Scott And Bill Went Up The Hill

High-tech leaders find that they can no longer afford to ignore Washington--and vice versa

Bill Gates looked as if he'd prefer a pie in the face. There he was, the richest man in America, the ruler of cyberspace, trapped in a Capitol hearing room between windy low-tech senators and nasty high-tech rivals, including Sun Microsystems CEO Scott G. McNealy, who argued that Microsoft's market grip is on par with "General Motors having the ability to decide what type of gasoline you put into your car."

Officially, this bit of televised political theater--a Mar. 3 hearing of the Senate Judiciary Committee arranged by its chairman, Orrin G. Hatch--was mounted to explore just how competitive the software business is. But it also served to prove just how important the exploding high-tech industry has become to Washington policymakers, and vice-versa. "It's been a year since I was in D.C.," Gates wrote in his online zine Slate on the eve of the hearing. "I think I'm going to be making this trip a lot more frequently from now on."

Indeed he will. As the titans of high tech seize ever larger chunks of the global economy, an industry that a decade ago only dealt with government sporadically is now warily taking on the pols of the Potomac on dozens of issues. With growing debate in Washington over everything from computer privacy to antitrust, "it's increasingly clear the industry's future is less about technology and more about policy," says America Online CEO Stephen M. Case.

At the same time, politicians of every stripe see high tech in their

future. House Speaker Newt Gingrich (R-Ga.) famously called for giving all poor Americans a laptop PC. And even before they took office, the Clintonites wooed Silicon Valley with promises to link Americans to the Information Superhighway. "The rapid growth in high-tech industries and globalization of the marketplace present new realities and challenges in every aspect of law and regulation," Vice-President Al Gore told BUSINESS WEEK in an interview on Mar. 3.

True enough. The Internet and electronic commerce have been rearranging the business landscape--changing how we buy everything from Buicks to books. Now, the leaders of the emerging digital economy are sweeping into the capital, changing the power relationships there, too. On the Internet, companies such as Microsoft Corp. and Netscape Communications Corp. are spreading into all sorts of digital services, from entertainment to online banking to telephony. As they do, they find their interests bumping up against the old guard that has played the Washington game for years--broadcasters, phone companies, even computer-hardware makers.

That's why scarcely a week goes by without big-name CEOs in town. In addition to Gates and McNealy, the Mar. 3 hearing brought out Netscape CEO James L. Barksdale and Michael S. Dell, CEO of Dell Computer Corp. On. Feb. 25, Cypress Semiconductor CEO T.J. Rodgers and execs from Microsoft, Texas Instruments, and Sun urged the Senate Judiciary Committee to permit more visas for high-tech workers. On Mar. 4, another coalition began a campaign to lift export controls on encryption technology. And the entire industry is lobbying furiously for better global copyright and patent protection.

SHORT HONEYMOON? The industry's growing focus on Washington already has borne fruit. In the past few weeks, President Clinton pledged to keep the Internet tax-free for now, and Hewlett-Packard Co. won approval to export sophisticated cryptography chips. The victories "show the Valley is learning to play the political game," says Netscape Executive Vice-President Marc Andreessen. And Washington is plugging into Silicon Valley, too--hoping that some of the Digital Age magic will rub off. "Wrapping yourself in things like job growth is not such a bad thing," says Halsey M. Minor, CEO of CNET Inc.

Some Washington insiders predict this honeymoon won't last. "The industry has led a charmed life in Washington, winning victory after victory without having to work very hard," observes former National Security Agency official and encryption expert Stewart A. Baker. But because the industry does not speak with one voice and because other industries are beginning to fight back as high-tech companies encroach on their turf, Baker predicts trouble ahead: "Every victory in Washington comes with the seeds of the next defeat."

There's also potential for a huge culture clash. Gates's barely disguised disdain for government is not anomalous. "The industry had an attitude that government should do what it needs to do but leave us alone," complains one Hill technology staffer. "Their hands-off approach to Washington will come back to haunt them." Admits Valley guru Regis McKenna: "A lot of Silicon Valley types still don't get it."

And when it comes to playing the Washington money game, many don't even try. TechNet, a policy group organized by the super-connected venture capitalist John Doerr, is an exception. To help advance the group's agenda, members have given between $2 million and $4 million to both parties. For the most part, however, techies favor issue advertising that directly addresses their own concerns, assuming the wisdom of its argument would be hard to ignore.

To win the policy battles to come, though, the new elite may need to learn lobbying. Internet access providers, for example, are likely to go head to head with phone companies as the Federal Communications Commission mulls concepts such as Internet telephony. And few lobbies in Washington can match the power of the telcos. "These incumbent interests are not going to go gentle into this good night," warns Kenneth R. Kay, executive director of the Computer Systems Policy Project, a group of computer industry CEOs.

The clashes have already begun. Last year, computer companies fought tooth and nail at the FCC to get a high-definition TV format that was compatible with PC technology. In the end, they settled for multiple standards--still impressive headway vs. the awesome power of broadcasters.

Of course, high-tech companies aren't exactly novices. "It's a silly notion that we haven't been here and we don't know what we're doing," snorts Sun's McNealy. His company set up its first Washington policy office in 1992. IBM has been here for decades.

High tech rode high during the Reagan Administration. The Semiconductor Industry Assn. mounted a huge crusade to fight alleged Japanese dumping of computer chips--repeatedly parading such luminaries as Intel Corp.'s Bob Noyce before Congress. That led to the 1986 semiconductor trade agreement that stopped the dumping of Japanese chips in the U.S. and set market-share goals for U.S. chips in Japan.

LITTLE PATIENCE. But that success also led to a split in the high-tech community that diluted its influence. After the chip agreement led to DRAM shortages in the late 1980s, computer makers realized they needed a rival Washington presence. So they set up the Computer Systems Policy Project, one of many coalitions that sprouted up in the past decade. "The semiconductor guys ended up spawning us because we didn't like what they had done," recalls CSPP's Kay.

Now, the Internet era is bringing a new set of high-tech heavyweights into Washington policy circles. Unlike chip and computer makers--many of which benefitted mightily from government and defense contracts--these Internet and software tycoons have little patience for bureaucratic oversight and tend to be uncompromising. The U.S., Gates warned at the Mar. 3 hearing, will only continue to lead in the Digital Age "if innovation is not restricted by government." That attitude rankles McKenna. "Bill Gates perfectly represents the techno-elitist view. He came out and said the government was full of B.S."

What do high-tech's new policy wonks want? While split on many issues--most notably how to deal with Microsoft's power--they agree on a few key points. One is easing immigration restrictions. Another is securities-litigation reform. Clinton lost favor in the Valley in December, 1995, when he vetoed a bill that would have made it harder for shareholders to bring what the industry considers frivolous lawsuits. "Clinton's veto shocked high tech out of its relative quiet," says Representative Tom Campbell (R-Calif.). "They'll never be passive again." Silicon Valley mobilized, helped push Congress to override the veto. And it followed up with a successful campaign against Prop. 211, which would have shielded California shareholder suits from the tougher federal restrictions.

At the moment, there's a rift between the software and Internet companies and the older computer makers over encryption. The government wants to limit exports of encryption technology to keep it out of the hands of terrorists. FBI Director Louis J. Freeh wants domestic restrictions, too. "The hardware guys, with all their experience in Washington, are willing to look for compromise, whereas the nouveau software guys want to have it all their way," says Kenneth Flamm, an economist at the Brookings Institution. Not surprisingly, hardware companies have gotten further. "Saying, `Screw you, FBI and Defense Dept.' is not a productive approach," observes Flamm.

Veterans of the Beltway predict that even the most arrogant and libertarian software execs will quickly learn to play the Washington game. They can't afford not to, considering the multitude of issues on the horizon. Battles over everything from privacy to intellectual property to electronic commerce will shape the economy of tomorrow. Welcome to Washington, Mr. Gates.