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In the history of corporate leadership, the Class of '01 was tested more than any previous group of chief executives in high technology.
Nearly all companies in the industry suffered devastating stock losses of a magnitude not seen since the Great Depression, forcing many into bankruptcy. Those that did survive faced still more chaos when the tragic events of Sept. 11 paralyzed the global economy.
As the first signs of recovery have slowly appeared, CNET News.com has examined the performance and strategies of CEOs at the helm of some key companies in all parts of the industry. What have emerged are the rough outlines for a post-apocalyptic map of the Internet, its technologies and the businesses behind them--often drawn from surprisingly candid assessments.
In this special series, News.com takes a comprehensive look at one of these industry bellwethers over the next few weeks.
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By Stephen Shankland
PALO ALTO, Calif.--It has been a tough year for Sun Microsystems. The recession has sharply reduced corporate demand for the company's high-priced servers, and many of its customers have gone out of business altogether.
But if CEO Scott McNealy is troubled, he's not letting on. In a recent interview with CNET News.com, the 47-year-old co-founder exuded his trademark cockiness. "We're not in a hole. A lot of companies would love to be in our hole," he said.
Perhaps more than any other chief executive in the industry, McNealy has garnered inordinate free publicity for his company with his contrary opinions, cheeky personality and public jabs at rivals. Both fans and foes of McNealy--and there are many of each--acknowledge that his unrelenting public-relations campaign has raised Sun's stature and often framed industry debate in his company's favor.
"We talk of Sun disproportionately to Sun's revenues," said Illuminata analyst Jonathan Eunice, admiring management's knack for capturing customer concerns. "They're the Jedi masters of this art."
Rhetoric, however, can go only so far. In today's unforgiving economy, McNealy's go-it-alone approach is being tested more fiercely than at any point in Sun's nearly 20 years of existence. The result will determine whether he is an independent-minded leader who can successfully buck powerful trends or a high-tech Don Quixote whose direction will only isolate his company from the rest of the industry.
The hypercompetitive McNealy, an amateur hockey player once ranked as the top golfer among CEOs, relishes his role as the unofficial conscience of Silicon Valley. Despite his Midwest upbringing and Ivy League background, the Harvard graduate is firmly rooted in the region: Sun was originally an acronym for Stanford University Network, a tribute to the California institution where he received his M.B.A.
Yet he has retained the survival instincts instilled in him growing up near Detroit at the side of his father, who was vice chairman of the now-defunct American Motors Corp. during the most tumultuous period in the U.S. auto industry's history. Now, McNealy must steer his own company away from a fate similar to AMC's.
At its peak just over a year ago, Sun saw quarterly revenue grow 60 percent to US$5 billion. Since then, the company has imposed major layoffs and mandatory vacations, reporting its first unprofitable quarter in 12 years.
Moreover, no easy fixes appear in the offing. Meridien Research forecasts that financial services companies, a top Sun market, will reduce technology spending from US$36 billion in 2001 to US$33.8 billion in 2002. Salomon Smith Barney expects Sun to return to profitability in the second quarter of the new year.
As if all that weren't enough, Sun faces growing competition from major players. Its lead in the US$29 billion Unix server market is eroding, with IBM awakened and Hewlett-Packard within a hairsbreadth of catching up.
Changing direction
Sun is slowly transforming itself, putting more emphasis on software, services and storage--a change that could diversify the company's revenue to better withstand hard times. But some question whether these moves are too little, too late.
"Sun risks isolating itself more and more," said Sanford Bernstein analyst Toni Sacconaghi, warning of the consequences of the company's all-for-Sun-and-Sun-for-all philosophy.
Many large businesses are resisting Sun's predilection for Sun-only simplicity. They must integrate new servers with existing computer networks tied to PCs, IBM mainframes, and servers using Microsoft operating systems with Intel processors--machines reviled by Sun.
Rival Michael Dell, head of Dell Computer, likens Sun's predicament to Apple Computer's situation in the 1980s. That's when the Mac maker began to lose business to mainstream PC manufacturers because much of its technology was incompatible with other hardware and software.
"They're an island unto themselves in terms of processor and software," Dell said, calling Sun "the Apple of the server market."
Dell is encroaching on the low end of Sun's server business, but the more serious threat comes from Big Blue.
Consider the example of eHealthInsurance, which sells health insurance from more than 70 insurers over the Internet. The company's Sun E4500 servers handle about 100 million database transactions per day with aplomb, according to Chief Technology Officer Sheldon Wang, who chose the product line because of its reliability. But as eHealthInsurance prepares to buy servers for a new project, Wang said he has decided to take another look at IBM because it has a more complete package of hardware, software and services.
"If they can have as good a reliability as what we have today, then they probably will get it," Wang said.
Sun vs. Wintel and beyond
Despite such obstacles, McNealy has refused to stray from his original course, generally refusing to buy other companies' technologies. Instead, Sun has chosen to develop its own processors, computers, operating systems and high-level software.
"You should own that intellectual property," said Greg Papadopoulos, Sun's chief technology officer.
Perhaps the best market illustration of Sun's insistence on independence is with Itanium, the high-end, 64-bit processor line HP pioneered and co-developed with Intel. The first Itanium computers hit the market in late 2001, years later than planned. Analysts nonetheless expect solid demand in time.
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One reason Sun opposes Itanium could be sour grapes. The company tried and failed to partner with Intel by bringing its Unix operating system, Solaris, to the new chip.
"We thought the poor Intel users might want a real operating system," McNealy said. Former Intel CEO Andy Grove "didn't trust us but was willing to give us the benefit of the doubt. As soon as Craig Barrett took over, (Intel) shot it down. They obviously got hammered down by Microsoft and told not to do it."
Intel, for its part, says Sun simply wasn't capable of cooperation. "Anytime you have a partnership, both sides have to have an interest," Barrett said. "Sun makes the majority of their revenue selling hardware. To have a relationship between Intel and Sun, you don't use Intel as an entry vehicle to sell Sun."
Sun's Wintel competitors boast that they collectively possess more research funding and thus offer a strong challenge to Sun. But so far, Microsoft has been largely relegated to the low end of the server market, and US$100,000 Intel servers are rare. In the third quarter of 2001, only US$12.7 million worth of Itanium servers were sold, compared with US$4.6 billion in Unix server sales, according to IDC.
McNealy said his computer plan is the "big frigging Webtone switch"--a collection of servers, networking hardware, storage systems and software, all tuned and tied together to deliver computing services that would be as dependable as a telephone dial tone. In theory, other companies' products could work on this network, but Sun hopes its modules will work best.
Curiously, Sun has enjoyed one of its biggest successes with Java, a software programming language whose open philosophy defies Sun's go-it-alone approach. With Java, programmers theoretically don't have to worry about whether they're writing for a Windows PC or an Apple Macintosh, on a Nokia or a Motorola cell phone, or on an IBM mainframe or a Sun Unix server. Java failed to weaken Microsoft's grip on desktop operating systems but is widely used on corporate servers.
Java helped Sun garner industry respect and important allies--even as the technology diminished the role of Solaris. Nevertheless, it remains unclear how the popularity of Java, which developers use for free, will translate into major revenue for Sun.
Sun extols the virtues of running software on powerful central computers instead of on less reliable and unmanageable PCs. At the same time, it has pined for consumer recognition, as evidenced by its move into the television set-top box market.
After several fits and starts, Sun may finally have found a way to bring its technology to the average person: Let someone else do it. While Microsoft's "Stinger" cell phone initiative lags far behind, the top six cell phone makers are building Java into their handsets so they can use Internet-aware programs. No. 1 Nokia expects at least 50 million Java phones to ship in 2002.
"We let Motorola, Nokia and Sony carry that water," McNealy said. "We support them. We're in the background."
Collaborating and taking a backseat role may seem awkward for McNealy, but he realizes that teamwork, as well as craftiness, will be needed to weather the current economic and industry challenges. Still, the CEO said he's more motivated than ever to preserve Sun's independence.
"We're not going to let the monopoly win," he said. "I can't leave my kids to a world dominated by Microsoft."
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By Mike Ricciuti
When he's excited--and he's easily excitable--Microsoft Chief Executive Steve Ballmer has a habit of saying things at least three times for emphasis.
"Windows, Windows, Windows" was the call to battle of the mid-1980s to popularize the company's now-ubiquitous operating system. Now, Ballmer has a new rallying cry as Microsoft seeks to establish its .Net Web services technology: In a widely seen video leaked to the Web, a sweat-soaked Ballmer stalks the podium at a Microsoft conference and, with evangelical fervor, chants "developers" no fewer than 14 times.
"I give speeches and I get excited about them," he said recently, in a rare moment of understatement.
Such rabid enthusiasm is classic Ballmer, whose name in industry circles is almost synonymous with over-the-top performances that seem even more outrageous when contrasted with the usually bland presentations by most companies in the business. But to see Ballmer merely as an overzealous cheerleader is to miss his equally prodigious business savvy and market sense, former employees and longtime observers say.
For years, Ballmer's public identity has been linked inextricably to his best friend and alter ego, the analytical and technocratic Bill Gates--so much so that one former employee quipped, "Together, they're the best chief executive in the business." Today, as Ballmer settles in for his third year running the world's largest software maker, the qualities that separate him from Gates are becoming clearer, and perhaps more valuable, than ever.
In many ways, Ballmer's combination of intellect, passion and a keen understanding of public relations may make him a better CEO for the 21st century version of Microsoft than Gates, who has been the company's public persona for two decades. Ballmer will need those skills as he faces a trio of new challenges that will define Microsoft for years to come: how to live with government oversight; how to repair the company's reputation as an industry bully to forge new alliances; and how to motivate more than 45,000 employees, including many stock-option millionaires, to tackle new challenges.
"Steve is contagious, exuberant. When you walk out of a meeting with Steve, you have to almost be a corpse to not be fired up," said Naseem Tuffaha, a "product evangelist" with Microsoft for six years and now CEO of Web services company Fidesic. He is quick to point out that it was Ballmer--not Gates--who recognized the market potential of Web services and was the first to discuss publicly the concept later to be named .Net.
"Steve was talking about it back then," Tuffaha said. "He got it, latched onto it, and attacked it with a characteristic vigor."
To many familiar with Microsoft, the .Net example speaks to another major difference between Ballmer and his famed predecessor: Gates may be able to spot an error in a line of code, but Ballmer can tell you whether the software will sell.
Ballmer's "intellectual horsepower is...really impressive in different ways" from Gates', said Rob Horwitz, who was recruited by Ballmer out of the Massachusetts Institute of Technology to work on an early version of Windows. "Give him an example of a business--not even a business he has experience in or knows anything about--and he can do a back-of-the-envelope calculation to figure out what the margins are and where they make money and where they lose money, and he'll be no more than 5 percent off."
Long arm of the law
This market acumen is a powerful tool that Ballmer uses to keep senior managers sharp, especially as he tries to keep the rank and file focused on the tasks at hand and to move beyond the distractions of government antitrust actions that have threatened to split Microsoft in two. By some accounts, the Justice Department's case has taken a significant toll on the company and its management and will continue to do so.
Ballmer acknowledges that the case has affected morale within Microsoft. "The number of people affected by the lawsuit in the senior ranks or the junior ranks, from a deep morale perspective, I don't think was high. But nobody wants to be sued by their government," he said in a recent interview with CNET News.com.
Now the challenge will be maintaining Microsoft's legendary hard-charging edge while staying on the right side of the law under a proposed settlement.
If the agreement stands, one huge change at Microsoft will be the establishment of an independent, three-person technology-oversight committee installed at Microsoft's Redmond, Wash., headquarters. That committee will have access to the Windows source code--the closely guarded genetic makeup of the company's prized operating system. Presumably, the oversight team will have permission to grill any Microsoft employee, examine code, and read any internal product-planning documents.
"The agreement is a clear set of restrictions and regulations on how we work, which we did not have before we signed the settlement," Ballmer said. "So I can't say that frees us up; it does not free us up. It restricts us, very clearly."
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Other changes are already taking place within the company. In November, Ballmer sent a memo to Microsoft employees outlining measures they must take to avoid potential antitrust conflicts. For example, Microsoft's business development groups and the company's legal team are supposed to have frequent consultations.
Ballmer seems resigned to the new governance and is clearly agitated by assertions by competitors that Microsoft was let off the hook. Some, like streaming media company RealNetworks, called the proposed settlement a "reward, not a remedy."
Some of Ballmer's harshest remarks are directed at Sun Microsystems, often identified by Microsoft executives as the company's fiercest rival. When the settlement was announced, Sun issued a statement saying it merely "reinforces the status quo and will do nothing to restore competition and innovation in the marketplace."
Ballmer countered only half-jokingly that "you are never going to make Sun happy. If we got broken up, Sun would say, well, they weren't broken up hard enough."
Mending fences?
Despite such talk, Ballmer knows that Microsoft needs to partner with many of those same competitors for .Net and other business software plans to succeed. "We understand based upon the fact that our industry didn't rally to support us that we need to change the way we interact and relate to our industry," Ballmer said at the company's annual meeting in November.
While many speculate that this mea culpa was driven by the unexpectedly harsh criticism of Microsoft during the three-year antitrust case, others believe that Ballmer is laying the groundwork to drive the company's corporate software sales, where partnerships with other companies are key. Analysts see the challenge as equal to or even greater than Microsoft's scramble to recover from its slow start to join the Internet revolution in the mid-1990s.
"Partners are a really big part of that and mean a lot in enterprise sales," said Horwitz, who co-founded Directions on Microsoft, a research and consulting firm based in Kirkland, Wash. "That's because companies buying enterprise software systems to run business functions aren't just deciding on a single product, but on a group of products which must function in unison."
For example, Compaq Computer executives say their relationship with Microsoft has already become stronger with Ballmer at the helm because he gets along well with Michael Capellas, the computer maker's CEO. The cooperation has helped the launch of key Microsoft products, such as Windows CE and Windows XP.
"He's a good operational guy, and I think execution has improved under Steve," said Michael Winkler, executive vice president of Global Business Units at Compaq, which is Microsoft's largest Windows customer among PC makers.
Microsoft's .Net My Services plan will also rely on partners to offer the initiative's Web services through their sites. Making Microsoft's .Net Web services and software programming architecture dominant is one of Ballmer's top priorities: "There's no Plan B," he said.
Industry veterans say Ballmer is exactly the right man to drive such partnerships and to keep them healthy--unlike some earlier executives who served as Gates' right hand, such as Mike Maples, an executive vice president who left in 1995, and Jon Shirley, former chief operating officer and now a board member.
"There has been a maturing process at Microsoft over the years," said Will Zachmann, an industry analyst with Meta Group who has followed the company for nearly 20 years. "Maples and Shirley were outsiders and didn't know the Microsoft culture or were as close to Bill as Steve."
Technology never sleeps
Ballmer's mettle will be tested once more as Microsoft expands its reach beyond its PC operating system stronghold. In just the last few months, the company has introduced three major products--XP, the Xbox gaming console and MSN 7.0--as well as its key .Net initiative. Microsoft is also gearing up to retool its SQL Server database and to begin a new corporate software project based on its acquisition of Great Plains Software--a developer of applications for small to midsized businesses--which closed in early 2001.
The company is slowly shifting away from the shrink-wrapped software business and into the services realm--a move that analysts say represents a major evolution for the company and for the high-tech industry in general. But many have questioned whether Microsoft's promised .Net services are overly ambitious, as the company has already been criticized for outages and security lapses.
As if all of those challenges weren't enough, Ballmer also must corral Microsoft's geometrically expanding organization. As Microsoft grows, Horwitz noted, "it gets harder to reach as deep, and there's going to be a limit to anyone's capability at some point."
That's where Ballmer's larger-than-life personality may become most visible. "Since Steve has become president and CEO, employment at Microsoft has doubled. It's already a different company than when Bill was CEO," Tuffaha said.
"So who is going to be the guy to keep this together? Microsoft needs the right strategy, but that alone is not sufficient," he added. "They need someone to explain that strategy to 50,000 people. That's where Steve comes in. Bill appeals more to the mind. Steve appeals to the heart."
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By Ian Fried
PALO ALTO, Calif.--There is no turning back for Carly Fiorina, and she's in no mood to talk about "what-ifs."
The chief executive of Hewlett-Packard is risking all on the proposed purchase of Compaq Computer. Asked whether there's a Plan B, Fiorina looks an interviewer hard in the eye.
"No," she says, refusing to speculate on what might happen if the quest fails, "because we won't."
That determination, which has marked Fiorina's rapid ascent to the top of the corporate ladder, is being put to the test. It is clear that the outcome of the Compaq battle will determine how history will judge her--as one of the technology industry's shrewdest chieftains or one of its biggest flops.
However the story turns out, Fiorina has already fulfilled one of her objectives since being lured away from Lucent Technologies to join HP: She is shaking up the status quo.
Upon succeeding Lew Platt as CEO in 1999, Fiorina presided over the roughly $13 billion Agilent Technologies spinoff, which had been initiated by her predecessor. She next tried to acquire the consulting business of PricewaterhouseCoopers, an $18 billion proposal that would have substantially strengthened HP's services arm in an important and highly profitable market.
The PricewaterhouseCoopers negotiations eventually failed, but it was clear that the only thing the 47-year-old executive was willing to leave untouched was the 1970s orange and brown carpet that lines the company's headquarters in the heart of Silicon Valley.
Then came the Compaq blockbuster. Fiorina argued that the addition of the rival PC maker would retool HP with a broader array of products and services. But the September announcement also triggered a firestorm of criticism that has forced Fiorina to play defense ever since.
Critics dismissed the proposed deal as an unwise gamble. They said the acquisition would do nothing to help HP compete against Dell Computer's unparalleled build-to-order, direct-sales business model. Nor would it enhance the company's attractiveness as an alternative to IBM in providing high-level consulting and outsourcing services. What's more, they warned, the merger of disparate operations and corporate cultures could become a long, complicated process.
On top of all that came a most unwelcome public-relations bombshell: The David and Lucile Packard Foundation, HP's biggest shareholder, and Walter Hewlett and David Woodley Packard, sons of the company's co-founders, opposed the deal. They said it would hurt the company's stock and destroy the 63-year-old corporate culture of openness and consensus known as the "HP Way."
Losing the support of the family, which controls an 18 percent voting block of shares, is not necessarily a deal breaker. But that opposition puts tremendous pressure on Fiorina, who must now get approval from almost two-thirds of the remaining HP stockholders to carry the day.
Getting what you wished for
Rather than remain a lame-duck CEO if she fails to pull off the deal, Fiorina will likely resign. And even if she succeeds, she will face more headaches in overseeing another huge restructuring as HP tries to build a one-stop tech shop of hardware and services.
"Can we screw it up? Sure, we can screw it up," she said candidly. "There are loads of lessons of people that screwed it up. But actually, not screwing it up isn't that tough. It requires sticking to your guns about where's the value and what (are) the goals."
As a student of history--she majored in medieval studies and philosophy at Stanford University--Fiorina reviewed Compaq's mishandled integration of Digital Equipment, an operational disaster that contributed to the ouster of former Compaq CEO Eckhard Pfeiffer. But for all its faults, Fiorina said, that acquisition was entirely necessary; otherwise, Compaq would not have acquired its position in high-end computing, storage and services.
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"So when people say the (Digital Equipment) acquisition was a failure, I think it's an oversimplification," she said. "The initial integration was clearly a failure, but what Compaq got out of that acquisition was a very strong services business, a very strong storage business. Those are good assets right now that are performing very well."
Fiorina has been pitching the deal to Wall Street since last fall, albeit with mixed results. Given that the Compaq acquisition was announced in the midst of a bear market, she argues that the negative reaction was not unexpected.
"This is a market that hates everything right now," she said. "So we knew they'd hate this. They hated it a bit more than we thought they would, but we knew they would hate it."
A convenient explanation, but it glosses over her uneven record managing the Street's expectations. Although Fiorina received early praise from analysts for efforts to reshape the company, she has also been criticized for being unrealistically enthusiastic about the company's earnings prospects--ambitious targets that encouraged Wall Street to raise its profit expectations. When the market softened last year, the company fell short of some of those goals, and many financial analysts lost confidence in her estimates.
Some point to a May 2000 meeting where Fiorina told analysts that quarterly revenue would grow 15 percent and Unix revenue 26 percent. The company ended up narrowly missing the overall revenue forecast and falling well short of the expected growth in the Unix business.
"There was doubt even at the time that those could be met," said J.P. Morgan Chase analyst Daniel Kunstler. Then, he said, the economy worsened, HP missed its numbers, and Fiorina began to lose support.
That credibility gap makes the task of capturing hearts and minds that much more difficult, especially when Fiorina is being portrayed by Hewlett and Packard descendants as out to destroy a corporate and family legacy. But she remains unapologetic about her desire to reverse what she views as stagnation and bureaucratic ossification.
"I was very candid when I came into HP that there were some really great things about this company and there were some things we'd gotten lax about," Fiorina said.
She dismissed suggestions that a CEO who pushes change--including widespread job cuts--is somehow destroying the HP Way, even if her direct style ruffles a few feathers.
"I've been very forthright with people. It is a choice. This is what we're trying to accomplish with the company; this is the environment we're trying to build," she said. "In many cases, it is a return to the environment that used to exist around here. Bill Hewlett and Dave Packard were famous for going to reviews, and if they didn't like something that was said or done in the review, the next day the person was gone."
The transition promises to be rough on employees, who will be asked to embrace a new corporate structure in which many will lose their jobs. Hard as that adjustment may be, HP nonetheless needs to change, according to John Jones, an analyst at Salomon Smith Barney.
"A lot of what (Fiorina) is doing, in my view, should have been done 10 years ago," Jones said. "When Lou Gerstner came to IBM in 1993, the analyst community and the media tore him apart. History has validated him, with the stock up 10 times where it was."
But Wall Street is an exacting taskmaster. And executives who fail to make good on promises don't get the benefit of the doubt later on. Fiorina has spent considerable time communicating how the acquisition will allow HP to eliminate overhead, merge product lines and get better deals from suppliers--to little avail.
She is frustrated at the way she believes her message has been twisted out of context. "We have some members of the analyst community who are not always particularly well-informed," she said, awaiting an opportunity to prove her critics wrong.
And they are waiting for the same chance to prove her wrong--and to bid her farewell.
News.com's Stephen Shankland contributed to this report.
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By Rachel Konrad
When eBay insiders recall the June 1999 computer crash that lasted 22 hours, they still cringe. The downtime cost about $4 million in lost fees and wiped out $5 billion in market value as investors dumped shares throughout the summer.
The "Big One," as the episode has been mythologized, immediately raised questions about Meg Whitman's future as CEO. Critics ranging from frustrated Wall Street analysts to Beanie Baby collectors called for her immediate ouster.
But the Silicon Valley newcomer was a quick study. She committed herself to learning the nitty-gritty of database corruption and hired a lauded technocrat as chief crisis controller. Whitman assigned former Gateway Chief Information Officer Maynard Webb the cubicle adjacent to her own and ordered him to contact her immediately whenever the site hiccupped.
"I woke her up at 3 a.m. more times than I'd like to imagine," said Webb, now eBay's president in charge of technology. "I knew her husband on a first-name basis from phone calls for an entire year before I ever met him."
The outage--one of the costliest software glitches ever for a U.S. company--proved a pivotal period in Whitman's career. With little in the way of a technology background, she realized she had to become fluent in the baffling language of servers and large-scale networks. At the same time, Whitman said, eBay more than any other company taught her the importance of making decisions fast.
The 45-year-old chief executive will rely heavily on these lessons as she attempts to steer eBay around even bigger obstacles in 2002--including the company's most significant technological upgrade--and to create a business strategy that will outlive her tenure.
"There's no substitute for being in the fray," Whitman said. "It's all about the quality and experience of the management team. It really is all about the people who you hire and their abilities, and their ability to make decisions in a rapidly changing environment."
It is also about the people who make up the millions of daily transactions that have made eBay the success it is today. And this is where Whitman faces one of her most difficult challenges: expanding the company into new businesses without alienating its legions of grassroots customers.
To her credit, Whitman has taken steps toward this goal that may seem unexpected for an executive with a distinctly Old Economy corporate background who is No. 2 on Fortune magazine's 2001 list of powerful business women, behind Hewlett-Packard CEO Carly Fiorina. For example, in a sign of humility unthinkable for the majority of Silicon Valley chief executives, Whitman types apologies to chat groups--a trait that has endeared her to many.
"We call her Meg. How many heads of companies of that size does anybody think to call the CEO by the first name?" asked Marsha Collier, a Los Angeles resident who began trading "Star Trek" figures on eBay in 1996 and recently wrote "Starting an eBay Business for Dummies." "She's not afraid to get out in front of problems."
Whitman's attention to the eBay "community," as it is known, is well placed. With its one-to-one sales model, eBay is perhaps the only major Internet company whose core business could not exist offline--and, as such, it cannot be managed like any other.
Even after her attempts to stay in touch with her buyers and sellers, many mom-and-pop franchises continue to complain that Whitman caters increasingly to large companies and high-end customers. Smaller businesses have always been suspicious of her corporate pedigree, especially because it differed so starkly from that of her predecessor, whose experience was based on programming and an outspoken advocacy for a democratic Web.
The company originally grew out of a black-and-white site called Auction Web that was created by Silicon Valley programmer Pierre Omidyar. According to Whitman, the business consisted primarily of an auction site that became eBay--a Web site created by Omidyar's fiancee, who collected Pez candy dispensers. Rivals such as Onsale, First Auction and Auction Universe seemed destined to eclipse tiny eBay.
Whitman was not an obvious choice to take over eBay or, for that matter, any other Internet company. She had been leading Pawtucket, R.I.-based Hasbro's preschool division, responsible for Mr. Potato Head and Playskool toys.
Previously, she had tried to transform FTD, the largest floral company in the world, from a member association to a private company. After slashing bloated overhead, trying to modernize the marketing campaign, and trimming the staff, she resigned within two years because key members opposed the idea.
When an executive recruiter called Whitman about eBay in early 1998, she refused. She was living in the Boston area and didn't want to yank her two sons from school or force her husband, neurosurgeon Griffith Harsh IV, into the job market. But after three weeks of phone conversations with the headhunter, she grudgingly flew to San Jose, Calif.--and changed her opinion.
"So many other concepts being born at the time were basically Internet versions of what you could do in a land-based environment," Whitman said. "This was a whole new concept--allowing people to trade with each other virtually on a 24-7 basis."
She joined eBay in May 1998 and vowed to spend several months on "basic blocking and tackling"--building a management team, switching financial systems, creating a marketing strategy, and streamlining e-mail systems. She also thought she'd be consumed with preparing Wall Street for eBay's initial public offering in September 1998.
Instead, on her first day on the job, eBay's site crashed for eight hours--a recurring theme that would plague Whitman and the company for more than a year, making site reliability her top priority. When eBay blamed Sun Microsystems software for corrupting a database, Whitman began sitting in on technical meetings between the two companies, and she personally called Sun CEO Scott McNealy to ask for more help.
Webb says eBay now averages unplanned downtime of 4 seconds per month--a respectable ratio considering that the site gets 260 million page views per day (from 65 million in 1998) and sends 1.3 gigabits of data per second (from 180 megabits per second in 1998).
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But Whitman can't rest on her laurels. The company will undergo one of its most significant technological upgrades in 2002, and Wall Street will scrutinize the CEO and "Meg's boys"--her 10 direct reports--to see if they can get a handle on technology this time around.
She will oversee the tricky installation of eBay's "V3" next-generation shopping technology, which will include real-time updates for eBay's data warehouse (now updated only once per day). Listings will also be updated minute by minute, up from once per hour. Also in the first half of 2002, eBay will launch new search and licensing technology.
At the same time, Whitman is busy crafting a long-term strategy so eBay can thrive "post-Meg."
"I want my legacy to be that we have built a global online trading platform that empowers all kinds of users to be successful doing what they love," Whitman said.
Gray markets and gangbuster growth
Several obstacles stand in the way of that goal. One nagging issue is the eBay gray market--groups of buyers and sellers who use the site as advertising but conduct transactions privately. According to Salomon Smith Barney, eBay loses 10 percent to 25 percent of gross merchandise sales this way. eBay must find a way to capture some of these sales.
The company also continues to face complaints by vocal members of the eBay selling community who say that, in an effort to maintain revenue growth, Whitman is starting to ignore the small players who still form the backbone of the company's business.
Their fears escalated in April 1999, when eBay acquired upscale auction house Butterfield & Butterfield for $260 million--a move many customers said was an attempt to move eBay away from its humble roots as a site for Pez aficionados and Beanie Baby collectors. They also lamented eBay Motors, which partners with General Motors and other Old Economy giants, and eBay's efforts to sell multimillion-dollar homes and crack the online real estate market.
Whitman also takes heat for PowerSellers, a program that gives extra support to large partners such as Sun, IBM and the U.S. Postal Service. PowerSellers must sell $2,000 a month and maintain a 98 percent positive feedback rating. They may buy ads linking to their sites--a loophole that allows them to legally participate in the gray market, infuriating small sellers, who are penalized for doing so. Despite the challenges, eBay can point to a rate of growth that has eluded most Internet companies. Net revenue in 2002 is expected to be at least $1.05 billion on gross merchandise sales of $13 billion, up from about $730 million in net revenue and $9 billion in gross merchandise sales in 2001.
Momentum will come through international expansion. Three years ago, the company had operations in five countries; the goal is to be in 30 countries by 2005. International operations brought in $110 million in 2001. Chief Financial Officer Rajiv Dutta projects they'll bring in more than $800 million in 2005.
Wall Street likes eBay because the company doesn't have any warehouse costs and is notorious for keeping a lean payroll. Employee costs have been declining since 1999 and were expected to make up just 4 percent of total revenue at the end of 2001.
"To the extent they can successfully execute on that plan and increase their revenue as a percentage of the gross value of the transaction, they'll do very, very well," said Tom Underwood, vice president of technology research for Legg Mason. "But the key is the user base--keeping them happy."
Whitman herself says she is happy at eBay and has no immediate plans to resign. She has, however, said she would like to become more involved in her undergraduate alma mater, Princeton University, and eventually try new roles outside daily management in corporate America.
"It's more manageable than it was in the earlier days, but the CEO position in any company is a lot of work," Whitman said. "This will be my last corporate job for sure."
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By Jim Hu and Stefanie Olsen
SUNNYVALE, Calif.--When Terry Semel was named chief executive of Yahoo, critics snidely joked that the former studio chief would try to bring Hollywood to Silicon Valley.
They were right.
But Semel, who helped run Warner Bros. as co-CEO for more than two decades, is not importing the lavish parties, battles over parking spaces, or other cliched trappings of Tinseltown so mocked by outsiders. Instead, he has brought with him the raw side of the media and entertainment business, where getting fired is a way of life and big talk must be backed up by the bottom line.
Although he was initially criticized for not acting more swiftly, Semel has since turned Yahoo's culture upside down. Gone are the free-form theoretical discussions and college-like atmosphere that made Yahoo the quintessential dot-com. Employees who were once given free rein to explore speculative growth areas have been asked to justify their businesses and even their jobs.
Many industry analysts remain skeptical that Semel, or anyone else, can rescue Yahoo from its steep descent anytime soon. But the 58-year-old chief executive has already secured a legacy in shepherding the company from the naivete of adolescence to the harsh realities of early adulthood. And in the process, he is becoming an early model for a new breed of leadership in the post-apocalyptic dot-com era, one far more beholden to the unrelenting demands of Wall Street than the ephemeral ideals of a digital revolution.
"The culture has been stagnated and isolated in Silicon Valley," one Yahoo executive said. "They know technology, but they don't know media."
An equally important point, however, is whether Terry Semel knows the Internet--or, at least, how to reverse the precipitous fall by one of its highest-flying leaders. Semel has never run a publicly held company, let alone a struggling dot-com with the monumental problems facing Yahoo today.
In roughly 18 months, the Web portal has gone from a seemingly invincible Wall Street darling to an embattled company that has seen an exodus of key executives. Revenue projections for 2001 have plummeted more than 40 percent from the beginning of the year, and last month the company announced it would lay off 400 people, or 13 percent of its work force.
The depth of Yahoo's challenge would be formidable for any chief executive, but it's even greater for someone who is parachuting into terra incognita from an entirely different industry. Semel's surprise appointment was ridiculed by many Silicon Valley elitists, who were quick to dismiss anyone not part of their inner circle.
In retrospect, much of the early sniping at Semel seems like sour grapes from an expanding pool of industry insiders increasingly defensive about their own worth. As one of the first high-profile outside recruits since the dot-com collapse, Semel represented a threat to the general competence of Internet executives, many of whom never showed a dime of profit despite their bluster and hubris.
Semel, on the other hand, was instrumental in building Warner Bros. from a division worth less than $1 billion when he became chief operating officer in 1978, to $11 billion when he stepped down in 1999 after a five-year stint as co-CEO. Even more impressive was his tenure of 21 years in the top managerial offices of a major studio in a world where executives see their careers crash and burn every day.
"He's the seasoned executive who doesn't panic under fire," said Bob Daly, Semel's partner and co-CEO at Warner Bros. "He's been through tough times in his life and knows how to keep his head."
Nevertheless, skeptics point out that Semel was not known for his operational skills before taking his current job. At Warner Bros., it was Daly who ran things on a day-to-day basis; Semel was known as the schmoozer, the deal maker--an entertainment industry veteran who negotiated multimillion-dollar distribution contracts and cultivated such stars as Mel Gibson and Clint Eastwood into virtual franchises for the studio.
This lack of nuts-and-bolts management experience has sometimes left Semel open to criticism that no one knows who is running Yahoo on a daily basis.
For example, even those within the company's senior ranks are unsure about the standing of President Jeff Mallett, who was passed over for the top post when longtime CEO Tim Koogle announced his resignation in March. Some speculate that Semel is loath to let Mallett go because he would be ill equipped to handle the company's operations himself.
(Editor's note: After the initial publication of this story, Mallett stepped down as Yahoo's president.)
Semel has offered few clues about his managerial style. Associates describe him as a direct but soft-spoken man who plays his cards close to the vest and never raises his voice in anger, contrary to popular Hollywood stereotypes. He often appears indifferent in his dealings with staff, an inscrutable trait that many say is surprisingly effective in making people want to please him, perhaps just to get a reaction.
This quiet demeanor is offset by a tough survival instinct born in his native Brooklyn, N.Y., and nurtured in the cutthroat back lots of major movie studios. Fiercely protective of his privacy, Semel refused to speak with CNET News.com for this article.
Detractors say Semel was taken aback by the assumed familiarity common at so many Internet companies and did not know how to respond after receiving unsolicited e-mails of advice from the staff upon his arrival. But those who know him say his apparent aloofness should not be mistaken for insouciance.
"We're not going to be crushed by anyone but our own ineptitude," Semel told Wall Street analysts in November, sounding more like a military field commander than a media executive.
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Yet questions have persisted about why he would want to take on an assignment as daunting as Yahoo. Money doesn't appear to be an obvious motive for Semel, who is already said to be a multimillionaire.
Some have speculated that it is simply the midlife folly of an ambitious man casting about for something new to do. Sources say Semel hosted a fund-raiser for presidential candidate George W. Bush--an unusually high-profile show of Republican support in the militantly liberal entertainment industry--sparking speculation that he was angling for an ambassadorial appointment.
Adding to Semel's enigma is his reluctance to live closer to the company. Rather than take up residence in Silicon Valley, he has chosen to keep his mansion in Bel Air--the exclusive Los Angeles County enclave that is home to many studio moguls, most notably producer Aaron Spelling with his famed 123-room estate.
For the moment, Semel seems undeterred by any questions involving his commitment, focusing instead on revamping Yahoo's business direction to wean the company away from its dependence on advertising revenue. In a fashion nothing short of brutal by Yahoo standards, he has pared 44 business units to six--listings, commerce, communications, media, access and enterprise--while cutting services including the lifestyle channel and the business-to-business marketplace.
"People were very jammed at how little time they were given to justify their existence," one Yahoo executive said. "We were in a fire drill; it definitely wasn't the old Yahoo culture. Everybody's plan was scrutinized for marketplace reality in a way they had not been in the past."
Today, Yahoo is seeking to become what it calls a "principal," owning and charging for access to the content it publishes, whether it be classified job listings, specialized search results or copyrighted entertainment material.
In doing so, however, Semel must undo some basic tenets of Yahoo's philosophy as an "agnostic" aggregator of content it does not own. And while this change is deemed necessary almost universally by those outside the company, it means a fundamental shift in Yahoo's original identity as the ultimate New Media entity, one that dismissed the old ways of established publishers and proclaimed itself a primary conduit of the Information Age.
It is here where Semel faces one of his most complicated challenges, in convincing the many rank-and-file Yahoo loyalists that the company's original vision was noble but no longer makes good business sense.
"I thought it was going to be a war-torn nation," Semel said in November about the restructuring of Yahoo's senior ranks.
Semel has recruited some trusted allies from his Hollywood days to occupy important strategic and deal-making positions. One example is Jim Moloshok, one of Semel's Warner Bros. lieutenants who spearheaded the now-defunct Entertaindom.com site, who will serve as a full-time consultant working on striking deals with entertainment companies.
Moloshok "is a Hollywood guy, and he speaks the language," said Lynda Keeler, vice president of interactive services at Sony Corp. of America, which is in a three-year, multimillion-dollar relationship with Yahoo.
In 2001, the boldest move Yahoo made in this direction was its entry into the Internet access business with SBC Communications. Industry analysts say such aggressive partnerships in Net access are necessary if Yahoo is serious about finding new profits and lowering its reliance on advertising from 76 percent to between 50 percent and 60 percent of its revenue by 2004, as stated. (In 2000, 90 percent of the company's revenue was driven by advertising, with business and premium services responsible for the other 10 percent.)
Further toward its ownership goals, Yahoo made a $436 million unsolicited offer in December to buy HotJobs.com, a leading site for classified employment listings. In addition, sources say the company may be exploring acquisitions of real estate site Homestore.com and online travel service Travelocity.com.
"I give Semel credit for putting a new ball in motion and not being afraid to go against Yahoo's religion," Salomon Smith Barney analyst Lanny Baker said, alluding to the company's longtime status as a kind of technological Switzerland.
Still, analysts are anything but certain that Semel will be able to return Yahoo to sustained profitability soon. He recently perplexed many of them with a vaguely stated promise to have 10 million paying relationships with Yahoo surfers "within a reasonable period of time."
"The story is still a show-me one," said Jeff Fieler, an analyst at Bear Stearns. "The value is there; the catalyst is not."
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By John Borland
SEATTLE--Whenever Rob Glaser needs to blow off steam, he descends to a two-lane bowling alley in the basement of RealNetworks' headquarters here.
It is a fitting retreat for the driven chief executive, who finds himself increasingly defending his company in bunker-like pitched battles against the vast empire of Microsoft based just outside town. Although RealNetworks popularized Web audio and video technologies years before others were paying attention, Glaser knows that such an "early mover" advantage isn't worth much once the Microsoft juggernaut gets rolling.
"Microsoft may not always be the best 'version one' company out there," the 40-year-old CEO said in a recent interview with CNET News.com. "But it brings a tremendous persistence and follow-through and discipline to the process."
This persistence has put Glaser in an adapt-or-die situation that forces him to keep one step ahead of Microsoft to avoid being crushed like so many other challengers. As a result, to avoid competing directly with Microsoft, he is creating a hybrid company that embraces aspects of both the media and the software business.
But that strategy carries an inherent risk: As RealNetworks continually evolves to stay beyond Microsoft's reach, it could get too far ahead of the curve and miss establishing its products and services in the marketplace just when mainstream consumers are beginning to accept Internet multimedia technologies.
"Real is going in two directions at once," said Will Poole, vice president of Microsoft's Windows Digital Media Division. "What we've been seeing is that Real is having a challenging time keeping up with the pace of demands from customers."
Although that opinion comes from the company's chief antagonist, others agree that RealNetworks is losing ground in basic multimedia technology as it concentrates on becoming the online analogue of a cable TV network. However, RealNetworks may face even more peril by stopping to take on the software giant--a fatal mistake that Glaser saw all too many companies make during the 10 years he himself worked at Microsoft after graduating from Yale in 1983.
The ambitious, young executive worked his way up through the ranks to become vice president of the multimedia systems group before leaving his mentor Bill Gates to found what was originally called Progressive Networks. In many ways, he has been running from Microsoft ever since.
To be sure, Glaser and his company are true pioneers of high technology, having the foresight and successful execution that have made RealNetworks a fixture of the Internet. But if there is one defining characteristic that drives Glaser--personally as well as professionally, some would say--it is a near-obsession with Microsoft.
Looking out from his office on a clear day, Glaser can see snow-capped mountains towering in the distance, as Puget Sound ferries busily haul commuters back and forth. In the rare moments when he has time to take a breath, he sometimes reflects on the long journey he has made from his old neighborhood in Yonkers, N.Y.
As a self-described "progressive" political activist in college, he didn't seem an obvious candidate for the corporate jungle: As Glaser pondered joining Microsoft at the first fork in his career path, the other tine led to a life in nonprofits. But he grew up in the decade he spent at company headquarters in Redmond, Wash., learning the software business at the hand of Bill Gates and alongside now-Microsoft CEO Steve Ballmer.
Leaving the company was something like leaving home for Glaser, who had recently turned 30. "The true north I wanted to follow was 60 or 90 degrees different than the true north that Bill or Steve were focused on," Glaser recalled.
As he sought to establish his independence, however, Glaser remained keenly aware of his corporate alma mater's penchant for eating its young once they've left the nest. As a result, he has looked from the beginning for a foothold in the media business as a way of avoiding head-on competition with Microsoft.
And for good reason. In the few short years it has focused on the Web streaming business, Microsoft has opened a powerful campaign to persuade consumers and businesses to use its Windows Media software, which it includes inside every copy of the Windows operating system.
So Glaser kept running, morphing RealNetworks into a network that distributes entertainment programming, as well as making the software used to download it.
"Most businesses that just focused on one way of making revenue find the current environment exceedingly challenging," he said. "(We'll succeed) whether we make our money principally selling pickaxes to a gold rush, or selling gold ingots to consumers."
That may be wishful thinking, but there is no denying that the Internet multimedia business Glaser helped spark is changing. For years, Net audio and video remained low-quality and free, but major media companies like AOL Time Warner, Bertelsmann and Vivendi Universal are finally starting to charge for their audio and video content online. By those companies' standards, RealNetworks is tiny.
Glaser believes he can thread his way between the media and software giants, taking just enough from each side to survive. At the same time, he's hoping that lingering fear of Microsoft will persuade big media companies to align with RealNetworks.
His direction jibes with the post-Napster desire of media companies to sell secure access to high-quality digital music, movies and other forms of entertainment online. They need a way to get online content to customers without letting it be pirated and distributed illegally. It was perfect timing for RealNetworks, which offers that and more--for a price.
"There had to be some kind of battering ram, some kind of galvanizing force, that would cause the record companies to realize they couldn't resist the technology," Glaser said.
In practice, however, the strategy faces two major uncertainties: Consumers have to prove they're willing to pay for online content, and RealNetworks' software must hang on to its popularity in the face of Microsoft's ubiquity.
Even though more than 25 million people use RealNetworks' software at home, according to Jupiter Media Metrix, the company's early lead among consumers has eroded. Some recent research also shows that RealNetworks and Microsoft are about even in the use of their software.
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The company is in relatively good financial shape to sustain it for the time being, having posted small but consistent pro forma operating profits in recent quarters. Last September, RealNetworks had more than $348 million in cash on hand, enough to last years into the future at its current burn rate, or the rate at which it spends cash reserves.
A more pressing question involving RealNetworks' fate is its ability to strike partnerships and balance allegiances with major media companies. Key to that success will be Glaser's ability to play a diplomatic role alongside his visionary one, a feat that has proven difficult in the past.
Glaser's fascination with media runs as deep as his interest in technology; even as a teenager he tried to seed new networks, creating a radio station broadcasting over his high school building's wiring. And the devoted Seattle Mariners fan is dedicated to sports and music, two of the most consistent programming options on the RealNetworks software.
But a politician Glaser is not: He is wholly type A, his stocky frame barely containing a fierce, competitive intensity that extends from the boardroom to the professional bowling league that he partly owns. That intensity has been known to backfire in his management style, which departed executives say offers little room for debate or disagreement.
"His greatest strength is his intellect, not his operational skills or his management skills," said one former executive who asked to remain unidentified. "That has been the principal reason for the high executive turnover."
Glaser has run into problems outside the company as well. As acting CEO of MusicNet, he spearheaded a deal with Napster last summer that the heads of the major record labels knew little about until it was announced. Privately, label executives complain bitterly about this deal, saying Glaser soured relationships with AOL and the other record labels.
"Rob's a bull in the china shop," said one senior record-label executive associated with MusicNet. "He violated our contract...He really screwed up."
Still, Glaser can be persuasive as well as abrasive. Even as Microsoft began putting more muscle behind its own multimedia ambitions, Glaser's peripatetic lobbying last year helped cement a partnership with MusicNet through which AOL Time Warner, Bertelsmann and EMI are offering high-quality songs for a monthly subscription fee. The other major labels have a similar plan but use Microsoft technology.
Now Glaser is betting on his company's RealOne software and service, which offers subscription access to features such as Major League Baseball games, TV news and MusicNet entertainment. Other companies have tried to create multimedia portals like this, but the predecessor to RealOne attracted more than 400,000 subscribers paying $9.95 a month, far outpacing any previous subscription service.
In addition to making such deals, Glaser is no stranger to corporate politics--and that includes pitting major players against each other if he can benefit from the conflict. AOL's rivalry with Microsoft, for example, has made it one of RealNetworks' strongest allies in an online media landscape that is as complicated as a World War I map.
AOL and RealNetworks "have struck relationships at multiple levels," said Larry Gerbrandt, a senior analyst with media research firm Paul Kagen Associates. "I don't see AOL making peace with Microsoft anytime soon."
While Glaser himself downplays the importance of the AOL alliance, he does say the other giants are loath to let Microsoft gain too much power. Allying with RealNetworks is safer and serves other companies' interests better in the long run, he says.
"They all share a common belief that they don't want any single company to be the vacuum cleaner that vacuums up all value," Glaser said in a not-so-veiled allusion to Microsoft.
But corporate loyalties are notoriously shallow, and RealNetworks has yet to prove that it is a necessary partner for the future of online media or a convenient ally that serves a limited purpose in a larger conflict.
In the long run for Glaser, that challenge may be tantamount to a 7-10 split.
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By Ben Heskett
SAN JOSE, Calif.--Not long ago, John Chambers was universally hailed as the model chief executive for the 21st century: Every business magazine wanted him for a cover story, every industry conference wanted him as a keynote speaker.
Then came the crash of 2001.
After six years as chief executive, a stunned Chambers witnessed Cisco Systems--once the highest-valued company in the world--suffer a stock meltdown of historic proportions. Wracked by revenue shortfalls and massive write-downs on assets, the one-time Wall Street darling was forced to impose a painful last resort: the laying off of 8,000 people .
"Oh, it hurt," said Chambers, his voice cracking with emotion as he recalled the decision. "It's something I considered a personal failure, ever having to do layoffs again. It isn't comforting to know that everyone else had to do it."
The golden boy of high technology had rarely seen his lot cast alongside that of other executives. For years, it seemed that Chambers could do no wrong as Cisco grew regularly by as much as 50 percent per quarter. At its peak it was hiring 1,000 employees a month.
In the postmortem of the New Economy's carnage, however, Chambers turned out to be guilty of committing the same flubs as lesser mortals at rival companies, including bad acquisitions and faulty loans to customers. And as the chief visionary of the world's leading maker of routing and switching equipment for the Internet and corporate networks, he had inspired employees and investors to dream of limitless heights--projections that in hindsight were impossible to meet.
If Chambers is to learn any lesson in this fall from grace, it is that he must stay focused on the present, not the future.
"It's not an easy call to go from 100 miles per hour to 20 miles per hour," said Don Valentine, a partner at venture investment company Sequoia Capital and a Cisco board member.
Yet Chambers, ever the cheerleader, has likened the past year's turmoil to a 100-year flood and told investors at Cisco's December analyst conference that he was "as optimistic about the market today as I've ever been." In the next five years, Chambers said in an interview with CNET News.com, he wants to build one of the most successful companies in history--"not just successful financially, but successful in changing so many aspects of our lives and also successful in a unique culture."
A noble ambition, but to succeed he will need to reset expectations for a results-driven corporate culture in which the company stock option was once viewed as a sure ticket to wealth. It remains unclear whether Cisco's rank and file are ready to sublimate dreams of personal gain in pursuit of Chambers' "one for the Gipper" vision of today.
How skillfully Chambers navigates this transition may reveal more about his talent as a manager than did any previous challenge.
"The real mettle of John Chambers is being tested right now," said Hilary Mine, analyst with industry consultants Probe Research. "Now we'll find out if he's a good CEO or not."
Some say Chambers was simply in the right place at the right time during the height of "irrational exuberance." That may be true, but if Cisco's good fortune was driven by market forces, it was certainly pushed in the opposite direction when the economy began to fall apart.
The company's tailspin reflected larger problems affecting the communications industry in general. Other networking rivals, such as Nortel Networks and Lucent Technologies, were suffering sharp reverses as well.
Supporters point out that until last year, Chambers had enjoyed nothing but remarkable success at Cisco. The 52-year-old West Virginia native joined the company in 1991 as its top sales and operations executive after stints at Wang Laboratories and IBM.
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Chambers became CEO just four years later, when Cisco posted annual sales of $1.2 billion. He oversaw the company's subsequent transformation into an industry behemoth with yearly revenue in the $20 billion range and a cash hoard of $19 billion, second in the industry only to software giant Microsoft.
A soft-spoken, likable man with boyish looks, Chambers proved to be an exceptional evangelist, telling the world how modern communication would be revolutionized by his company as the primary builder of networks that make up the Internet.
When Chambers talked, people listened--and for good reason: Cisco was raking in quarterly sales gains of 60 percent to 70 percent during its heyday, figures that were unheard of for a company of its size.
"I couldn't explain my own numbers," recalled longtime Cisco executive Jayshree Ullal, 40, who recently returned from a leave of absence.
But the fairy tale lasted only so long. Eventually, the glut of companies created during the Internet's boom years led to what market researcher RHK describes as an "unsustainable" $50 billion spending bubble in the telecommunications industry in 1999 and 2000. It wasn't long before Cisco and its networking rivals found themselves scrambling for a piece of an increasingly smaller business.
With reduced demand from the telephone companies, Cisco was further hurt by a double whammy: Many Internet service providers, which had been customers for the company's Internet routing and switching equipment, began to struggle at the same time that corporate spending on computer gear was taking a nosedive.
As if that weren't enough, Cisco--which had always prided itself on stringent accounting practices--subsequently disclosed that it had made large loans to start-up carriers so that they could buy its products, only to see them go out of business first. The cascade of bad news led some to question Cisco's strategy, and, for the first time, even former boosters were taking public potshots at Chambers.
"The first five months of this year were miserable--painful beyond any description," Chambers recalled. "It was the only time in my life I haven't been excited about going to work."
After the layoffs came a record $2.25 billion inventory charge and a warning that Cisco was pulling back from previous growth predictions because it couldn't accurately gauge the market anymore.
The collapse led some members of a previously laudatory business press to sharpen their knives. In a May 2000 column, for instance, Fortune magazine writer Andy Serwer published a glowing appraisal of Chambers and his company. "No matter how you cut it, you've got to own Cisco," he wrote. A year later, Serwer complained that he'd been had: "I just feel so burned!"
In his defense, Chambers said no one could have predicted the plunge taken by his company and the rest of the industry.
"If you told me (sales) could go down 30 percent after 70 percent growth in 45 days, I'd say that it was mathematically impossible," he said. "And it did."
The sobering experience has forced Chambers to take a hard look at all of Cisco's operations. In addition to being plagued by delivery lapses, Cisco has often had hundreds of products at any one time in inventory--many of which failed to contribute much to the bottom line--as a result of company acquisitions. Chambers has reorganized product development into 11 areas to get better control over that unwieldy system.
On the sales side, Chambers is pressuring his staff to do a better job of pursuing more stable telecommunications customers, such as the four Baby Bell local phone companies. This has long been a company weakness, and Chambers knows that Cisco will need more big-name customers if it is to regain Wall Street's confidence.
Recent studies suggest the company is at least holding its own. Despite a fierce challenge from router maker Juniper Networks, Cisco has maintained its 60 percent share of the market.
Paul Sagawa, an equities analyst for Sanford C. Bernstein, said the company's task is difficult but not impossible. "I actually see them trying to turn the clock back," he said. "They're approaching things like they used to."
When asked for his own assessment, Chambers seems to choose his words more carefully than he might have in more confident years, sipping one of his daily 12 to 15 Diet Cokes while taking a moment to ponder his answer.
"In fairness, we were the poster child of the Internet economy going up, we're going to be the poster child when it hit its dips," he said. "And we're going to probably be the poster child when it goes back up again."
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By Jim Hu
DULLES, Va.--Barry Schuler wears his geek credentials on his sleeve.
He built the wireless network that lets him tap into his digital music and photo collections from any floor of his spread in suburban Virginia. In his corner office at America Online headquarters here, he displays an IMSAI microcomputer, a precursor to the PC that he put together himself in the mid-'70s.
To those who know him, this love for gadgetry says a lot about Schuler as AOL's chairman and chief executive--both good and bad.
"Barry doesn't want to talk about numbers and goals," said one former AOL executive. "He wants to talk about the interface and gadgets. Barry's at his best as the high-level creative mind."
Current and former colleagues describe the 48-year-old Schuler as a visionary with a confrontational streak, a guy who loves to tinker with technology and immerse himself in product development. But they also allow that he may not possess the kind of business acumen and operational expertise required of his job, arguably the hottest seat in the entire AOL Time Warner empire.
Of all the media conglomerate's vast holdings, Schuler's division is the one charged with meeting its ambitious growth projections and satisfying Wall Street. Executives at his level are drawing additional public scrutiny since Gerald Levin, CEO of AOL Time Warner, last month unexpectedly announced plans to resign in May.
Although Schuler has been with AOL since only 1995, he represents the old guard that ran the online company before the historic merger with Time Warner. His tenure is being followed closely by those looking for clues to the company's future leadership, which tilted significantly toward the Time Warner ranks when Levin appointed longtime lieutenant Richard Parsons as his successor over co-Chief Operating Officer Robert Pittman, AOL's president before the merger.
A key question is whether Schuler's brand of leadership offers the right combination to deal with AOL's new challenges, which include nothing less than a reinvention of the company. As 2002 gets under way, America Online is hoping to evolve from its role as a provider of dial-up online services such as e-mail into a high-speed Internet entertainment and e-commerce hub.
Schuler's challenge is to "build an upgrade path...and allow consumers to take the AOL experience to whatever form of connectivity they desire," said Robert Martin, an equity analyst at Friedman Billings Ramsey.
That's a tall order, given that AOL is beginning to show signs of sputtering since Schuler took over responsibility for the division. It continues to struggle with weak advertising sales, slackening subscriber sign-up rates and growing competition from a reinvigorated Microsoft.
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In January, AOL Time Warner was forced to restate its earnings forecasts in a humbling admission that the merger would not escape the economic downturn unscathed, partly because of a disappointing performance by America Online. The company said EBITDA would be just under $10 billion for 2001, some $1 billion short of its initial predictions. It said EBITDA growth in 2002 could fall as low as 8 percent, while revenue may come in shy of $40 billion--a benchmark the company was supposed to reach by the end of last year. (Analysts consider EBITDA--earnings before interest, taxes, depreciation and amortization--to be the key measure of the financial performance of media companies.)
Of even greater concern are signs that growth of dial-up online service is beginning to plateau in the United States. Although AOL added 1 million new dial-up subscribers in 35 days in the fourth quarter of 2001, analysts say its growth rate has slowed.
Youssef Squali, an equity analyst at FAC/Equities, estimated that AOL added 1.7 million to 1.8 million new subscribers for the quarter, down from 2 million in the same period last year. "There's absolutely no arguing that dial-up subscriptions are slowing down across the industry," Squali said.
The slowed pace is not unique to AOL, but that doesn't mean Schuler won't be blamed for his company's waning numbers.
Some speculated that he had lost a measure of confidence from above when Levin moved J. Michael Kelly in November from his role as chief financial officer of AOL Time Warner to chief operating officer of America Online. That position was left vacant after Pittman was promoted to co-chief operating officer of AOL Time Warner.
Sources close to that decision said the move could ultimately be less about chastising Schuler than allowing him room to take the company to the next level. Even so, there is no denying that Kelly's reassignment was specifically aimed at giving AOL more operational discipline.
"There's a possibility (Schuler) could be the sacrificial lamb," said David Simons, managing director of institutional research firm Digital Video Investments. "If things aren't performing...a typical reaction in companies is to put somebody new in."
A low profile, despite the flower prints
A heavy-set New Jersey native, the goateed Schuler has a flamboyant side accentuated by his partiality for flower-print shirts combined with dark suits. His AOL career has treated him well, helping fund an 83-foot yacht and a 30-acre vineyard in the wine country of Napa Valley.
AOL veterans consider Schuler instrumental to the company's success, crediting his redesign of its graphical user interface in the mid-1990s as a crucial point that helped turn some 33 million self-proclaimed Internet dummies into AOL devotees.
Nevertheless, he has cut a winding, low-profile path to the top, never fully stepping out from the shadows of Pittman and AOL founder Steve Case, even after becoming CEO.
A psychology major at Rutgers University, Schuler gravitated toward advertising and marketing after graduation, co-founding a creative agency called CMP that focused on high-tech clients.
After 10 years, Schuler quit CMP to run Cricket Software, which was sold to Computer Associates in 1989. He then left for California, where he co-founded Medior, a software company that was tapped to redesign AOL just after it had surpassed 1 million members, making it the third-largest online service behind CompuServe and Prodigy.
Schuler "was very opinionated and he followed his instinct," recalled CMP partner Eri Golembo. "He knew what he felt was the right way to go, and he pushed very hard to do it. He's confrontational in that he's not going to step down if he believes that's the right way to do something."
Although AOL's success has long been attributed to its marketing prowess, Schuler's simple and uncluttered design is often given equal credit. Case was so impressed with it that he bought Medior in May 1995 for about $30.9 million in stock.
"Looking at the design of how AOL should look, the whole room can say do it one way, and then Barry would sit back and say, 'No, we're doing it this way.' And (he'd) be right," said David Weiden, a former colleague who is now vice president of marketing at Internet telephony company Tellme Networks.
Waiting for the revolution
These days, Schuler is as eager to discuss his grand vision for the new, high-speed AOL as he is dismissive of naysayers. Given half a chance, he eagerly spins scenarios of Internet-connected stereos and even alarm clocks delivering AOL services to the masses in their living rooms and bedrooms, as well as on the road.
"When you get this broadband platform into the home, it will spawn a revolution," he said in a recent interview with CNET News.com.
Yet for all his enthusiasm, Schuler's strategy for AOL is surprisingly predictable for someone touted so widely as an Internet visionary. His master plan essentially consists of squeezing more monthly revenue from a growing roster of subscribers.
Above all, that means switching as many customers as possible to high-speed broadband accounts while relentlessly promoting AOL Time Warner's sprawling entertainment products. In December, for example, AOL previewed a new music-subscription service, hoping to charge customers $9.95 a month on top of the regular $23.90 dial-up subscription fee.
Schuler's optimism refuses to leave room for concerns about his division's health. "Are we going to go into a period of negative growth? It's not going to happen," he said.
When prodded to discuss Microsoft and slowing subscriber rates, he flatly denies there is a problem. While he has acknowledged that Microsoft is a competitor that needs to be watched closely, he has long played down the significance of a direct clash between the two companies.
That may be wishful thinking.
Although MSN trails AOL badly in the U.S. Internet service provider market, Microsoft is making inroads on many other fronts, ranging from instant messaging to subscription services. Moreover, AOL's dominance in dial-up access may count for less as the industry sets its sights on broadband.
AOL is the second-largest cable owner in the United States but needs to expand through acquisitions and partnerships to provide national broadband service. It has already suffered a major setback, losing out to Comcast in a December bidding war over AT&T Broadband, the nation's largest cable network.
None of this appears to trouble Schuler, who seems content to pass over the awkward details of the present and place his faith in the future.
"Did we get impacted by the advertising economy getting worse faster than we ever would've expected? Yes," Schuler said. "Do I think that we have a business that is experiencing a downturn that's going to last a long time? Absolutely not."
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By Michael Kanellos
Intel Chief Executive Craig Barrett leads the world's largest chip company, often from a seat in coach at 30,000 feet in the air.
His most recent sweep through Latin America was typical: Barrett put in a couple of 14-hour days in Chile and Brazil, sandwiched around a meeting in Argentina, speeches in Peru and Venezuela, and an emergency landing in Bolivia. He frequently meets with top political leaders, such as Chinese President Jiang Jemin and Mexican President Vicente Fox, to discuss the business of technology.
This is more than a case of happy globe-trotting. When Barrett looks across the border, he sees Intel's future.
"The U.S. is 4 percent of the world's population," he said. "I will take the other 96 percent."
As the PC market moves into middle age, Barrett is visiting 30 to 40 countries a year to seek out new customers and markets for his company's silicon products. His mission is urgent: Although Intel investors have enjoyed what one analyst termed "asinine" returns in the past decade, they won't be happy unless Barrett again delivers double-digit growth.
If he succeeds, the 62-year-old former engineering professor will establish a legacy that finally moves him out of the shadows of his legendary predecessors.
Intel's first three chief executives--Robert Noyce, Gordon Moore and Andy Grove--took the company from its roots as a small start-up in Santa Clara, Calif., to become the world's dominant manufacturer of microprocessors. Noyce and Moore came up with scientific breakthroughs that helped create the semiconductor industry, and Grove personified the company's values during its meteoric rise.
Barrett, by contrast, leads a mature company with more than 80,000 employees--an important position but not a glamorous one, in historical terms. As a result, he may be destined to become Intel's version of Chester A. Arthur, the 21st president of the United States: a qualified leader who operated in unremarkable times.
That may not be such a bad thing for Intel, a company that many believe needed a renewed emphasis on operational basics after its years of unbridled growth. Barrett may not be regarded as a visionary, but he can certainly be credited with cracking the whip and reducing the company's lingering problems in chip design and manufacturing.
"Intel has had to deal with a lot of different variables. They saw a level of competition they hadn't seen since the 1980s," said Dean McCarron, an analyst with Mercury Research. "While the growth is not present, the revenues have largely been maintained. Things could have been worse."
This lukewarm assessment offers little consolation to investors, however. Intel stock recovered most of its lost ground after falling to a 52-week low of $18.96, but that's a far cry from its heyday.
Despite plans to diversify, Intel remains dependent on PC demand--and the collapse of the market last year only magnified that Achilles' heel. Like most high-tech companies, Intel suffered through a dreary 2001, with revenue expected to come in at $26.4 billion, down from $33.7 billion a year earlier. In the third quarter, Intel's net income finished down 77 percent from the same quarter a year earlier, excluding nonrecurring items.
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The company's problems extended beyond the obvious challenges of a recession-induced slowdown. From 1999 through the first part of 2001, Intel suffered an extraordinarily high number of glitches, recalls and delays. In addition, the company's insistence on promoting memory based on more expensive designs from Rambus aggravated PC customers and helped drive business to rival Advanced Micro Devices.
Escalating price wars, which defined the hardscrabble competition in the chip market, further eroded profit margins. When Barrett became CEO, many desktop PC chips debuted for nearly $900. Nowadays, a similar new processor can debut for below $400.
That's one reason Intel has spent about $11 billion on 35 acquisitions, most in networking and communications, in the past three years. But the expansion has coincided with the collapse of the communications market, and some of the mergers, even by Barrett's estimation, have been tough to digest. In new markets, Intel is often a secondary player.
Not surprisingly, second-guessing has followed Barrett ever since he inherited his job from Grove. But Barrett glosses over comparisons with his famous predecessor, a former Time magazine "Person of the Year," saying that Intel hasn't substantially changed under his tenure.
Barrett, who speaks in a lower voice than Grove, is just as demanding, just as smart and just as paranoid as his former boss, according to former and current Intel employees.
"Grove is a natural leader. If this was the Army, and he said, 'We must take that hill over there,' the whole company would charge out of its foxholes and try to do it. And Grove would be right out front," said one former executive who asked to remain anonymous.
Barrett "is not in that league," the former executive added, "but (he) was the one who turned Intel's haphazard manufacturing efforts into the world-class enterprise it is today."
It is this kind of attention to detail that plays to Barrett's strengths as both a manager and a technologist. He pioneered "copy exactly," Intel's obsessively exacting methodology for ensuring that all its factories maintain an almost identical high level of output.
"You have a ready check-and-balance system because if you screw up, I get Michael Dell and Michael Capellas and Carly (Fiorina) and (Lou) Gerstner and Ted Waitt and a dozen other people calling up, saying, 'What the hell are you doing?'" Barrett said, referring to his CEO counterparts at top computer companies that use Intel chips in their products.
Barrett's management has had an effect on the bottom line. He cut Intel's losses and snuffed out a consumer products division, streaming-media group and e-commerce unit in 2001 while curbing further investment in Intel Online Services. At the same time, he reorganized the company into three product divisions focusing on PCs and servers, networking equipment, and cell phones.
"There's no question that just about everybody had a little bit of irrational exuberance associated with the dot-com deal," Barrett said. "Would we have done some things differently in the last two years? Sure, who wouldn't have done things differently in the last two years?"
When he assumed the helm in 1998, the company largely revolved around one product: the Pentium II processor. By the time Barrett leaves, if all goes as planned, Intel will provide components for handheld devices, telephone equipment, mini-mainframes, wireless providers, game consoles and consumer electronics. It also will design and co-manufacture the servers, software and other products that use Intel's chips.
Already, some of the company's diversification efforts are bearing fruit. Intel's communications and wireless groups accounted for a combined $3.7 billion in revenue in the first nine months of 2001, or nearly 19 percent of total revenue.
When Intel acquired a fabrication facility and some communications chip designs as part of a legal settlement with Digital Equipment, the plant's production was running at less than one-third capacity, said Nathan Brookwood, an analyst at Insight 64. A year later, he added, the company was making the same chips as Digital Equipment and running the factory at full tilt, thanks to Intel's sales force. Much of the chipmaker's new business in communications and other areas will be overseas. In late 2000, Asia for the first time accounted for more sales of Intel products than did North America--a trend that is likely to continue as the company erects more facilities abroad.
"Everywhere you go, the fundamental truths are that nobody looks upon their future as depending on natural resources," Barrett said. "Nobody looks on their future as being dependent on low labor rates. Everybody looks on their future as depending on value creation and knowledge. Mexico, China, India, Taiwan, Russia--you pick it. It's the same deal."
As for his own future, Barrett says it's too soon to contemplate life beyond Intel. But if he does retire in three years at 65, he'll be handing off the company to a new breed of manager: The leading candidates to succeed Barrett--Intel Architecture Group General Manager Paul Otellini and Sean Maloney, manager of the company's networking and communications division--both rose through the ranks of sales and marketing, not through the "hard science" divisions.
"If the chairman decides to remain chairman, it is pretty clear that I go to Montana or Mazatlan or go parasailing or do something like that," Barrett said, alluding to the position Grove has maintained as head of Intel's board. "We'll just have to wait and see what the environment is at that point in time, but I have plenty of things to keep myself busy."
And just in case the travel bug decides to bite, he'll have plenty of frequent-flyer miles in hand to get on his way.
(Editor's note: After the initial publication of this story, Intel promoted Otellini to president and COO, making him Barrett's likely successor as CEO.)
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By John G. Spooner
If there is a key to Michael Dell's success, it is his ability to make the right decision at the right time--and often, that decision is to do nothing at all.
He did not join the rush to make handheld devices. He did not open stores as Gateway and Apple Computer did. He did experiment briefly with a stylishly designed PC but axed the product six months after putting it on the market.
"Customers have the best ability to determine which products and services are valid," said the 36-year-old CEO of Dell Computer. "It's not so much people in laboratories. That's actually proven to be a pretty bad way of coming up with products. There's a lot of technology in search of a problem."
That ingrained caution--combined with a cool feel for the jugular--has paid off for the corporate wunderkind, who was 10 years old when the first personal computer was unveiled. In building a multibillion-dollar company before he was 30, Dell has revolutionized the way computers are sold by mastering the game at hand, luring his rivals into losing price wars instead of chasing the latest industry fads.
Time and again, Dell's willingness to sacrifice profit margins for market share has won these wars of attrition. Even with PC growth slowing and prices falling, the famously efficient system he constructed allowed Dell to reap better returns than could bloodied competitors.
Yet for all his accomplishments, Dell can scarcely afford to slow down. In the unrelenting demand for growth and profits that defines so much of the high-tech industry, his company must branch into new areas to continue its impressive trajectory.
In 2002 and beyond, Dell's challenge is to expand the company's offerings in precisely those higher-margin areas where Dell Computer has barely rated an honorable mention: services, storage and networking, which now make up about 20 percent of revenue.
Dell will need to tap its $6.4 billion stockpile of cash as of November and short-term securities to either buy a services company or build its existing in-house capabilities, analysts say. All this is happening as corporate budgets remain soft; Dell has already seen workstation and server revenue decline for three consecutive quarters.
A troublesome harbinger? Perhaps, but this is where the Dell formula is put to work.
"It takes time. We've been at this for 18 years," the chief executive said in a recent interview with CNET News.com. "But we've seen that in the enterprise market, it works well."
"It" is the Dell Way, the company's methodical plan of attack for turning higher-priced computer categories into commodity markets.
Dell Computer takes orders directly from customers and keeps only about five days' worth of inventory in its warehouses. That keeps annual write-offs for excess and obsolete inventory down to 0.1 percent. Contrast that with companies like Compaq Computer, which may need to stock its middlemen with several weeks' worth of products--and, when sales soften, is stuck with much higher inventories.
The question is whether Dell can afford to pursue that strategy in relatively new areas where products are far more costly to produce than standard PCs.
"Dell couldn't be competitive with IBM or Compaq without a substantial investment (in services) at this point," IDC analyst Roger Kay said. "They still have a long way to go in their global services capabilities."
But Michael Dell isn't worried, for this isn't the first time he has faced a difficult proposition.
Since founding his Austin, Texas-based company in 1984 as a 19-year-old dropout from the University of Texas, Dell has heard no shortage of experts explain why the sky was about to come crashing down on top of him--starting with the stock market collapse of 1987, which hit just as he was preparing to take the business public.
A company of less than $8 billion at the time, the PC maker grew to finish 2001 with $32 billion in sales. Perhaps most remarkable, Dell has succeeded without the next-big-thing bluster and hype that have come to define much of the high-tech industry in recent years.
The cautious empire
Microsoft and Apple often speak about the changing nature of technology and bring out new, experimental products to capitalize on alleged pent-up demand. Similarly, Hewlett-Packard CEO Carly Fiorina has touted the proposed acquisition of Compaq as an epoch-making event for the technology field.
Michael Dell is a sober, less flashy study in contrast. Much of his success was achieved by avoiding mistakes that took down competitors and by concentrating on doing a few things very well. Dell Computer has acquired just one company, ConvergeNet, in its entire history.
Dell's is a conservative outlook that pervades the entire corporate culture. The company rarely announces executive shuffles or new departments, preferring to make most changes quietly without calling attention to them. In interviews with reporters, Dell executives rarely stray beyond that message, taking their cues as if the boss were sitting down next to them.
The company also makes a priority of an increasingly rare phenomenon these days: customer satisfaction. Dell himself frequently takes a turn staffing the company call center, where he pitches in taking customer orders over the phone. Even though he has delegated day-to-day responsibilities to President Kevin Rollins, Dell keeps close watch over operations, especially when it comes to product development.
He is often his company's best beta tester. During a recent meeting with an industry analyst, for example, he tested a prototype 802.11b wireless-equipped machine. Using it as a customer might, Dell kept an eye on his e-mail all throughout the discussion.
It is this kind of personal research that keeps Dell in touch with consumer needs.
At technology conferences, for example, he frequently asks attendees to raise their hands if they carry handhelds or cell phones. Nearly all hands go up. Then he'll ask them how many run spreadsheets or perform other PC tasks on their cell phones or handheld computers. All the hands go down.
That is the kind of anecdotal evidence Dell will cite when he resists jumping into other businesses.
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"There isn't another technology hardware company that we are aware of that has seen this level of stability during these tough times," Goldman Sachs noted after the end of Dell Computer's fiscal third quarter last October.
Indeed, the man who ranked 15th on Forbes Magazine's list of the richest people in America last year has made a career of having the last laugh.
Not long ago, Sun Microsystems CEO Scott McNealy sniffed that his rival essentially operated a grocery store for Microsoft, merely building boxes to house Windows software and Intel chips. But like others who have underestimated Dell Computer as a one-trick pony, McNealy had it only partly right.
It is true that the company rarely ventures beyond the Microsoft and Intel technologies, spending just 1.5 percent of its net revenue on research and development. Nevertheless, whatever the company is doing, it works.
Five years after entering the server market in 1996, Dell Computer sold more systems than any other competitor. The company similarly climbed to the top of the workstation heap three years after introducing its first machines in 1997. And while most rivals in both categories are suffering declines, Dell Computer's market share is on the upswing.
Technologically, there's also a benefit. Dell Computer can immediately offer the latest products from Microsoft and Intel because its computers are custom built. In addition, as the largest customer of the Wintel duopoly, it enjoys the largest volume discounts handed out by Microsoft and Intel. The response from competitors? "Lose money," Dell said. "You consolidate. You run away."
The efficiency of the distribution model comes across in the numbers. Dell Computer had 10.3 percent operating expenses in its last quarter, compared with 21.3 percent for Compaq. That kind of disparity gives the company leeway to get aggressive on pricing.
In the early 1990s, Dell launched a price war with higher-cost computer makers that eventually forced cross-state rival Compaq to oust its CEO and scramble to find a low-cost strategy of its own. He launched another withering price war last year, picking up four points in market share and dethroning Compaq as the world's largest provider of PCs.
"Dell has enough of a buffer that, even by accelerating its own profit erosion, competitors experience twice as much erosion," said Brooks Gray, a senior analyst with Technology Business Research.
This is not to say that Dell has been free of casualties. As the company continued to squeeze out more cost efficiencies, it handed out pink slips to more than 4,000 employees. That was a bitter pill, but management was able to keep operating margins flat or to increase them in the past four quarters during one of the fiercest price wars in the history of the computer industry.
Having survived those battles, Dell is trying to apply his Darwinian principles to new markets. Later this year, the company will have new products in two server categories that Dell says will be more affordable than anything offered by the competition.
It is, for all intents and purposes, another declaration of war.
"Now," Dell said, "we're getting to the fun part."
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By Sergio Non
Glancing at a list of high-powered technology CEOs, the average person would be excused for not recognizing the name James Morgan.
In an industry legendary for its outsized personalities, Morgan remains a relative wallflower. He may not even be the most famous member of his own household--his wife, Rebecca Morgan, a California state senator for nine years, holds that distinction.
Yet no CEO of a bellwether technology company has been at the helm longer than Morgan, who has run Applied Materials since 1977. Along the way, he's transformed a niche market supplier into a semiconductor-manufacturing empire with more than $7 billion in annual revenue. And unlike counterparts at most computer and software companies, Morgan doesn't worry so much about the competition.
"The biggest threat to Applied is Applied itself," said Risto Puhakka, an analyst with VLSI Research.
That's a common refrain heard from analysts who say Morgan's primary challenge will be managing through a patch of soft demand while his customers wait for the economy to rebound. Applied Materials is one of the few companies with products for almost every step of the semiconductor-manufacturing process, including the processing of silicon wafers, the etching of circuit patterns, and the detecting of flaws in finished chips.
But for all its dominance, it's still unclear whether the company can grow faster than the rest of a depressed industry. The company's fortunes depend on orders from chipmakers, which buy their machinery from Applied Materials. And because of the slowdown in the PC and communications equipment markets, it may take another couple of quarters before the Intels and Advanced Micro Devices of the world are confident enough to expand chip fabrication plants or build new ones.
In the meantime, Applied Materials has felt the effects of the 2001 recession: The company was recently forced to eliminate 3,700 positions, and its stock fell as low as $26.59 from a 52-week high of $59.10. Even so, shares recovered much of their lost ground by the end of 2001 amid optimism for a macroeconomic recovery in 2002.
Despite these setbacks, Morgan says the most recent tech collapse hasn't forced him to alter his strategy for the new year. It will look a lot like his plan for 2001, which called for heavy spending on research and development.
"As a leader in a rapidly changing business like ours, if you aren't a little steady, people get confused," he said.
This kind of stoicism comes naturally to the 63-year-old industry veteran, who has lived through several booms and busts since his first business experience as a teenager in the 1950s, when he was put in charge of 35 workers in his family's vegetable-canning business in Indiana. Morgan was further instilled with a sense of discipline in the Reserve Officers' Training Corps during his college years at Cornell University, and he went on to work in management consulting for the Army Materiel Command in the 1960s.
His first civilian executive job came with Textron, which had a 1,600-employee unit so inefficient that it was losing $15 million on a large government contract. Morgan spent four years turning the division around--an experience that served him well when he arrived at Applied Materials, a company with annual sales of $29 million but losses steep enough to persuade him to eliminate five of six business units. Revenue fell to $14 million as Morgan rid the company of everything not directly related to chipmaking equipment.
Since then, Morgan has spent far more time spending money to grow his company rather than cutting back.
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The company's growth has generally outpaced the overall market for chip equipment, keeping revenue from declining despite a slump in the chip market and a financial crisis in Asia, the company's biggest market. Applied Materials grew 17.7 percent in 1999 and followed up with a fiscal 2000 that can only be described as wildly successful--87.7 percent sales growth--even if you account for the technology bubble of the time.
The question, however, is whether Morgan's steady-as-she-goes direction is what Applied Materials needs to navigate some of the most turbulent times in its history. Even in the current recession, the CEO has resisted curtailing long-term planning and allowed R&D spending to top 21 percent of revenue in the company's last quarter.
As a percentage of revenue, the company's budget for research and development actually has risen during industry downturns; during the chip market slowdown in 1997 and 1998, for instance, R&D consumed 14 percent and 16 percent of sales, respectively, compared with 12 percent in 1996 and 2000, two of the company's strongest growth years.
That spending has paid off in the past year, allowing the company to roll with three major changes in the chipmaking industry: Densities shrank from 250 nanometers to 130 nanometers; wires moved from aluminum to copper; and the silicon wafers from which chips are cut expanded to 300 millimeters from 200.
The first two developments make chips cheaper and more powerful. The third improves chip-manufacturing yields. In every case, long before most chipmakers were willing to produce the chips en masse, Applied Materials was ready with machines because of its R&D layouts during previous downturns.
"They have a breadth of product and an ability to deliver the latest technology that no other company can touch," said Larry Tolson, logic operations manager for Texas Instruments, the biggest maker of chips for wireless phones.
Although it remains unclear whether future R&D investments will be equally successful, Morgan has shown that he's not afraid to take chances with resources. In building Applied Materials' international business, for example, he has been willing to lose money in a region for years if he believes in the area's potential to pay off.
"That's what's driven my personal focus on being early into the markets and getting the position before anybody else," Morgan said.
Indeed, overseas markets may be as important as technology in determining the company's future. Applied Materials gets the majority of its business outside the United States and refuses to think of itself as anything but a multinational corporation. Morgan in 1981 went so far as to ban the words "international" and "domestic" from his company's literature.
He also decided Japan deserved attention in the late 1970s, at a time when the Japanese market was considered impregnable to foreigners. He even wrote a book about it, called "Cracking the Japanese Market: Strategies for Success in the New Global Economy." Although Japan is a unique market, Morgan believes in the same persistent, careful approach of building contacts, getting to know government personnel, and being on hand as soon as customers develop works in other areas, such as mainland China.
Applied Materials entered mainland China in 1984, when the country's shift to capitalist business practices was just beginning. Applied Materials' Chinese operations have never produced noteworthy earnings, but even in the face of Asian chip gluts, as recently as the late 1990s, Morgan refused to leave.
"Though it was pretty backward at that time (1984), I felt that someday it would be a major player," he said. "That really hasn't paid off in great dollars, although it's beginning to accelerate now. But on the other hand, we built the relationships with all the people who emerged into the decision-making positions of the high-tech industry in China."
VLSI's Puhakka attributes much of Applied Materials' success to its attention to business relationships, saying that the company will continue testing and tinkering with equipment at a customer's plants until the system works properly instead of forcing shaky machines onto the market.
"If you're a big customer of Applied, you know they'll work out their problems," he said.
Morgan said the company has benefited in other ways from its international forays, occasionally picking up management tips from companies with vastly different cultures. In the end, however, he will rely on the basics.
A booklet of Morgan's own managerial musings, called "10 Ways to Be Successful," reads like a collection of corporate aphorisms urging readers to "lead from your strengths" and "routinely to plan ahead."
The pamphlet's final exhortation? "Press on."
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By Wylie Wong
REDWOOD SHORES, Calif.--At 57, Larry Ellison has built one of the most powerful technology companies in the world and amassed billions of dollars in personal wealth--only to find himself going out on sales calls to potential customers, the kind of grunt work usually expected of junior executives.
It is a role that Ellison has never emphasized among his duties at Oracle, now the largest manufacturer of databases, with a market value approaching $80 billion. But the co-founder and chief executive knows that the company needs his personal attention as it tries to rebound from the industry's brutal recession.
"Now, I'm doing more sales than I've ever done. I probably spend 20 percent of my time selling," Ellison said, a significant devotion of time that would normally be spent on long-term, big-picture planning.
In many ways, it is appropriate that Ellison is doing more ground-level work at Oracle today: The company is in the midst of a transition that he put in motion with the realignment of top ranks, and it is redefining key parts of its business. The evolution has left Ellison directly in charge of many aspects of the company for the first time in years.
Although some analysts remain troubled by the departure of key executives, most notably longtime President Ray Lane, others argue that Oracle needs the kind of inspired leadership that only a dynamic figure such as Ellison can provide. And even though his background is in technology and not sales, industry veterans believe he is the perfect pitchman for Oracle, whether he is selling the company's strategic direction to Wall Street or a new application to a database customer.
"When you are in a room with him, you feel like this guy knows what he's talking about, and customers want to buy from someone who knows what they're talking about," Illuminata analyst James Governor said.
Still, the reluctance of chief information officers to make large purchases in an uncertain economic climate presents a formidable task even for the most effective salesman. The challenges are all the more difficult for Oracle, which is facing competition in every area of its business.
While contending with IBM and Microsoft in databases, Oracle's 11i software smacks up against rival offerings from SAP, Siebel Systems and PeopleSoft. The company also competes against BEA Systems and IBM in the lucrative market for application-server software, technology that runs e-business and Web site transactions.
Further, Oracle finds itself in the awkward position of competing against some of its closest partners. For example, most SAP customers use Oracle's database. But with Oracle entering the business-applications market, SAP has built closer ties with IBM and begun selling its software with IBM's database.
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For the most recent quarter, ended Nov. 30, Oracle netted $549.5 million, or 10 cents per share, compared with $622.8 million, or 11 cents per share, a year earlier. Not bad in a tough economy, but hardly enough to rekindle investor enthusiasm for this former highflier.
Yet if there is anyone who relishes a challenge--especially one that puts him squarely on the front lines--it is Larry Ellison. His mix of hardheaded business acumen, technology vision and insufferable braggadocio has catapulted this college dropout to business superstardom as the fourth-richest person in the United States.
Throughout his career, he has been consistent in one respect: His personal desire for the public spotlight has earned Oracle outsized attention. Whether he is igniting national debate involving privacy rights or racing yachts, Ellison manages to keep Oracle's nameplate in headlines worldwide.
"He's a seductive, great speaker," said CIBC analyst Melissa Eisenstat, who believes that once the economy improves and businesses start spending again, Oracle's fortunes will rebound.
In the constellation of tech leaders, Ellison clearly stands apart as one of the few executives who, like Bill Gates, can convincingly set an agenda for the wider computer industry. Also like his Microsoft rival, Ellison is an amazingly successful entrepreneur who built a company from scratch into a multibillion-dollar concern. In 2000, Oracle held the greatest share of the $8.8 billion relational database market, with 34 percent, ahead of IBM's 30 percent and Microsoft's 15 percent, according to analyst firm Gartner.
With Oracle's annual database growth expected to increase only 10 percent to 15 percent, however, Ellison must move the company beyond its roots as a traditional software maker. Under his watch, the company has developed software products that move the functions of a customer's business onto the Internet. Oracle envisions deriving half its revenue from sales of application software, a market that's bigger and growing faster than the company's mainstay database business.
It's not an unblemished record. Ellison was overly optimistic about the popularity of Internet gadgets, and his predictions for network computers failed to account for the subsequent emergence of PCs that sell for less than $500.
More recently, Oracle was forced to reprice its database applications after it antagonized customers by launching an unpopular fee based on the amount of processing power they used. The company also had to work out kinks in its bug-ridden 11i e-business software package and has faced criticism for hard-sell business practices.
For the record, Ellison dismisses suggestions that there were any negative repercussions from the first 11i release. Every software company has initial problems with new products, he said, and this was no different.
"The bugs are behind us now," he said. "Our customers understand the product is ready for prime time. It's a huge release, but it took us a year to stabilize."
At the same time, Ellison complains that critics overlook the fact that Oracle earned between $500 million and $800 million in each of the last three quarters, mainly by tightening costs and moving business operations to the Web. With new versions of every piece of Oracle software in the pipeline, Ellison believes the picture is a lot brighter than conventional wisdom might suggest.
He also is betting heavily on the acceptance of Oracle.com, the company's 3-year-old application service provider that rents business software to companies and houses their information in Oracle databases. Ellison expects Oracle.com to account for half the company's database and applications revenue by 2005.
"We're the last ASP standing," he says. "It looks like our fastest-growing business. It could turn out to be our largest business."
This is the kind of trademark bluster that has historically turned heads on Wall Street and helped promote a cowboy image of Ellison among some of Silicon Valley's early entrepreneurs. In private, however, people say there is a dark side to the CEO's ego that drives people too hard--and sometimes away.
Four senior executives have left the company in the past 18 months, including a top salesman in December, at a time when Oracle needed continuity to carry out a concerted sales campaign.
"It's not helping the business to lose senior executives, and the business has under-performed, partially because of management issues," Banc of America Securities analyst Bob Austrian said.
Ellison, who has restocked his executive team with people from within Oracle, dismissed suggestions that the company is suffering through a brain drain. Oracle has a deep management team, he said, and turnover is part of the natural life cycle at any company. "Almost every enterprise software company--except SAP--is run by an Oracle veteran, and some people say that's a negative?" he asked rhetorically. "For Oracle, that shows our incredible depth. I'm sure more will leave and become CEOs. There's nothing wrong with that."
Some, such as Siebel Systems Chief Executive Tom Siebel, have even come back to haunt Oracle as formidable competitors. Other alumni include Veritas Software CEO Gary Bloom and Beatriz Infante, chief executive of software maker Aspect Communications.
"Oracle is a great training ground because Larry is brilliant and a tough, ruthless individual," said Infante, who recalls being on the receiving end of more than a few Ellison verbal lashings. "And because of that, you learn survival skills inside the company."
Now Ellison will be putting those skills to use in the field--this time as a Willy Loman dressed in an Armani suit.
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By Robert Lemos
Two months after settling in as CEO in November 1999, Matt Szulik watched Red Hat's stock price begin a free fall that would unnerve investors, drive away disillusioned employees, and raise questions about the company's very existence.
Critics of Linux--an operating system created by volunteer programmers and licensed for free--said it couldn't create a profitable business as Red Hat had promised. But Szulik made a full-court press on Wall Street and successfully hurried through a secondary offering that left the company's coffers flush.
"The $300 million in the bank on the balance sheet was key," said Peter von Schilling, a senior analyst at Merrill Lynch. "It removed any kind of doubt that Red Hat is sustainable."
It was a successful baptism by fire for Szulik. But that was only the first test at Red Hat for the 45-year-old New Englander, who must still prove that the Linux seller can survive as a profitable company in a field dominated by such industry heavyweights as Microsoft and Sun Microsystems.
A hard-charging executive who does not suffer fools gladly, Szulik has won wide praise among Linux supporters for his fierce loyalty to a cause sometimes described as high-tech socialism. Now the software veteran must find a way to turn a profit on this grassroots alternative-operating system movement, taking Red Hat beyond its geek-chic origins to the wider business market in a hostile high-tech economy.
As the galloping momentum behind Linux has slowed, Red Hat's quarterly revenue has seesawed. The company's "open source" model allows Red Hat to benefit from work done by a wider community of programmers and Linux software makers, but that arrangement also makes the operating system essentially a free commodity because everyone has access to the software code.
Despite such obstacles, Red Hat has made progress. Three years ago, the company had only one way to make money: a distribution package that brings together a variety of Linux programs and components available from open-source projects into an integrated operating system.
Now it has at least two-dozen sources of revenue, including support services and systems integration. Red Hat makes sure all the software works as a cohesive whole, which is no mean feat with a current distribution that contains hundreds of software applications, such as Web servers, mail programs and office applications.
On the horns of a dilemma
Linux customers save money because they can theoretically buy a single copy of software and install it everywhere. Google, for instance, uses Red Hat across all 10,000 of its servers and saves millions of dollars by buying only a handful of software copies, said Jim Reese, the Web company's chief operations engineer.
If his company had gone with Windows software, Reese said, "the seat licenses alone would be prohibitive."
Yet such devotion does little to help Red Hat's bottom line. Because the company can't profit from selling core software, it's unclear how much of Linux's popularity will translate into revenue.
"That presents Matt with a particularly difficult challenge," said Dan Kusnetzky, a vice president at market researcher IDC. "He has to find many ways to find money in a market where the software cannot be high cost."
The list of casualties included Eazel, which concentrated on creating a desktop replacement; database maker Great Bridge; and the Linux division of software maker Corel. Others have canned the free-software approach in favor of proprietary applications, such as e-commerce company Ars Digita, Linux software maker VA Software (formerly VA Linux Systems) and file system creator Sistina.
Szulik, however, is not one to shy away from a challenge. As a teenager, he worked his way out of tough economic times in his hometown of New Bedford, Mass., by caddying at a local country club and learning enough to receive a golf scholarship to college.
While still in his 20s, Szulik started at Exxon Office Systems, where he rose to become head of worldwide sales. After spending nine years at Interleaf, he then rocketed through several start-ups, including MapInfo, Sapiens International and Relativity Software.
Szulik might have stayed at Relativity had he not been a rare fish: a seasoned software executive in the small pond of North Carolina. "It isn't the easiest place to recruit senior talent to," recalled William Kaiser, a partner with venture firm Greylock and a board member who led the executive search for Red Hat's CEO.
True believer
Kaiser found what he was looking for in Szulik. And perhaps just as important, he got a true believer.
Szulik says he has not touched a Windows product in more than four years. He has even brought home copies of Linux and the GNOME desktop interface to his children, who have been using it since last year.
"Matthew sees this not as just a job, but a mission," said an admiring Billy Marshall, who works alongside Szulik as vice president of enterprise sales and marketing for Red Hat.
While other companies have abandoned the open-source model, Szulik's insistence on keeping Red Hat rooted in Linux has won him support well beyond the company's headquarters at Research Triangle Park, N.C., outside Durham.
"He's doing good things for the community," said Bruce Perens, a well-known Linux developer and the open-source strategist for Hewlett-Packard. "It's great that Red Hat made the switch to a different management without doing away with what makes the company great."
Still, with all driven leaders comes controversy. While keenly aware of the importance of rewarding talent, Szulik prides himself on being independent-minded and even stubborn at times--traits that have occasionally backfired among some of his 600 employees.
For those who fail to produce to his satisfaction, the 6-foot, 4-inch CEO can be a harsh taskmaster, according to some who have worked with him. Vivek Wadhwa, who was Szulik's boss at Relativity, recalls that differences in opinion did not always end amicably: "We've had yelling matches in the middle of the hallway," he said.
Others say Szulik is simply doing what is required of a chief executive, especially in tough times that call for tough measures.
"He has a very strong personality. If he rolls over you, then he doesn't respect you," said one employee who spoke on condition of anonymity. At the same time, the source added, "if you are not a pain in the ass, you wouldn't get the job done."
Indeed, Szulik's accomplishments at Red Hat are many. Since he has taken the helm, the company has expanded beyond software sales, charging for support through the Red Hat Network. It also makes money from books, training and custom installations for large customers.
From a broader perspective, Red Hat has taken advantage of weak economic times to snap up smaller companies and enter new markets. Through such mergers, it has acquired the expertise to create a pint-sized Linux operating system to run handheld devices and communications equipment, drawing such customers as mobile-phone maker Ericsson and hardware maker Intel.
Red Hat has not been immune to the industry's recession, but Szulik has resisted blaming the company's problems on the economy. Co-founder Bob Young said Red Hat's top brass had every right to make excuses.
"But they didn't," Young stressed. "Instead, they have used a great amount of financial discipline."
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That discipline has helped Red Hat's bottom line. In the latest quarter, for example, the company reduced the costs of subscription revenue and of delivering services. As a result, gross margins edged up to 60 percent from an average of 53 percent in 2001.
With only $68 million in sales for the first three quarters, Red Hat is likely to see revenue fall from the previous year's total of $103 million. Szulik says profits won't come until the next fiscal year, ending February 2003.
Red Hat won't displace competitors like Microsoft anytime soon, but its success is a relative measure. Because Red Hat has only $100 million in revenue, becoming a billion-dollar company can be considered an enormous achievement.
This is not to say that Red Hat is afraid to compete with the industry's leaders. It is taking on Sun with Linux, which is an open-source variant of the Unix operating system and is compatible with most Unix applications, but much less expensive.
A recent IDC study found that companies that switch from Unix to Linux can save up to 82 percent on messaging and collaboration applications and up to 45 percent on Internet and intranet applications. Amazon.com recently acknowledged that it has saved as much as $17 million by switching to Linux from Sun's Solaris Unix.
Winning over Microsoft's customers is a different matter. Moving from Unix to Linux is relatively easy because of their similarities, but converting systems based on Windows takes an entirely different set of skills and knowledge. However, companies looking for new systems will be much more likely to seriously consider Linux as opposed to Windows, IDC's Kusnetzky said.
"It's a mainstream choice in very few markets right now, but it will be a mainstream choice in every market by 2005," Kusnetzky said. More than a third of core Windows customers had Linux software installed somewhere in their company, according to an IDC report.
Linux even has the backing of computing titan IBM, which pledged to spend $1 billion on the open-source technology in 2001. Red Hat has also logged several high-profile customers, including Morgan Stanley and Cisco Systems.
Although those sales were scored by replacing older, and more expensive, Unix systems, Szulik sees the biggest battle against today's dominant operating system.
"By the year 2005 there will be two credible operating systems," he said. "One will be Linux, and the other will be a Microsoft operating system."
The question is whether Red Hat has enough time to pull that off before the money runs out.
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