Man, Plan, Canal

Baldwin Louie — Mon, 16 Jul 2001 15:00:00 -0700

The greatest projects always turn out to be the hardest to finish: the pyramids, the Brooklyn Bridge and rockets to the moon; networks of railroads, tunnels, highways, canals and airports; the massive infrastructure of electrical grids, water systems, broadcast networks and telecommunications. These engineering marvels make for some of the most inspiring stories in human history. They also offer valuable clues on how to navigate the turbulent waters of today's business environment.

How? Consider the story of one famous international infrastructure project. Proponents of this massive undertaking promised to speed up the flow of goods and services around the world, eliminate time and distance constraints on commerce, reduce costs for everyone and make investors fabulously wealthy. In its first years, the project raised millions of dollars, much of it from the public. Stock prices rocketed into the stratosphere. As the project proved harder than expected, however, markets crashed just as dramatically as they had soared. Minor setbacks and delays turned into years of stalled progress. And a cottage industry of journalists devoted to tracking the failings, blunders and arrogance of the project's promoters flourished.

That may sound like a synopsis of the Internet, but actually I am describing the Suez Canal, the 101-mile trench through Egypt's Sinai Peninsula. The Suez created a permanent passage from the Red Sea to the now-bustling town of Port Said on the Mediterranean and was an engineering marvel on a global scale. Its construction had a revolutionary impact, making it possible to ship cargo between Europe and Asia without a long, dangerous detour around the southern tip of Africa.

The canal not only changed the nature of global commerce, but also played a starring role in the political fortunes of Britain, France and the Middle East. After more than a century of operation, five owners and a seven-year war that temporarily shut it down, the canal is still in operation. Nearly 14,000 vessels will journey through the desert this year alone, carrying more than 400 million tons of cargo and generating nearly $2 billion in revenue for the government of Egypt.

Today's effort to build commercial infrastructure in the form of digital channels like the World Wide Web is still in the early stages, perhaps only a few miles into its own trough. A review of the tortured history of its 19th-century predecessor can teach us much about what has happened so far and what we can expect over the many miles to come.

The Suez Canal almost didn't get built at all. French entrepreneur Ferdinand de Lesseps first proposed a canal in 1854, at a time when nearly all global trade traveled by sailboat and large-scale construction could be done only by hand. Doubts about the plan's feasibility and even the utility of a canal delayed the project until 1859. When it finally opened in 1869, the canal was six years late and had cost double its original budget of 200 million francs. Port Said had to be built from scratch on a narrow strip of beach. Along the way, Lesseps changed routes and, midway through the project, switched his principal technology (men with picks) to state-of-the-art dredgers and steam shovels. Machines cost twice as much, but they worked twice as fast.

Financing the canal proved almost as arduous as building it. Britain shipped three quarters of the goods that went around the Cape of Good Hope, and so presumably would benefit most from a canal. But when Lesseps approached the British, they professed skepticism that anyone - much less a Frenchman - could solve the engineering and financial problems inherent to such a giant undertaking. In 1857, British Prime Minister Henry Temple Palmerston savaged the project, calling it "the merest moonshine" and "among the many bubble schemes that from time to time have been palmed upon capitalists." The Edinburgh Review went further, proclaiming the canal would never "touch the grand commerce of the world," especially since "it is very questionable whether steamers will ever be able to compete with sailing vessels for goods traffic."

The struggling online news company Salon Media Group on Wednesday unveiled a syndication wire service in its latest attempt to increase revenues as the company's stock faces delisting.

Salon Media Group, the holding company of Salon.com, will make approximately 100 articles per week available for syndication on its newly launched SalonWire. The San Francisco media company has syndicated its work for years and currently has about 50 customers, according to spokesman Patrick Hurley. SalonWire, however, takes the company's syndication service a step further, offering an automated feed that also can customize content based on subject matter.

"We now have a vehicle to more easily distribute our content in a way that's convenient and familiar to our syndication clients," Salon President and CEO Michael O'Donnell said in a statement.

Salon, which counted 3.4 million unique visitors in April, would charge on a per-article basis for content distributed via the new SalonWire service, but would not disclose the rates it will charge. SalonWire has already signed up 10 customers in the past month, including Schwab Foundation, Catholic Digest, Sydney's Child and CMP Media.

The new business-to-business syndication service is the latest effort by Salon to boost and diversify revenues amid the weakened economy. The move follows a premium service launched in April that offers select content, such as erotic art and photography, without pop-up ads, for $30 per year or $50 for two years. Salon would not disclose the number of customers who have signed up for its premium service, but Hurley did say the company has exceeded its goal of reaching 1 percent to 2 percent of its reader base.

Hurt by the ailing ad market, Salon's revenues and stock price have plummeted. Earlier this month, Salon received notice from the Nasdaq Stock Exchange that it failed to comply with minimum bid requirements for listing. Salon has requested an oral hearing to appeal that decision and is considering asking shareholders to approve a reverse stock split. Shares of Salon were trading at 25 cents in afternoon trading Wednesday.

In April, the company said it is trying to raise working bridge capital until it breaks even by the end of the year. Salon reported having only $3.7 million in assets on May 31, and it posted fourth-quarter revenues for the period ended March 31 that dropped 63 percent to $1 million, from $2.6 million a year earlier. The company had a fourth-quarter loss of $5.5 million (42 cents a share), compared with a net loss of $6.2 million (50 cents) the same period a year earlier.

In the end, Lesseps scraped together half of his initial capital by building a fragile coalition among France, Turkey (which controlled Egypt) and the provincial Egyptian government. For the other half, Lesseps sold shares directly to the public through a dubious network of underwriters, drawing outrage from the press. As the London Globe put it, "The whole thing is a flagrant robbery gotten up to despoil the simple people who have allowed themselves to become dupes."

As progress slowed, investors grew hostile, and Lesseps grew desperate. In 1867, already years behind in interest payments, Lesseps received permission from the French government to sell even more bonds to the "simple people." By then, what began as a symbol of French national pride had turned to cynicism. The only way Lesseps could unload the new notes was to attach them to lottery tickets that qualified bondholders for quarterly prize drawings of 1 million francs a year. They sold out in five days.

When the Suez finally opened, initial revenues were far below what Lesseps had expected. Despite the obvious benefits of a shorter, safer trip, shippers were slow to change their habits. Fewer than 500 boats passed through the canal in its first year of operation. Lesseps himself made nothing from the Suez (and tried, unsuccessfully, to make up for it by building a canal across Panama). The Egyptian government, meanwhile, had hoped the canal would help them buy their independence from Turkey. Instead, it found itself strapped for cash as the canal floundered.

Within four years, though, the canal was finally generating enough revenue to begin paying off overdue debts. The company's stock, which had crashed after an early speculative bubble, began to trade over its par value in 1875.

That's when the British swooped in. Though they had ridiculed the project from start to finish, the British bought out Egypt's 40-plus percent of the company (the Turks' shares had been consolidated with the Egyptians'; the French stayed on as minority shareholders) and took over the company. By the outbreak of World War I their shares had increased in value tenfold.

It has been only in the past 50 years that the canal has generated spectacular profits. Between 1955 and 1966, after Egypt nationalized the canal in an event still known as the Suez Crisis, traffic increased by 50 percent and revenue tripled. Nearly a century after opening, the Suez was finally living up to Lesseps' outrageous claims.

The Suez Canal is characteristic of all great infrastructure projects. Because they attempt to do what has never been done, their design and construction is fraught with unknowns. Setbacks, accidents and exasperating changes in strategy are frequent. They are often the obsessive dreams of visionaries who invariably come equipped with egos big enough to match their ideas. Their arrogance leads to startling turns of events, and thus the projects become a topic of never-ending fascination by the press, who cannot resist reporting on the folly of trying something new.

Underwriting such giant, risky projects often falls to governments and other large institutions that can hedge them against other investments. But governments are fickle partners, and the projects' fortunes wax and wane with every minor adjustment in both local and international political climates. Countries that complain the project is harmful to their economic interests may be plotting all along to capture the profits when everyone else is too exhausted to stop them.

Unfortunately, con men also find big projects irresistible. As a result, the public is often drawn in too soon and on the worst financial terms. Project delays lead inexperienced investors to demand accelerated returns, which further delays profitability and threatens the project with collapse. Frequent panics, booms and busts dog the effort from beginning to end. The media throws fuel on all the ups and downs, doting on each misstep and gleefully predicting total failure right up until the moment of victory.

Over the past five years we have been working on our own global infrastructure project, the construction of a kind of virtual canal. Built on a platform of cheap computing power and the Internet's open networking standards, its goal is to connect one end of the supply chain to the other - from producers all the way to consumers - so that data can flow freely along with the transactions they describe. Like the Suez, it promises to speed the flow of goods, improve productivity and - not incidentally - make its builders wealthy.

But like the Suez and other engineering marvels, the Internet has failed to deliver on the early promise touted by its arrogant creators. Our new infrastructure is plagued by technological delays of its own, as well as its share of crooked promoters and media overexposure. Anxious regulators threaten its existence, and disappointed investors, insisting on profits before they can be delivered, have crippled its development. The public-private partnership that has managed its development so far appears to be breaking down, leaving everyone with claims to being the legitimate toll collector.

Winning the Internet revolution is not, of course, the same as digging a ditch through a hundred miles of desert. The Suez is too small to handle a new generation of supertankers and faces obsolescence. But the Internet was designed to function even after a nuclear holocaust, and it can expand its bandwidth as quickly as new technologies are invented. Our project has not one but an army of designers, from professional systems architects down to individual users experimenting with it. Unlike Ferdinand de Lesseps, we don't even know exactly what it is we are building, and because we have been using our new infrastructure from the very first day of its construction, we may never know when it is actually finished. Without thousands of workers and massive reshaping of a landscape, most of us may not even realize that our efforts are part of an infrastructure project in the first place.

That's a dangerous blind spot, leading many companies and investors to see the collapse of the Nasdaq as proof that the revolution is over. Time now to salvage the millions of dollars spent on hardware, software and communications gear during the orgy. "With Internet exuberance barely cold in the grave," begins this year's Business Week Info Tech 100 Report, "a far more sobering period has arrived: the era of efficiency."

Don't believe it. The work continues, inching its way through the most unforgiving terrain and intractable design challenges, falling further into debt but still alive. Give up on it and you will wake up one day to find yourself standing alone in an empty port, waiting for your ships to return.

Larry Downes is a strategy consultant and co-author of Unleashing the Killer App. John Castro provided research assistance for this column.

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Man, Plan, Canal