Our guest this week is George Gilder, Chairman of Gilder Technology Group, which sponsors Gilder Telecosm Forum, a Web-based conference related to his longtime publication Gilder Technology Report.
Gilder is a member of the board of directors of Wave Systems Corp. and chairman of that company’s executive committee. He is a senior fellow at the Discovery Institute in Seattle and has been a contributing writer for FORBES since 1981.
A noted author, Gilder earned a bachelor’s degree at Harvard University and was later a fellow at Harvard’s Kennedy Institute of Politics.
Steve Forbes: Good to have you with us, George. With all this pessimism around, at least give us one good thing that’s happened in the last ten years. You’ve talked about the broadband miracle, where we went from way behind to surging ahead.
Gilder: Well, we sure did. The irony about it is this broadband miracle that’s happened in the United States over the last five years or so was totally unanticipated by the people who wanted massive government programs to lay fiber to every remote farmhouse.
Instead we had a 553-fold increase in wireless bandwidth deployed over this period — completely unexpected — that thrust the U.S. into the world lead again in communications. It shows these upside surprises that are the essence of capital creativity. Creativity always comes as a surprise to us. If it didn’t, we wouldn’t need it and socialism would work. You could plan these great new technologies.
Forbes: As Bell once thought it could do.
Gilder: That 553-fold increase in wireless broadband, nobody imagined really. I mean, it startled me with its speed and overwhelming impact.
Forbes: Well, pat yourself on the back — you called them teleputers years ago. Now we call them smartphones, tablets, iPads. Explain it.
Gilder: I always said that your computer would not be a desktop machine; it would be as mobile as your watch, as personal as your wallet. It would recognize streets. It would recognize speech. It would navigate streets. It might not do windows, but it would do doors and it would, in general, open doors to your future. And these teleputers are really the force that is driving this massive global roll out of wireless bandwidth, which was pioneered in the United States.
Bell’s Law and Moore’s Law
Forbes: Now, before we get to all the things that stand in the way of reaching the true harvest of all of this, explain some of the areas of great creativity. Let’s start with a thing called cloud computing, which I guess you’ve pointed out as Bell’s corollary to Moore’s Law.
Gilder: Yeah. As Gordon Bell, who was one of the great figures of digital equipment and is now at Microsoft, propounded Bell’s Law, which is sort of a corollary of Moore’s Law. Moore’s Law is that the number of transistors on a chip doubles every 18 months or so.
And he projected this into Bell’s Law, which is every ten years you got a 100-fold increase in computing capabilities. And this enables and requires a fundamental change in computer architectures. And we’re seeing it today in the rise of cloud computing.
As Eric Schmidt said, when the back plane of your computer runs more slowly than the network, the computer hollows out and distributes itself across the network. And that’s essentially what is underway today, where the actual computing is almost never done or rarely done in the device that you have in your hand or on your desk.
Forbes: Or in even the software. Now, some would say that’s centralization, which the French tried to do years ago, you remember that. But you see it as profoundly different.
Gilder: You still have a lot of processing power. The teleputer has more processing power than whole IBM mainframes that attempted to centralize computing in the past. Computing is more widely distributed than ever before in history. But nonetheless, a lot of the computing is not done where you happen to be. It’s done at the optimal point.
So what it means is that computing power gravitates to its optimal point geographically. And that’s the advent of cloud computing. And it’s resulted in an efflorescence of creativity and computer architectures because everything now has to run at fiber speed, that is, at the speed of fiber optics, which is the speed of light.
And so all the various devices in the entire computer universe have to be upgraded to fiber speed functionality. And that is the transformation that’s currently underway in the world economy — the upgrade to fiber speed. And it’s really my paradigm which I use as an investor to decide where to put my money and my customers’ money.
Forbes: So what are some of the companies that you feel are in the forefront of this transformation?
Gilder: Well, there are several in Israel because Israel’s really genius under the gun. That is a very productive environment. EZChip is one. EZChip is a wonderful company that’s completely in the fiber speed paradigm. In the United States, there’s a company called NetLogic, which raises the fiber speed paradigm from just switching packets across the network to actual deep packet inspection.
They have knowledge processors that are crucial in this development of deep packet inspection, which entails looking at the contents of packets at millions of packets a second and collectively trillions of packets a second. This is a major frontier in the world computer industry and there are a number of companies that do it.
But I always look for the chips that embody the crucial functionality rather than the various systems that are developed around those chips, because they change from year to year. But if you get a real edge in the production of the chips, as NetLogic does and EZChip does, you can get an enduring creation of value.
Israel And The US Economy
Forbes: Now, you’ve made the point, as a handful of others have, that knowledge is about the past, entrepreneurship is about the future. Even looking at the world today in terms of foreign policy: You say “Middle East” — people think oil. You’ve made the point that Israel, with its brains and what it’s doing in high technology, is really a functional part of the U.S. economy, which is where the real value is.
Gilder: Well, it’s just wonderful that Israel has become a new Silicon Valley just as our own Silicon Valley gets paled over by green goo. Israel is moving to the forefront in developing new technologies that are based on fundamental advances. And these technologies instantly propagate to the United States. So, Israel is a substitute for a somewhat temporarily declining Silicon Valley.
Forbes: So it’s sort of like a baseball team. It’s our farm system.
Gilder: Yeah, it’s our farm system. And it’s just been great. Israel is the key asset in the Middle East. This idea that oil, a fungible element that can be sold anywhere, is comparable to the genius of the Jewish people in Israel is just an absurdity.
Israel is where it’s at in the Middle East. And the leading edge of the U.S. economy today is in Israel, surprisingly enough. I was surprised to discover it, but in the last five years I’ve been increasingly turning to Israel for my new companies.
Telegraph To Teleconference
Forbes: Before we get to what’s made Silicon Valley, as you call it, a valley of green goo and some other obstacles, let’s hit on a couple of the other areas where you see enormous creativity. Interactive video, video teleconferencing and the like. You feel that it’s just exploded in terms of technology.
Gilder: Well, this is absolutely crucial. And this will require another transformation of the existing Internet as great as the transformation from the telegraph to the public switch telephone network 50 years ago or more. That created this great public switch telephone network that could deal with voice — the telegraph system could not deal with voice.
Now, we have this vast data-oriented Internet that hast to be upgraded to do interactive, full-motion, even 3-D video. And that’s a transformation like the transformation to voice. It will require a new network, a completely interactive fiber-speed network. That’s why I’m focusing on fiber speed technologies and the new architectures, new computer architectures that are indispensable to achieve this level of performance.
Forbes: And what are the companies you think are in the forefront there?
Gilder: Well, cloud computing — the immediate field is moving up to layer five, which is sessions. It’s called sessions. And to conduct voice or video sessions across the network in real time, you need to be able to interact between all sorts of different kinds of networks.
And this requires entities called session border controllers, which I think resemble routers in their impact. In previous eras the router dealt with all the different networks at layer three, but now it has to be real time, so it’s as if the whole router infrastructure has to be upgraded to layer five.
And companies like Acme Packet and Audio Codes — which is another Israeli one, and there are lots of others — that are doing that. Then that entails deep packet inspection, because if you’re doing all these things, all different networks across the world, you want to know what the content is of the various packets that are coming to you to make sure they aren’t part of some cyber attack or whatever. That’s why I like these companies that do deep packet inspection, including NetLogic. And Cavium also does chips for that purpose. These chips are going to be increasingly in demand as time passes.
Forbes: Now, another area of creativity you’ve referenced in the past is one that you’ve pointed out has a lot of hype but now really seems to be perhaps coming into its own, nanotechnology.
Gilder: Well, nanotechnology was full of hype at a time when they said, “Oh, we’ve got carbon nanotubes. They’re 100 times stronger than steel and they have all these wonderful characteristics. And we’ll use them to make memory cells or new kinds of transistors.”
In other words, they were trying to retrofit this radically new capability into the old digital computer model. The fact is, nanotubes do all kinds of unique things and they won’t prevail until those unique potentialities are explored. And the one that I’ve invested in myself, a company called Seldon Technologies up in Windsor, Vermont, uses carbon nanotubes to make a straw that you can stick into a septic tank and drink potable water out of it.
Forbes: Is this your NanoMesh straw?
Gilder: The NanoMesh straw. And that’s made with tunable carbon nanotubes. So you can actually change the filtration function that you want to perform in these nanotubes. There are tens of thousands of these devices going to the American military now.
Forbes: So they work.
Gilder: Yeah, they work. And they’re also beloved of NASA because they think it’s the only way they’re going to be able to filter lunar dust. And that’s going to be a big market one of these days. They named Seldon as one of the 50 best technologies, supported by NASA. Nanotubes are beginning to emerge as a really crucial technology and it’s exciting to see it. You’ve been predicting it for decades.
Forbes: I have the hair to show it, too. Now, another area you liked in nanotechnology is building and construction materials. You pointed out that if you’re concerned about global warming, well this is right up their alley.
Gilder: Well, I’m not concerned about global warming.
Forbes: Neither am I. But those worriers can embrace this technology, positive technology.
Gilder: Yeah, this is a positive technology. The one I invested in was called iCrete. And actually Gary Winnick was a leading investor and leader of iCrete, which makes concrete that’s ten times stronger. It enabled the Freedom Tower to get off the ground.
It’s beloved of Frank Gehry. It’s a new way to make concrete that is a fundamentally different chemical binding that yields concrete that’s ten times more durable and more cost effective and thus uses less energy usage in making a building of a particular strength.
Security In The Clouds
Forbes: Now, going back for a moment to cloud computing. Nothing comes without challenges. How about security? How do we keep the hackers at bay since there’s a lot of valuable stuff in the clouds now?
Gilder: Well, I, myself, have been on the board of a company for a long time called Wave Systems that I love. But I really shouldn’t be touting my own company.
Forbes: Why not? As long as it’s full disclosure, the police won’t arrest you.
Gilder: Okay. You never know these days.
Forbes: That’s true.
Gilder: But anyway, they use something called a trusted platform module that is in every computer or every high-end computer and increasingly spreading throughout all of the computer world. And this is appropriate to distributed computing where. Now the firewall is just an obstacle to computing. It doesn’t increase security, it just provides a new focus for attack because the people have left the building.
It’s the end of the LAN. I’ve been talking about LAN’s end for a long time. The local area network is now a planetary utility and that requires that security migrate to the edge. And the way to do that is through trusted platform modules and that’s what Wave uses.
Forbes: So the good guys can stay ahead.
Forbes: Now, you mentioned deep packet — that gets this whole area of regulation, the FCC. What do they want to do with deep packet technology?
Gilder: Well, a lot of people are afraid that deep packet inspection is a threat to privacy. And this is just mischievousness. Deep packet inspection is absolutely critical to our technology and the advance of digital technology, because you can’t really have cloud computing, you can’t have video teleconferencing, you can’t do any of the new promise of broadband without having ways to differentiate among different packets and repudiating all ideas of network neutrality.
You’ve got to treat each packet differently, the way it deserves to be treated. And you’ve got to kick out the criminal packets and cyber warfare packets. And so deep packet inspection is not only crucial commercially, it’s also crucial militarily.
Our great advantage as a country is that we have technology that’s developed commercially and is used by customers all over the place. And thus it can move down the learning curve faster and actually create capabilities which at the high end are useful for defense.
Edward Teller told me, and I’ll never forget it, he made the point way back 30 years ago when I interviewed him. He said that democratic countries have no advantage over totalitarian countries in secret classified defense projects. After the Second World War, the Soviet Union even outperformed the U.S. for a while. They sent up Sputnik first and developed or copied our nuclear technology readily.
Secret projects are not the source of America’s leadership. It was the computer industry and the semiconductors and the software and the proliferating efflorescent private commercial technology that gave the U.S. the world lead in defense and which is the heart of America’s defense advantage today, which is information technologies and pattern recognition technologies. It’s the same with Israel, and that’s why our two countries are so interdependent.
Forbes: Now, talking about regulation, what’s with the FCC? Now the FTC is threatening to get its claws in the Internet. Is it just the bureaucratic imperative of something’s there, you must control it?
Gilder: Yeah. Yeah, it’s just really horrible, this effort to fixate on an existing technology that is changing more rapidly than perhaps ever before in history. I’m describing this transformation from a world essentially of telegraphs, the current Internet, to a world of video teleconferencing, which requires a whole series of fiber-speed breakthroughs that have to exploit the best possible business plans at the front end or they’re going to fail.
For the FCC to intervene and try to manipulate the industry and impose various rules on it that restrict what might be profitable and successful plans that can sustain a new economy, like this new wireless breakout that’s happening today, is just perverse.
Bridge To The 19th Century
Forbes: You’ve referred to many venture capitalists in California and elsewhere as welfare pimps, loony-bin politicians. What in the world has happened? First — as we were discussing before we did the taping — in terms of mistaking Moore’s Law for what you can do with solar panels and energy, and then we’ll get to this addition to government subsidies.
Gilder: Yeah, well, you know, venture capital is absolutely central to the future of the American economy. It’s radically less than 1% of total GDP and yet the companies it supports currently comprise close to 20% of GDP, maybe more now.
It’s just catalytic seminal capital that’s absolutely crucial. And that’s why the worst development in the United States, in my view, in the last few years and at least on the private side, is venture capitalists becoming poverty pimps.
They aren’t any longer generating new wealth. They’re angling to get part of your wealth and my wealth to support their green dreams of medieval energy sources like windmills. I mean, you can’t parody this return to the Middle Ages looking for new technologies. This is what always happens. The government props up the past in the name of progress. The trains – we’re supposed to go back to old train technology of 50 years ago and create a new train network, and people have actually imagined that people will abandon their cars to take trains everywhere.
It’s not that there isn’t a profitable train industry, but the idea that the government needs, today, to make a major new investment in the name of progress and trains or in solar power or in windmills is a parody of creative destruction of Schumpeterian capitalism
Forbes: I call it a bridge to the 19th century.
Gilder: A bridge to the 19th century, that’s right.
Forbes: And then solar panels, the problem there is even though it’s portrayed as futuristic, as you say you cannot get a doubling every 18 months.
Gilder: No. No, I mean solar panels are useful in many niches and solar energy is valuable, but as a replacement to the grid or a replacement for the massive amounts of power needed to fuel electric cars or whatever it is, it’s just a joke. Solar panels are based on the incident sunlight that hits photo detectors. And their size is governed by the wavelengths of sunlight, not by the imagination of engineers who are contriving ever more miniaturized transistors down the Moore’s Law learning curve.
CFOs Know Nothing
Forbes: Finally, a favorite saying of yours, you quote Peter Drucker that CEOs and CFOs, the myth is that they actually know what is happening to their companies. Explain.
Gilder: Well, Peter Drucker is a great genius who has made many wonderful contributions to Forbes and to Forbes conferences. And the last Forbes conference, a CEO conference, he almost fell off the stage. He was really precarious and everybody was just terrified that he was going to be interrogated.
And then finally he pulled himself together and said, “I have only one thing to tell you CEOs. No one, and I mean no one, in your company knows less about your business than your CFO, your chief financial officer.” And what he’s conveying is that businesses are really governed not by what’s going on inside, but the future of them is determined by two groups, customers and investors who are outside the company.
And they can change their minds in an instant. The idea that CEOs and CFOs, by pouring through the financials, can project the future and know what’s happening in the minds of these forces beyond their walls, is quixotic. They don’t know.
That’s why, again, it’s this illusion that the surprises of capitalism can be captured in some computer model or some socialist plan. They can’t. It’s the upside surprises that Peter Drucker said signify the big opportunities. And the other great Drucker statement is, “Don’t solve problems. That plunges you into the past. Pursue opportunities.”
That’s the key entrepreneurial role, pursuing opportunities, which often leaves the problems behind by transforming the whole landscape as wireless broadband did. People thought wireless broadband was a contradiction in terms and it may end up being the dominant form of broadband.
Forbes: So as in the old days, instead of worrying about horse manure in the cities, invent the automobile.
Gilder: That’s right.
Forbes: George, thank you very much.
Gilder: Well, thank you. It’s been great, as always.