As the new chief executive for Network Computer Incorporated, Kertzman is looking to
Kertzman, who speaks at a clipped rate with hands gesturing, joined NCI as CEO last November, after heading up database maker Sybase.
He left a company that had been struggling to set itself above its competitors and came to a company that also was facing some rough and tumble times. (Kertzman is a director for CNET: The Computer Network.)
Q: Can you update us on what the company's direction is now?
A: The company has an interesting history and genetic makeup, with the combination of Oracle's NCI Network Computer division and Netscape's Navio, which got combined about 18 months ago. And the company, since it still bears the name of Network Computer, I think still bears some of the perceptions associated with the original mission of Network Computer.
I think it had two founding principles, one of which turned out to be flawed and the other one turned out to be right-on. The one that was flawed was the notion that thin-client computing would rid the earth of the satanic personal computer. And that notion that somehow PCs and Windows were evil...and that people would want to replace them with thin client devices I think is the part that was flawed.
The part that was right-on was the model of thin-client computing, which Larry [Ellison, chief executive of Oracle] and more people now refer to as the "Internet model of computing." So the way the mission of the company has changed as the company developed was to stick to that model of thin-client computing, and it turned out that the work that had been done in order to support that.
And of course thin-client computing requires fairly robust servers to support the users, the application loading and delivery, updating application integration on the backend. And so all of that work that was done with this original mission turned out to be perfect for the category that developed, which is information appliances.
And the other thing about the first model of the company was that the company Network Computer was actually going to sell directly to consumers and sell hardware devices. And about maybe a year or more ago that mission changed to be a software company only?And the method of getting to the market changed from selling to consumers to selling to what we describe as network operators--cable television companies, ISPs, telephone companies, telcos around the world.
Q: What markets are you targeting?
Probably the most robust market for that model now are devices attached to televisions--Web boxes, set-top boxes, game consoles, satellite receivers, and bringing enhanced television, Internet connectivity, email and various other kinds of communications to the TV platform. And then beyond that we'll go to things like cell phones and pagers and PDAs and then eventually home appliances and everything we think of as information appliances.
One of the ways that we think our model will be more successful than, let's say the WebTV model, in this space will be that Microsoft is trying to do the end-to-end delivery to consumers. And we think demand is actually going to be driven by the network operators who have existing subscriber bases, have fat pipes coming into the home, and the like. So the model of the business has changed then to software-only; we sell the client software that goes in the device typically to the manufacturers of the device. And we sell the infrastructure software--the servers and the applications that go along with it, to the network operator. And it's a software model, it's a business model, it's a distribution model that is an OEM model--we don't sell directly to end-users--and it's a software model--we don't sell online services, we don't take a portion of the network operator's revenue...we license software to them and we support that software.
The other strategy that we pursued then before I got there was to really pursue the top network operators around the world. And we've had some success with that. The most advanced digital television market in the world is the U.K. and all of the three major cable television suppliers in the U.K.--Cable and Wireless, Telewest and NTL are using our software. We have a lot of activity going on the U.S., a lot of which is unannounced but the ones that are announced are things like U.S. West. In Asia we're working with a joint venture of Intel and Pacific Convergence Group called PCC that's doing satellite-based delivery of TV and interactive services to Asia, largely to Hong Kong and China.
Q: Could you clarify the relationship between AOL and NCI, now that AOL has
A: The relationship is one more where those companies are major shareholders. Oracle is over half the company. AOL is a little under 15 percent. Both of those companies came to the conclusion before I got to the company that as often happens, NCI would be more successful if it were managed and run and went to the market more like an independent company with the agility and the flexibility and the responsiveness of a start-up rather than with the kind of overhead and bureaucracy that's associated with very large companies. I see my mission as primarily delivering a tremendous return on investment to our major shareholders as far as Oracle and now AOL go.
And the company is doing well. It has real revenues, real customers.
Q: Are you profitable?
A: No. We have probably invested by the end of this fiscal year in May close to $100 million in the development of our product set. It's a business that is very much like a business like @Home, in the sense that it requires a lot of up-front investment and the revenues come as our customers deploy directly to subscribers. So there's a very heavy front-end investment that turns very profitable in the out years as they deploy to subscribers. It's got a nice profitable software company business model, but we don't see that profitability come until really active deployments start.
Q: So your software model, is it based on per customer?
A: Yes, but unlike @Home, which is a monthly subscriber fee, we have more of a software model. Our customers pay us a software license and then they pay us maintenance and support and things like that. We have a Professional Services operation that helps our customers install and implement our software.
Q: What kind of sequential revenue growth have you seen?
A: When we get to showing our stuff to the public you'll find all of this out, but it's been historically for awhile now somewhere in the 100 percent year-over-year range. And that's pretty good, given that we've not seen deployment in very large numbers. So the growth has been pretty healthy.
Q: What other RBOCs (Regional Bell Operating Companies) do you see as interested in experimenting with advanced
telephony services, in a fashion similar to what you guys did with U.S.
West? Are there other
companies that are out on the edge?
A: Well we tend not to speculate about customers, potential customers. I will say that if you look at RBOCs, if you look at cable MSOs, the large cable TV companies, you will find that they all have somewhat different priorities. So for instance some cable companies are focused on interactive services, some on video on-demand, some very publicly now like Time Warner focused on adding telephony to cable services through their relationship with AT&T. And so similarly true with RBOCs. Some of them are pressing ahead with [interactive services]...U.S. West actually had gone pretty far with their ISP services and have done very well with that and they viewed this as a natural extension of their ISP business.
And so what I think you will find in all these service businesses is that they will all get to expanding to interactive services on a variety of platforms, but in different time and priority.
Q: Are you talking to other RBOCs right now?
A: Yes, sure. You should assume we're talking to everybody in all of these industries--all the cable companies, all the RBOCs--everybody in this business. So yeah, we're having conversations with just about everybody these days. And our main competitor here?Microsoft is having probably the same conversations, and they're probably across-the-board on all the platforms?We have a somewhat more friendly business model for our customers. They get to keep the brand identity so that U.S. West's service is branded U.S. West @TV. It's not branded "Network Computer." And that relationship with the customer turns out to be very important, because the reason they're deploying these services is to increase customer loyalty, increase revenue per subscriber, and they defeat that purpose if they put somebody else's brand and divert a lot of the revenues to somebody else. So we're having pretty good luck competing with Microsoft in these markets I'm delighted to say.
Q: So why haven't we heard what cable deals you're pursuing?
A: Stay tuned.
Q: How close are you to striking a
cable deal without having to buy your
way into them?
A: I'd say we're at a constant two weeks away, just as we were two years ago! The cable industry has fairly long cycles of design and competition. And as you've seen by recent announcements, the ownership of the landscape changes: AT&T bought TCI; Comcast is buying MediaOne. But we think we're in a pretty good competitive position there and we're hopeful that we'll have some announcements to make soon.
Q. Is there a chance you can replace Microsoft as an operating system
provider to AT&T's cable unit or are you just
content to exist as sort of a glue between the server and the client?
A: Well, we are not in the operating system business, so if Windows CE gets displaced there, it's more likely to be displaced by [any] number of real-time embedded operating systems on which our stuff would sit. And nobody has been selected to provide the applications. Sun has been selected to provide a JVM and Java for the box and Microsoft CE for the box, but to our understanding there is still no selection of the application suite that would run on the box. And that would seem to be a potential opportunity for us.
Q: Since the browser is actually what people would wind up seeing, wouldn't
a win of that nature
be more important than a win as the operating system vendor?
A: We think so. We think there's more value in the stack above the OS, although Microsoft has had modest success with leading with the OS side, I think we'd have to admit! It helps to be a monopoly. We do not have that advantage. We don't plan to reach that status until 2004 at the earliest!
Q: How are the prospects for doing an IPO? The market is really good right
now. Are you going to strike while the market is hot?
A: I think the company is a good candidate for a public company for a variety of reasons--it's got a great story, it's a leader in a category, I think we'll have some blue-chip customers and partners. To me, a public offering is a part not just of a financial cycle, but it's a part of the business cycle of the company. And I think what we're going to do is we're going to pick the right time in the business development of the company--customers, partnerships, things like that to tell the strongest possible story, to make sure that we have as much visibility as possible into our revenue streams going forward. And when that happens we'll do that. Obviously the market conditions are...I guess I could understate and say they're favorable. So we'll see if they stay that way.