No, Virginia, The Net Is Not Going To Make Everything Simple

Arno Penzias sees a multiplicity of e-devices in which "no one size fits all"

After 36 years at Bell Laboratories, including three years as director of the legendary research center, Nobel laureate Arno A. Penzias has retired in California. There, he serves as an adviser and investor with blue-blood venture capitalist firm New Enterprise Associates, offering his insights into telecommunications and other technologies. Dressed in a red sweatsuit in his San Francisco home, Penzias shared some of those insights with BUSINESS WEEK's Andy Reinhardt, while cargo ships plied the bay outside his picture windows.

Q: Why did you leave Bell Labs?

A: I had changed everybody's job except mine. So I decided to change, and right at that point, I began to see all these little companies doing interesting things out here. The work we did at Bell Labs had set the stage for all this wonderful stuff. So I came out here, initially with Lucent (LU), and started working with small companies. Now I'm on my own and working with New Enterprise Associates.

Q: What's your vision of how the communications system is being transformed today?

A: There is going to be intelligence everywhere in the network, but there will be considerably more control at the edge than there is now.

Q: What is the difference between intelligence and control?

A: Intelligence is what allows a function to be carried out. Control is where the choice is made to use the function. There are big religious arguments about this. But the trend is undeniable. It's like the Internet--where users have control--compared to the old phone system, which was completely centralized. This is a growing theme throughout our whole society, and not just in the communications sector.

Q: Tell me more about decentralization.

A: Back in the industrial age, the image of progress was Pittsburgh, with its huge stone chimneys belching smoke. Now it's small offices and home offices. People can carry their laptops everywhere, and those are their offices. The poster child of American prosperity today is somebody with a laptop getting on an airplane. For a telecom company like Lucent or Bell South (BLS), what that means is that their job is moving from the central telephone office to the customer premises. They're in the best position to take care of networking stuff in the home anyway. After all, they make house calls; they're the people who come and make your phone work. Maintaining things like home networks will become the locus of tomorrow's communications companies. If the local telephone companies ever become well-managed, they could be really dangerous [laughs].

Q: What will the network of the future look like?

A: There will be copper and there will be fiber, there will be fixed radio and mobile and satellite, and each one will fill its own niche. On top of these there will be a variety of protocols. No one size fits all. There will be a lot of complexity, and your machines will attach to whatever is out there. You will see the emergence of things like bandwidth-on-demand, where you can share a pipe and get the bandwidth you need. But Internet Protocol [the software lingua franca of the Net] isn't going to solve every problem. Not all of this stuff is going to be handled by a single goddamn Internet Protocol network.

Q: Who said it would be?

A: Well, John Chambers [CEO of Cisco Systems (CSCO)] says the telephone is a dinosaur. He's a great man, but his mentality is that you should get rid of your phone and use your computer instead. Give me a break. The telephone is convenient, it works, it goes in your pocket. The mistake he's making is to think that the world is going to be a neater place, that Internet Protocol will do everything. I think it'll be quite the opposite. Things are getting more diverse.

Q: Can you give me some examples of that?

A: You are going to see other protocols for things like channelized data, where you want your own pipe or you need more security. And you are going to see a multiplicity of devices, not a blurring. You don't want to watch video on your cell phone. Within five years, every new car in the world will have a satellite antenna that lets it receive 500 radio stations and six to eight hours of storage for saving programs. And think what your life will be like when a TiVo box [a digital video recorder] will be able to store 3,000 hours of video instead of 30. All of these different devices will use various kinds of networking technology.

Q: So what is the hottest area you are looking at now?

A: I'd say metropolitan area networking. There are lots of companies making gigabit Ethernet equipment, and on the other side, outfits like Global Crossing (GBLX) and Qwest (QWST) that have huge data pipes. But people don't understand that these two worlds don't connect very well today. It's the part of the python where the pig is stuck. So I'm looking at a portfolio of companies that are taking a fresh look at how to weave together these two worlds. Companies like Mayan Networks, LuxN, Astral Point, and Quantum Bridge. They're throwing electronics at the problem, collapsing everything together to improve the connection between local area networks and the backbone.

Q: What's the biggest trend you see overall in the computer business?

A: The move from products to services. The only way people are going to be able to make money is on the service side. The margins in the PC business are gone; there's no value in stuffing boards. Even Michael Dell could finally work himself out of a job. He makes only $200 off a computer that costs its buyer $20,000 in service and support over the life of the machine. He has to find a way to grab the other 99% of the value of each machine his company sells. You have to keep reinventing yourself.

Q: Are there any other technical trends people aren't aware of yet?

A: There is tremendous stuff going on with electronic displays. Right now, display panels cost around $1,000. But people are figuring out how to make them as thin and flexible as a plastic vegetable bag. Imagine what that will mean. You will be able to hang them on your walls just like posters. Displays will be so cheap that packages will have their own displays.

Q: What's the biggest difference that you've noticed between the East and West Coast high tech businesses?

A: There is a tremendous amount of diversity here. But probably the most important difference is in the work style. People out here are less worried about failure than they are back East. Even the venture capitalists are different: They use the same words, but they tend to be more conservative in the East. I saw that when I came out to learn about startups for Lucent. When you are farther away, it's easier to deny what's happening here. But there is a tremendous amount going on.

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