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» Technology and telecom roundtable » Meyer on Greenspan

Technology and telecom roundtable

GEOFF COLVIN: The industry that connects you to the world is in tumult, with giant companies devouring one another almost weekly and FCC chairman Michael Powell leaving after four controversial years. Through it all, you and I are being pushed to buy technology that's ever more dazzling and bewildering.

Is any of this good for you as a consumer? As an investor? And in a world where my kids say I'm a dork, in their words, because my cell phone doesn't have a camera in it, what in the world is next?

Scott Cleland is chief of the research firm the Precursor Group and a top independent expert on this industry. Andy Kessler is an author, a former hedge fund manager, and a long-time telecom analyst. Guys, let's start with the news, which is the merger frenzy. This week Verizon said it's buying MCI. Just before that, SBC said it's going to buy AT&T. Sprint is buying Nextel. Cingular bought AT&T Wireless. Nobody seems to think this is over. Andy, is any of this good news for you and me as consumers?

ANDY KESSLER: Yeah, I don't really think so. I mean when I first heard about SBC buying AT&T, you know, Ma Bell and the Baby Bell getting reunited, the first thing I thought of was that Alexander Graham Bell would be so proud, and he'd be proud because he'd recognize a lot of the equipment inside these companies. I mean the phone business hasn't changed much since 1875. Those copper wires that we still have into our home, Alexander Graham Bell was putting in. And the phone companies, the telcos, they're not innovators. They're obstructionists. They hide behind the skirt of regulators and try to keep a business where they overcharge us for a phone service that is becoming obsolete.

COLVIN: And so what they're trying to do with these big deals is gain mass so that they can have some market power?

KESSLER: I think you're going to see prices going up for businesses and for consumers after these deals are done.

COLVIN: Well, that would be a change, and not good news for consumers. Scott, is it good news or bad news for us as investors?

» Telecom duopoly

SCOTT CLELAND: Well, I think it depends on where you sit. You know, AT&T and MCI investors were delighted that somebody picked them up. These two companies are in serious trouble. AT&T went from $50 billion in revenues to $30, going to $25. We think they'll go to $15 in about five years. And MCI is plummeting as well. So we're kind of scratching our heads of why SBC and Verizon would want the negative growth. But Verizon got it a lot cheaper than SBC.

COLVIN: Yeah, they paid a very low price for MCI. Who's next? I mean how few companies are we going to end up with?

CLELAND: Well, we're going from six national wireless providers down to four, and we're going from six big wire line down to four. Now there could be some others, but right now it doesn't look like Bell South or Quest have logical pairings. There could always be some more surprise deals, but I think the biggest of them, at least for now, is done. I mean four big ones is a lot.

COLVIN: That's a lot. And of course all these multi-billion dollar deals are bets on technological advances and how real consumers are actually going to use them. So Karen Gibbs recently went electronics shopping with outgoing FCC Chairman Michael Powell, a self-proclaimed gadget geek who explains the larger significance of what you'll find on the shelves of a Best Buy store.

(video package begins)

KAREN GIBBS: Okay, Michael, you're a self-proclaimed gadget geek. Suppose we gave you an unlimited gift certificate to this store. Where's the first place you'd go?

MICHAEL POWELL: Well, now you're talking. The first place I would go is to the home theater section.

GIBBS: Let's go! Michael, we're in the home theater of the future, or is this the home theater of now?

POWELL: Believe it or not, this is the home theater of now. Everything we're looking at is currently on the market, and you'd be surprised how quickly this kind of technology is selling. The average family is really beginning to invest a lot of money in a home entertainment system in which they replicate a lot of the movie experiences for DVD watching and television watching. And more and more content providers are providing that kind of content that really makes this kind of equipment shine. What we're looking at is really probably the highest end type of TV that's on the market. It's a plasma and it's running high definition content. And the various boxes you see, some of the boxes are for the high end audio system. Here we have a DirecTV box which is getting the high definition signal, a DVD player, which most families can't do without these days, and maybe a TiVo functionality or a replay TV box that allows you to record programs and watch them as you want and pause like TV.

GIBBS: Currently there are three types of competing flat screen platforms: Plasma, LCD and DLP. The question for consumers is which platform will survive?

POWELL: I personally think all of them have a place. I think it's very confusing for consumers right now to sort through all of that. In fact at the FCC on our web site, DTV.gov, we have a place to help consumers understand what the different technologies are and the tradeoffs are.

GIBBS: We're coming up on the home office center attached to the home entertainment center, and they speak to each other wirelessly.

POWELL: What you have here, for example, is you have a television entertainment system, and it's connected to your home personal computer with all your photos, your music, perhaps videos are stored on the personal computer, but over here in the living room you can draw those things into the TV using the wireless connectivity.

GIBBS: Could you show me how it works?

POWELL: Sure. You'll have a simple remote control, just like a television remote control, and you can see that you can change channels among the various components. And so if we go to say pictures and you click on the pictures -- these are the same photos that are on your personal computer -- so what's great about that is instead of bringing out photo albums, you can have friends here looking at pictures of your most recent vacation, but really being run from your home office.

GIBBS: Now this is the buzzword I hear everywhere: Wi-Fi, wireless fidelity.

POWELL: Wi-Fi is probably the hottest thing going on. Wi-Fi is basically just a wireless technology, not all that different to what people are used to in their cell phones. But this is a wireless technology that carries data at really high rates. And so you can buy a box like this fairly inexpensively. You hook it into your computer and then it takes your high speed Internet connection and broadcasts it throughout your home. And then if you have a card like that built into your other computers, they can get on the Internet without having to plug into anything.

GIBBS: What kind of non-technology companies are benefiting from this Wi-Fi technology?

POWELL: Well, a lot of merchants in a lot of stores and in a lot of airports are realizing, look, it's part of the experience that we provide our consumers. More and more don't want to provide Internet connectivity. So one of the most famous ones is Starbucks around the country have Wi-Fi hotspots in them so that you can come in and get a latte, flip open your laptop and be on the Internet. The beauty of Wi-Fi is that it can transmit any kind of data. So what's starting to happen is people are inventing really neat products that don't have to be plugged in. They can do neat things. So what you have here is a video camera that's Wi-Fi capable. So it's taking a video image of us. It's using Wi-Fi spectrum, and it's sending it to the television. So these are being sold as security cameras as well as video conferencing. We all used to have those baby monitors. Now the baby monitors are actually cameras, and so you sit in the living room, you can actually see the crib and see the baby sleeping, and they're very inexpensive. These are technologies that are really going to be accessible to consumers.

GIBBS: This is the hot thing. Even I know about Voice Over Internet Protocol.

POWELL: People have hit on the idea that why can't your broadband connection be your telephone system? And so what an exciting thing that you don't have to necessarily call your phone company. You walk in here to an electronics store, you buy this box off the shelf. You connect it to your Internet connection, and then you plug your regular phones into it and you have high quality telephone calls that actually go out as data over the Internet and you can call anybody. But that's not so remarkable. What's remarkable is you can have a telephone number from anywhere in the world, so you could have a Chicago area code in Virginia. If you were traveling, you could take your little box with you to Europe, plug it into a data connection, and your local phone number would ring in your hotel room. So the minute you have a service that uses the computer and the Internet, you're talking about all kinds of things that are possible that wouldn't have been possible, and it's cheap.

GIBBS: Well, here's a product that's seen a lot of advances during your tenure, the cell phone.

POWELL: This is really starting to substitute for wire line telephone service. Some statistics tell us that young kids coming out of college don't ever get a phone in their home anymore. And these things are becoming the Swiss army device of the digital age. This year in 2005 some of these phones are going to actually have full motion video, and you'll be able to watch like headline news clips, weather news clips, television shows. It's a brave new world, but this stuff has really come a long way. I think the most important thing for folks to really begin to get in their head is that what you've come to believe is a computer in a little gray or black box is changing. These cell phones are computers. Your Apple iPod is a computer. Your television set is a computer. As computer technology begins to miniaturize, they don't necessarily have to take the form of these boxes with keyboards. They're being integrated in all of our devices. So computers are in essence becoming invisible and merging their way into the rest of our world.

GIBBS: We've seen a convergence now between customers, computers, communication, and Internet. What does that mean for the way this economy runs?

POWELL: I think it's enormous for this economy, because I think historically we've had lots of sectors that were divided into stovepipes, if you will. If you were the telephone industry, you lived in this little bucket. Your only competitors were only other telephone companies. If you were cable companies, you lived in another bucket. If you were a wireless phone company, you lived in another bucket, broadcast television. What convergence means is it's all data. Today I have a smart device. It can tell me when the phone should ring, when the phone shouldn't ring. I can come to a store like this and buy phone service off the shelf in a box and bring it home. Consumers are becoming critical as the technology spins to the edge of the network and they become the programmer.

GIBBS: No matter how advanced all of this high-tech gadgetry gets, the elusive technology the business world really dreams of is a crystal ball that hints at the next big trend.

POWELL: What I say to people when I think about that is look to the children running around your home. I think digital technology has really exploded in our lifetime, but we really are watching the first generation of digital children who really have grown up enmeshed in a world of interactivity. They expect to be active participants in their information and entertainment. And I think they tend to be the ones you need to watch their behaviors to get a sense of what the future is.

(video package ends)

COLVIN: Well, if your kids are boys, I think you would conclude the future will involve playing video games for about 18 hours a day, but I'm hoping that's not the way it works out. Scott, what will Michael Powell's legacy be?

CLELAND: I think history is going to be very kind to Michael Powell. He got several things dead right. He got a market forces policy, meaning getting the government out of the way. He got technology right, knowing that what it was all about was a migration to digital and a migration to IP. So he had a light touch there. And I think he understood the law and understood where it should go. So I think the history will be very kind to Michael Powell.

COLVIN: Andy, you share that view?

KESSLER: A little bit. I mean I like Michael Powell's free market philosophy. Unfortunately, he never changed any of the existing telecom regulations to implement that free market philosophy. So we're still stuck with the telecom act of '96 that has freezed things over. And I think it's going to always say Michael Powell, Janet Jackson, in writing up his legacy.

COLVIN: Well, there is that other aspect, which is not the technological one, but it is a regulatory one. Do you think that the fallout from the Janet Jackson business plus the Howard Stern and Bubba The Love Sponge and all the other indecency controversies will have a lasting effect on content? Andy?

KESSLER: Well, content over the public airwaves, yes. I mean in effect that's what the FCC was originally created for was to manage the scarcity of airwaves. And so things that are broadcast from a tower to our home that anyone can get access to, the FCC, rightly or wrongly, you know that's their job is to provide a format for decency. But as you know from your Spam emails that you get, things that come through cable and Internet networks and everything else, all bets are off. There's no one that has a say on what can and can't be done. And so we need technology, if you will, to filter out all the things that my family and other families might consider indecent.

COLVIN: Scott, will those controversies have a lasting effect on content?

CLELAND: No, I don't think so. I think, you know, the FCC is the cop that has to decide what's over the line. Janet Jackson, you ask virtually anybody, everybody knows that was over the line, and somebody's got to say that's over the line. And so I think people are trying to push the limits, and I don't think it will have a lasting effect.

COLVIN: Andy, if we look to the future of the mobile devices -- and let's look out not just to the end of this year, let's be adventurous -- five years from now, what do you think you and Scott and I will be carrying around in the way of a mobile device?

KESSLER: Well, it depends on how the wireless networks get built out. Right now the bandwidth in these wireless networks are negligent. There's nothing. And it's fun watching Michael Powell go through a Best Buy, because there's a wonderful saying out here in Silicon Valley, that intelligence moves out to the edge of the network. And millions of Americans and Michael Powell being gadget freaks, that's the ultimate testament to that saying. I mean you get these terribly intelligent devices. Unfortunately, telecom regulation supports exactly the opposite. In fact, Ivan Seidenberg at Verizon explaining why he was buying MCI, I'm going to read his quote he had on TV, "We need to install the networks, because the networks represent our lifeblood to the customer. All the intelligence gets put into the network. All of the interesting features and functions get put into the network." Now out here in Silicon Valley, we like our networks dumb, thank you very much. So the answer to your question of what kind of devices, you know, Verizon would like the network to do everything for you, and out here in Silicon Valley and in the device business, we'd like our devices to do everything for you. And that's the battle royal that's being set up.

COLVIN: Meaning the high technology goes in the cell phone, in the computer, in the TV, and whatever that may be. Scott, is that the trend?

KESSLER: And the network just passes our packets around.

COLVIN: Is that the trend as you see it?

CLELAND: Yeah. The trend, I call it the tech-com dynamic, because it's really not telecom anymore. It is Internet protocol on a device, a handheld, and different people are going to want different things. I think a phone is going to be an aspect of almost everything, probably a camera. Some children will have a game player or an iPod. There's not going to be any one device. It's going to really become a series of niche devices that meet the needs of that segment.

COLVIN: I want to know what you think about how companies are positioned in this industry, because this has been in many ways a competitive death zone, right? Prices constantly go down, people are in price wars that are brutal all the time, and you wonder if they're just going to push themselves to a point where nobody makes any money. Scott, you first, who do you think is best positioned?

CLELAND: Well, let's first of all talk about what is going on. It is not competition. What is going on is substitution. People are substituting wireless for wire line. They are substituting data for traditional circuit. And when you make those switches, you can get dramatically lower prices, and therefore the consumer is the big winner. So there aren't, I would say the cable companies relative to the Baby Bells are going to do very well. I still am scratching my head of why the Verizon and SBC wanted to buy AT&T and MCI. Those, the backbone is the worst segment in all of telecom. There are over 17 backbones, and it is, there's so much overcapacity. The technology only multiplies the capacity. So I'm scratching my head.

COLVIN: Andy, is this going to be an industry like airlines where it's great for consumers but nobody makes any money?

KESSLER: Well, what I look at is more where is the intellectual property? The service providers, we saw it in long distance, prices crashed by 90-something percent when there was pure competition, and companies would just eke out a small return. But in the computer business, there's operating systems and there's microprocessors and cell phones.

There's a whole bunch of slivers of intellectual property that you can find. And while the telecom providers may not make as much money, those that are providing the intelligence out at the edge, you know, the Intels of the world and the Microsofts and the Googles and others like that, those can be wonderful investments. You know, think about high telecom prices as a tax on all of us. When that tax starts going down, you get all sorts of benefits from those out on the edge.

COLVIN: Scott, Andy, thanks for your views.

Meyer on Greenspan

KAREN GIBBS: The chairman of the Federal Reserve Board testifies before Congress twice a year on the state of the economy. Many consider his comments this week to be the most important economic pronouncements of the year. Traders and investors hang on his every word. The problem is, even the experts often can't make heads or tails out of what the Fed chief says.

As governor of the Federal Reserve Board from 1996 to 2002, Laurence Meyer helped shape economic polices. Now he's written a book -- A Term at the Fed, an Insiders View -- that peels back the veil of the world's most powerful financial institution. He joins us from the nation's capitol.

Dr. Meyer, could you talk a little bit about the culture of the Fed? A lot of people think that it is all-knowing, almost omnipotent. Is it as buttoned-down and tightly-wrapped as that?

LAURENCE MEYER: Oh, my goodness. Omnipotent? Nobody on the committee, no member of the staff would look at it that way. Indeed there's a great deal of humility about the ability to forecast the economy, and therefore there's a great deal of importance attached to adjusting policy as the incoming data alters your view about the economy. So not only don't we know very well how to forecast the economy going forward with great precision, but there's often a great deal of uncertainty about what appropriate monetary policy is given the outlook.

GIBBS: Well, Greenspan's statements obviously are very well-crafted. Can you tell us what goes on behind closed doors to arrive at that language?

MEYER: Well, the Chairman works on the testimony in conjunction with the staff, and what he does is he then previews it with the governors. And one of the most interesting meetings we had during my term was, before each semiannual testimony, to sit around the table and talk about the testimony. And everybody would say, well, gee I don't like this particular part; I'd like you to include this, and the Chairman always tended to be rather inclusive.

GIBBS: If there were any one thing that you could change about the process, what would it be?

MEYER: I think that many members of the FOMC really bristle at the degree of control or influence or power that the Chairman sort of exercises. So the Chairman at his testimony indicated that he has just one vote, but really the Chairman has a great deal of power, and so for many people on the committee there's a sense that they're really not able to play the role that they hoped they would play when they came to the board and became a member of the FOMC.

GIBBS: Well, Greenspan spoke this week, and he sounded rather upbeat about the economy. Let me quote. He said "All told the economy seems to have entered 2005 expanding at a reasonably good pace with inflation and inflation expectations well contained." Well, the stock market seems to have shrugged it off, but what does that language mean for stock market investors?

MEYER: Well, the Chairman is saying that the economy is growing at an above trend rate enough to reduce the unemployment rate, reduce slack, and move the economy back to capacity. That's very good news for workers. It's very good news for really everybody in the economy. It's an economy that's growing above trend but with stable inflation. It's a very bright picture.

GIBBS: A lot of people have been astounded by the fact that as short-term interest rates rise, long bonds haven't moved at all. And in fact Greenspan said this week at his testimony, "For the moment, the broadly unanticipated behavior of the world bond market remains a conundrum." Now it certainly got the attention of bond traders, but I haven't the slightest idea of what he said. What the heck does he mean?

» Meyer outtakes

MEYER: He means it's a real puzzle. I'd tell you why if I knew. And this is the question that everybody in the markets, everybody who follows monetary policy in the financial markets is talking about, the unprecedented development that as the Fed has begun to raise interest rates, and now up 150 basis points, long-term rates have fallen, not risen. Typically they rise as the Fed tightens. And so it is a real puzzle, and the Chairman reviewed a variety of possible explanations, none of which he found particularly compelling.

GIBBS: All right, let's look at another statement the Fed Chairman said this weekend in talking about Social Security. He urged a go-slow approach on personal investment accounts, saying "If you're going to move to private accounts, which I approve of, you have to do it in a cautious, gradual way." He also said that "Real progress on these issues will unavoidably entail many difficult choices, but the demographics are inexorable and call for action." And I would assume that those difficult choices are either benefit cuts or tax hikes.

MEYER: Absolutely. So I think we want to separate the two issues. One issue is returning Social Security to long-term solvency, and another question is should we change the system and move more toward personal accounts? They're two basically separate issues. And the Chairman has always focused on the importance of cutting benefits or otherwise returning the system to solvency. In this case he said, you know, given you move in that direction, yes, private accounts are also a direction that he would also agree to go in, but they're two separate issues.

GIBBS: Looking into your forecasting model, Dr. Meyer, how do you see the rest of 2005 playing out for the economy and for investors?

MEYER: Well, our forecast is very similar to the forecast, you know the FOMC, you know, as the Chairman gave his testimony at the same time released its forecast. So it's a, we both have I think a very bright outlook of solid growth, stable inflation, and an economy converging towards full employment, what we often call a soft landing, moving back to full employment, having the economy slow to trend just as you get there. It couldn't be better than what the Fed is forecasting for 2005 and 2006.

GIBBS: Dr. Meyer, thank you very much for joining us.

MEYER: Oh, it's my pleasure.

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