October 19, 2003
The Revolution Is Coming, Eventually
HORTLY before noon on a drizzly day in late August, George Gilder had a housekeeping announcement to make during his annual technology conference at the Squaw Creek resort in Lake Tahoe. The weather forecasters had been dead wrong, he said, taking some obvious delight in this pronouncement. Lunch would be served indoors.
Mr. Gilder's swipe at the meteorologists wasn't just an opportunity to elicit a few chuckles from the audience. It was also a subtle reminder to the 350 or so faithful in attendance that he is not the only one who can botch a prediction.
Then again, few people have ever lost their shirts betting on the weather. Investors who believed in Mr. Gilder's wildly optimistic predictions about the telecommunications revolution, on the other hand, spent the last few years watching their portfolios unravel.
Now, slowly but surely, portions of the telecom industry are recovering. Shares of the companies Mr. Gilder recommends in The Gilder Technology Report - a more diverse mix than it used to be - have outperformed the Nasdaq by a healthy margin for the past year, and his adherents are cheering up. And Mr. Gilder is gradually regaining the credibility that nearly vaporized before his eyes three years ago.
Still, a sense of wariness and an air of enthusiasm held in check hovered over this year's Tahoe conference. And if any group has reason to be wary, it is this one.
Perhaps more than anyone else, Mr. Gilder, 63, is - to use one of his favorite words - the reification of all that went right, and then calamitously wrong, in the new economy.
In early 2000, Mr. Gilder presided over a small but lucrative empire that consisted of his newsletter, the Gilder Technology Report, and its various spinoffs - with names like Digital Power Reporter, Dynamic Silicon and the Supply Side Investor - half a dozen annual conferences and a staff of 55.
At the time, Mr. Gilder's net worth, around $7 million, was modest by dot-com standards, but Merrill Lynch and Hambrecht & Co. were vying to take his company, Gilder Publishing, public, valuing it at $150 million to $200 million. His newsletters had 110,000 subscribers.
Then, as quickly as the riches and the promise of more riches came, they vanished. People canceled their subscriptions by the tens of thousands; only the original newsletter survives today, with just 8,500 subscribers. Since the tech bubble burst, all but five staff members have been laid off. A former business partner holds a lien on Mr. Gilder's house. And in a cruel twist of fate, Mr. Gilder, an outspoken critic of the nation's tax structure, finds himself at the mercy of the Internal Revenue Service, as he awaits the agency's final decision on the terms of his tax bill.
Last month, just home from a trip to Shanghai, Mr. Gilder sat in the spare yet elegantly appointed guest cottage next door to his house in rural Tyringham, Mass., and reflected on how he happened to come within an eyelash of losing everything.
George Gilder is a slight, gentle, unprepossessing man. He holds himself with some delicacy, and although he is physically fit (he runs six miles a day), it seems as if a gust of wind could knock him off his feet.
Yet when he opens his mouth to rail against "idiot" American economists, corporate lobbyists and the perniciousness of taxes ("the power to tax is the power to destroy") and government regulation, the mild manner evaporates and Mr. Gilder might be mistaken for a glassy-eyed nut case on the University of California at Berkeley's Sproul Plaza shouting random invectives at passers-by.
Mr. Gilder, however, is no wacko, and his invectives are anything but random. Through the years, he has been building his own version of a socioeconomic unified field theory, integrating politics, sex, economics and technology, with a dose of religion thrown in.
MR. Gilder hails from solid New England stock, if tinged with a
When George was 3, his father, Richard, a pilot, disappeared over the Atlantic Ocean during World War II. David Rockefeller, Richard's roommate at Harvard, saw to it that George, who he considered to be like his surrogate son, received a Harvard education as well.
In the 60's and 70's, while a speechwriter for Richard M. Nixon, Nelson A. Rockefeller and George W. Romney, Mr. Gilder branched out briefly into attacking feminism by writing magazine articles and books opposing day care and celebrating a woman's place in the home. In the early 1970's, Time magazine and the National Organization for Women named him Male Chauvinist Pig of the Year. Shortly thereafter, having decided that this was "a triumph I could not exceed," Mr. Gilder migrated to supply-side economics.
He hit his stride with the best-selling book, "Wealth and Poverty," in 1981, in which he argued that capitalism and entrepreneurialism are intrinsically altruistic, oriented toward the needs of other people. Selfishness and greed, on the other hand, pave the way to socialism, as avaricious people petition the state for benefits they haven't earned.
Although the book made Mr. Gilder wealthy, he started looking for a new focus. He hit on computer chips, which he decided were fast becoming the most important development in the world economy. He took some time off to learn solid-state physics, and soon became one of the semiconductor industry's leading pundits.
Next came his infatuation with the "telecosm," a word Mr. Gilder coined to describe the convergence of computers and communications. In the mid-1990's, he argued that the expansion of the Internet was giving rise to demand so great that the so-called big pipes carrying information would need huge capacity to accommodate all the data, voice and video they would be transporting.
In 1996, Mr. Gilder predicted, famously and, as it turned out, erroneously, that by the turn of the century, broadband connections to the home would be ubiquitous. He described a telecosm of fiber-optic and wireless networks girding the globe. Companies like Global Crossing, Level 3 Communications Inc., and Global Star Software sprang up to help meet the expected demand for bandwidth.
The first Gilder Technology Report was published in 1996. Before long, his influence on the stock price of the companies he favored - many of them obscure start-ups - came to be known as the "Gilder effect." Within minutes of a company making a debut on Mr. Gilder's list of darlings, the stock price soared, some by as much as 80 percent.
His insights were at such a premium, he says, that he was paid as much as $100,000 for a public speech.
Subscribers to his newsletter, in the meantime, were delirious with joy as they watched the value of their holdings rise. "It was like finding the fountain of youth or a money tree or something," said Dick Sears, a retired actuary in Palisades, N.Y. Mr. Sears is a subscriber who independently produces the daily Gilder Technology Index, which charts the performance of the stocks on Mr. Gilder's list against the Nasdaq and the Standard & Poor's 500-stock index.
Then reality intervened.
Demand for bandwidth, it turned out, was not what everyone had thought it would be. The networks weren't filling up with customers at anywhere near the rate that the new-economy faithful had expected. The market had a huge glut of capacity, and many of the fiber-optic networks were left sitting idle.
Within a few months of the March 2000 plunge in the stock market, many of Mr. Gilder's prime picks nose-dived. "My whole optical paradigm crashed, and it crashed on my head," Mr. Gilder said.
When things fell apart, newsletter subscribers were irate. "They were mad and hurt and aggrieved and pained and broke," Mr. Gilder said. "And, they had a real grievance. These people didn't lose 50 percent or 80 percent of their money. They lost 98 percent of their money."
As fate would have it, says Mr. Gilder, 90 percent of subscribers had bought their stocks during the peak months of 1999 and 2000. Some of them blamed Mr. Gilder personally for their losses. One group of subscribers started a class-action lawsuit against him, but the suit never got off the ground. He was also sued by his chief financial officer for severance pay, and settled for $7,000.
Marc Denny, a longtime subscriber in Los Angeles, said of Mr. Gilder: "Because of his eloquence and unique insights, a lot of people put a lot of trust in him." Mr. Gilder was and still is a regular presence in the Telecosm Lounge, the electronic bulletin board for his newsletter subscribers. He told people on the board many things as the stocks went up, and then as stocks fell. But the one thing he never told them was to sell.
"I was in this really ridiculous position," he said, "because I explicitly didn't do timing." On the other hand, Mr. Gilder said, it was "obvious to anyone with eyes to see" that the stocks would undergo a massive correction. "I never said it," he said. "I'd hint at it on the board, but I never said it."
Many of the companies - including Global Crossing, Global Star, Metromedia Fiber, WorldCom (which now is known as MCI) and Corning - are now either reduced to wisps of their former selves or gone entirely.
Mr. Gilder was hardly insulated from the fallout. Not only did he lose hundreds of thousands of dollars from his Global Crossing investment alone, but other stocks in which he had large holdings plunged. His church, the Christian evangelical congregation he has belonged to since his childhood and to which he had donated a generous amount of Global Crossing and Avanex stock, took a big hit.
When his subscribers fled so suddenly, Mr. Gilder's tax bill skyrocketed. As long as the number of subscriptions is rising, taxable income is nullified by new subscriptions. But when subscribers are lost, each expired subscription means the income has been earned and taxes must be paid.
Forbes, which owns half the Gilder Technology Report and thereby half its liability, is helping to "mollify the tax ogre," as Mr. Gilder puts it.
ANOTHER blow came as a result of his own shortsightedness. When Mr. Gilder formed his company, he did something that turned out to be unwise. Rather than set up a limited liability corporation, he incorporated Gilder Publishing in a way that eventually made him personally liable for every penny of the debt and taxes that he incurred. Even Ritz-Carlton came after him for an unpaid bill of $100,000 for a conference held at one its hotels in early 2000.
Back in the salad days of early 2000, Mr. Gilder also decided to buy out his two partners for $10 million. Although he managed to pay all but $1 million of that, one of the former partners - Chuck E. Frank, a restaurateur from Los Angeles - now holds a lien not just on Mr. Gilder's house but on the 100 acres it sits on as well.
The lien on his property has been the ultimate insult heaped upon injury for Mr. Gilder, who grew up in the modest yet comfortable house nestled idyllically against the Berkshire hills. It is the farmhouse in which he and his wife, Nini, raised and home-schooled three daughters and a son.
How did Mr. Gilder get it so wrong?
Mr. Gilder's critics say he was too focused on technology at the expense of business realities. Others, farther to the left, question his complete embrace of free markets.
"He doesn't trust the government but he does trust free markets," said Tom Frank, an outspoken Gilder critic who is editor of The Baffler, a journal of cultural criticism. "That's very curious to say in the aftermath of the catastrophe that befell his portfolio."
Mr. Gilder looks out the window and appears to be pondering a cow as it grazes nearby, but is actually deep in thought over this question.
The one thing he did not foresee, he says, was the effect of what he calls "this incredible morass of regulations" affecting the telecommunications industry. "I knew the factors, but I kept believing technology would triumph over them." He said he still believes it will, eventually.
Richard Karlgaard, the publisher of Forbes and a longtime colleague of Mr. Gilder's, put it this way: "I don't think anything he's said or written about the trajectory of technology or the underlying economics has been wrong. But George, like all of us, got caught up in the stock market to heights that weren't sustainable."
At the same time, Mr. Karlgaard and others point out what they believe to be a fundamental truth about Mr. Gilder that helps explain his world views, which are, they say, at their core religious.
"George believes that scientists and entrepreneurs are almost doing the religious work of revealing the universe to us," Mr. Karlgaard said. "This whole view of taxation and government policy is, 'What can we do to liberate the technologists?' All of his beliefs spring from that."
Today, as the telecom sectors rebounds, Mr. Gilder appears to be re-emerging as an influential thinker who can once again move markets. Over the last 52 weeks, the Gilder Technology Index has risen 221 percent, while the Nasdaq was up 71 percent and the S&P was up 29 percent. A little bit of excitement is beginning to creep back into the Telecosm Lounge.
INDEED, one day this month, after Mr. Gilder mentioned the Avistar Communications Corporation, a small company that sells videoconferencing systems, in the Telecosm Lounge, the stock price doubled over the next two days.
This turn of events, Mr. Gilder confesses, is making him just a tad nervous - but not enough to shake his sunny outlook for the U.S. economy in general and technology in particular. Employment, he says, is on the upswing. Not only will the economy come back, but it will come back "very vigorously." And a budget deficit? Nonsense! "All those numbers are just goofy," he said. "The whole thing is one-eyed economists who can see liabilities but not assets."
More important, Mr. Gilder feels utterly vindicated on the topic of broadband. He points out that the trajectory that began in the United States but was derailed by regulation is continuing in Asia. In South Korea, for instance, 75 percent of households have a broadband connection.
Mr. Gilder is also optimistic about his personal situation. Most of the stocks he now holds are on the rise. He is still waiting for the I.R.S. to make a final determination on the taxes he owes from the newsletter debacle. But he is hopeful that he will not lose his home, as long as he is able to continue making $10,000 monthly payments to his former partner for the next 17 years.
"It does mean I'm working for the government and my partners for the rest of my life," he said, noting the irony of seeing his wages go to fuel a government with a tax structure and regulatory practices he has spent so many years lambasting.
His speaking engagements have all but dried up. He still travels to Washington occasionally to discuss telecommunications regulation with Bush administraton officials. He does this in his capacity as a senior fellow for the Discovery Institute, a conservative research organization based in Seattle. Still, he says, he prefers to stay home these days and write.
The book closest to completion and scheduled for publication next
year is titled "The Cat and the Camera." It is the story of
the invention of a radical new camera from a university effort to create
a silicon retina. The second,
Mr. Gilder discusses all this as the rain falls outside in periodic torrents. He is put in mind of a harrowing incident he feels compelled to recount. If he is aware that the story he is about to tell is an obvious metaphor for the turns his life has taken over the last three years, he does not let on.
One rainy day in 1998, he and his family set out for New Hampshire to see his eldest daughter, Louisa, then a student at Dartmouth, play Desdemona, Othello's wife, who dies at the hand of her jealous husband.
Some 35 miles south of Hanover, his Ford Winstar began to hydroplane. With Mr. Gilder at the wheel, the car flipped over and continued to skid upside down.
When the car finally stopped, it was totaled. But all four passengers were wearing seat belts and, miraculously, they were not hurt. Shaken but undeterred, the Gilders called a taxi to take them the rest of the way. They missed dinner with Louisa but arrived in time for the play.