to as a professional society to advance.

The board has wanted for some time, to inaugurate such an award for sustained achievement, and today that award that I'm privileged to present is going to a scholar, it's going to an author, it's going to a teacher, it's going to a leader, it's going to an outstanding manager, and I might say a very accomplished strategist. And you can understand why after listening to the remarks we have just heard.

Could there be a better starting point than we have here to make this award to Andy Grove. And it's for these reasons, and others, that we think we have a wonderful starting point in making this award for something we're going to label a Lifetime Achievement Award, which I will make to Andy Grove.

And I have a token of that in the form of a plaque, and I'd like to read from it before I give it to Dr. Grove, if I may.

It says, "The Strategic Management Society presents its Lifetime Achievement Award to Andrew S. Grove in recognition of his outstanding leadership in the practice of strategic management at the Intel Corporation; for his record of innovative strategic decision-making that repeatedly demonstrated his insights into successfully guiding organizational change that produced superior results; for his important work essential to the development of the computing and communications industries, which he has so graphically told us today is so important; and for his outstanding contribution to the welfare of society that has resulted from his work.

"Andrew S. Grove provides inspiration for all who study and all who practice strategic management."

So Dr. Grove, it's my pleasure.

(Applause.)

ANDREW GROVE: Thank you very much.

(Applause.)

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