Ray Zinn, the longest serving CEO in Silicon Valley, discusses the history of silicon as only he can, having watched it from Shockley to Facebook.
In Part IX, Ray, Goldman Sachs analyst Peter Marchetti, and Silicon Valley vet Guy Smith, cover the continuing shifts as the Internet begins commercialization and the cellphone industry explodes.
Peter Marchetti has spent the past 20 years as an advisor to some of the most significant families and foundations in the country. He joined the Goldman Sachs team in 2000 after receiving his MBA from the Haas School of Business at the University of California, Berkeley.
Ray Zinn: Hello, everyone. Welcome again to another, in the series of our podcasts regarding the history of Silicon Valley. This is a fun series for me. I’m enjoying doing it. It’s causing me to have a lot of senior moments trying to remember back all the things that I need to cover in this podcast. So I’m glad you’re bearing with us as we slog our way through this.
Anyway, with me today, I have Peter Marchetti, Who’s a personal wealth advisor for a bank. And grateful to have Peter Marchetti here with us and also Guy Smith, who is my director of marketing for Tough Things First. So hello everyone, and welcome Peter and Guy back to our podcast.
Guy Smith: Great to be here.
Peter Marchetti: Morning Ray.
Ray Zinn: Okay. So let’s talk about, as we now move into the ’90s, what the landscape was looking like. Silicon Valley has really taken off. I mean, it was getting a lot of momentum, a lot of companies going public, a lot of semiconductor companies that are really rocking and rolling. Again, I want to emphasize that almost all of the semiconductor companies had their own wafer fabrication facilities. So the off shoring of wafer fabrication really hadn’t taken off much in the early ’90s.
So the big driver now for semi conductors, as we now start into the ’90s were cell phones. And so Motorola of course, was the big cheese doing it. You had Ericsson, Nokia, but Motorola was the big guy. They were the big gun in doing a cell phone. But a lot of other companies were trying to get into cell phones too. Blackberry or something research, was-
Peter Marchetti: Research in motion. RIM.
Ray Zinn: Research In Motion. All right, they were getting into it with the Blackberry and a little different approach. Qualcomm was jumping in the freight. They developed a protocol called CDMA code defined something access, code defined-
Guy Smith: Code Division Multiple Access
Ray Zinn: Okay. Code Division Multiple Access. And that was something that Motorola was fighting because Motorola was TDMA, Time Division Multiplexing. Qualcomm was having a hard time, I mean, they were slugging it out. So they managed to get their foothold into South Korea with Samsung. And that really helped launch Micrel, my company. Because they needed power management because the early cell phones were gigantic. I mean, you had the transceiver in the trunk of your car and the antenna was about nine feet tall and it was like a telephone. And we didn’t even call it a cell phone, we called it a mobile phone, but up comes the cell phone and these cell phone towers were being put up and you had to have certain protocol to operate on those cell phone terrorist towers.
Samsung was jumping in with both feet and the cell phones really launched Micrel because the power management requirements for cell phones, was just gigantic. So we kind of hitched our wagon to the CDMA, to Qualcomm. And in fact, we were in Qualcomm’s very first cell phone. It was quite a ride as you would. And then after Qualcomm started selling their cell phones, that then encouraged Samsung because now Samsung had a launching platform that they could use to… Because they wanted to compete with Motorola, when Samsung jumped in of course, they lowered the price and they were able to get a real good foothold in cell phones. And that began the beginning of the end, as you would have Motorola because Motorola was by far the big dog in cell phones. So anyway, that’s kind of the launching ground, as you would have of Micrel’s really entry into power management.
Guy Smith: Well, an interesting parallel story there, was the personal digital assistant market during the 1990s. You saw things like the Apple Newton and the Palm Pilot. This was a key push in making things smaller and lighter. And it was almost the bleeding edge before somebody had the bright idea to take that glass screen technology in the PDAs and then merge them with a phone. And that was pretty much the idea behind the iPhone.
Ray Zinn: Good point Guy, because that’s interesting. Because the PDA, the Personal Digital Assistant was a precursor really to the smartphone. And because the original phones were not smart at all, they were just telephones. And by the way, every single PDA company I think is now out of business.
Guy Smith: The phone became the PDA.
Ray Zinn: Exactly, exactly. So that’s when you don’t learn to pivot and see, here’s an example of people not knowing how to pivot because the cell phone companies pivoted into the PDA, whereas the PDA companies did not pivot into the cell phone. As you pointed out that really was the crux of why the PDA guys went out of business because they couldn’t pivot themselves into the cell phone market. So anyways, thanks that’s a good capture point.
Peter Marchetti: Going on the question about the PDAs versus cell phones, but how did the cell phone adoption was heavily dependent upon telecommunication in the network and how did that kind of play into it? Do you think the development of the network led to the further growth of the cell phone, or do you think it was vice versa? And how did Micrel play into that as well?
Ray Zinn: Well, I think the cell phone market did launch the internet because they go hand in hand. You’ve made a good segue for me to talk about that next product area, which is all the products associated with the internet. The internet came into being at about the same timeframe in the middle nineties that really sent the digital home and set it really in motion was the internet. A lot of companies then jumped on making gateways and routers and all those products, as we now enter into, we would call the .com era. So the .com era, which is again, parallel with the cell phone market, really was the beginning of the growth of cell software and other products outside of the semiconductor area.
So you had these outside foundries are all getting set up in Taiwan and Korea and Japan and China started putting in these wafer foundries, and these guys that were just designers, they weren’t semiconductor guys, were able to build products that were very intelligent, very sophisticated, because they had access to very, very good technology, wafer fab technology outside of the US. And I think that probably really launched as you would, the .com era, was the ability for companies like Broadcom and others to use outside boundaries with their designs to really enter the telecommunication space. And that was really, I think, a real strong growth area for the entire Silicon Valley as you would environment.
Guy Smith: I think you’re spot on there because one of the things in the early days of the commercialization of the internet to misquote somebody else, they said at this particular point in time in the 90’s we’re just crouched around the fire in our loincloths chewing on chicken bones. We don’t know what the internet is, we don’t know where it’s going, we don’t know what we can do with it. So going to the fabulous models so that people could continue to experiment with chip designs without that massive upfront cost of setting up your own fab, I think was the thing that turned a lot of Silicon Valley into a chip incubator. In other words, a lot of people could get into the game and develop very niche products that would have never been developed before if it had that upfront capital cost.
Ray Zinn: Yeah, absolutely like Marvell and Broadcom and Avargo and so many others were able to do that without having these a hundred billion dollar a wafer fabs. What’s interesting is that the big gun in telecommunication was Nortel, N-O-R-T-E-L is a Canadian company and they are no longer in business because the .com implosion, did them in, but they were growing like crazy. I mean, all these fiber lines were being put in, spent these real expensive gateways cloud computing. All that began to really spread rapidly. You had Apple beginning to grow and get some traction, as well as other very large electronic companies AT&T started really getting involved, Ericsson in Sweden. And of course, Germany with Telefunken. You had these huge telecommunication companies really began to boom, during this time period.
What I’d like to end on today is really talk about what really caused, what they call the .com implosion. The .com era began in probably the mid 90’s and it was just growing like crazy. We were seeing under Bill Clinton, the push for the telecommunication capability, internet and so forth became a real launching point for him. What happened was, is that the growth is so spectacular that companies were double ordering. We’re seeing a little bit of that now, even today and with this Coronavirus pandemic, we’re seeing a little bit of that happening in the semi space and I’m feared we’re going to have the repeat of the .com implosion. If we don’t watch and are not careful.
Peter Marchetti: On that rate, just a little bit of a segue, but what areas do you think right now are kind of getting a little bit overheated or more purchasing than is maybe fundamentally needed right now?
Ray Zinn: Well, the semi space is getting overheated because the inventories are way down. Like they were back in the time period we’re talking about the 90’s, the inventories are very, very low because we weren’t prepared for this rapid growth that we saw prior to Y2K, which is the turning of the 21st century. People were getting scared of that, they thought there was this conspiracy theory believing that somehow or another something was going to happen. And we were going to lose all this, some explosion was going to happen, which did happen, but more of a financial explosion. And so people ordering like crazy, they ordering tons and tons of stuff. And so there was a 30% more apparent demand than it was real demand.
And so people start gearing up like crazy to meet the demand. Well, you had the similar problem now with the Coronavirus, inventories are way down because of what happened a year ago, the layoffs and plants shutting down. And so the inventories are extremely low right now in the semi space. I know we’re getting off our discussion, but they’re very similar. So the Coronavirus pandemic is actually looking a lot like the .com implosion. So when the economy turns back around, again everything is kind of back to normal. You’re going to see excess inventories. You’re going to actually see the same thing that happened in 2002, 2003, when the industry imploded. And so we need to watch for that, we need to be careful that that doesn’t repeat itself. History has a tendency by the way, to repeat itself and I kind of see that potential in the next 18 months.
Guy Smith: I kind of agree with you whenever I see a lot of people being stupid simultaneously, it’s usually a bad sign. And back during the 90’s, because the internet was such a new thing to so many people, everyone was in a gold rush mentality. They were putting bets down on every company that sprang to life who said they could make a buck on the internet. And I still think the poster child is Webvan. For the younger people in the audience, Webvan was a company that came to life saying that you can use the internet to order your groceries, and they’ll be delivered to your house. And they raked in tons and tons and tons of capital investment, which went up in a puff of smoke because they didn’t take the time to understand the actual demand or the mechanics of what it was going to take to deliver groceries. And they are really the epitome of that gold rush mentality that leads a lot of people to sink their money into operations, they’ll never get their money out of.
Ray Zinn: Well, again, they raised a ton of money over $400 million, and they didn’t just give the money back to the investor, they spent every dime of it. But they were the kind of the precursor, if you know then Amazon has acquired Whole Foods and they’re doing basically what Webvan did. Webvan just didn’t have the physical resources to really implement their idea. Even though Webvan is basically what Amazon is doing now with Whole Foods and other companies like a Walmart and a Safeway and others, you can now get your food delivered to your door. What’s that Door Dash is another company that delivers food and delivers product directly to your door, but getting back about and so we can end this particular podcast. As we entered Y2K or entered that next century in 2000, the demand looked like it was off the rails, but it really wasn’t.
In other words, the supply now began to far exceed demand. So our eyes were bigger than our stomach. In the early two thousands, you saw this implosion where the whole .com space just totally blew up. A lot of people lost their jobs, companies went out of business like Nortel. It was a disaster. I mean, the .com was a disaster. And what I’m worried about and concerned about is the pandemic could be a follow on or sequel to what happened in 2000. So when I talk in 20 years, so look at this two decades later, we’re facing a similar type type problem. Okay, guys, thank you for this segment. And again we’re going to move into the 21st century as we begin to talk about how we came out of the .com implosion and kind of where we’re going over the next 20 years.
So thank you for being here with us Guy and Peter for this segment, appreciate your comments and ideas. I’m sorry if this is sounding so much like, a raise in the dialogue here, but I’m so excited about talking about Silicon Valley history that I kind of get carried away. So I apologize. So read my book, Tough Things First, that’s a good textbook for those of you who want to start your own company. And my book, Zen of Zinn and then my new book, Zen of Zinn 2, which it’ll be out here in another four months. So thanks again, Peter and Guy for joining us, I look forward to meeting with you guys next time.