by James A. Bacon
Publisher, Virginia Business Magazine

Two years ago, William Schrader electrified an audience with a grand vision of the future of the telephone industry. Speaking at the kick-off of Gov. Jim Gilmore’s Commission on Information Technology, the iconoclastic CEO of Ashburn-based PSINet said that his company and others like it were building vast fiber-optic networks. Broadband would become so abundant that the price of long-distance and data-transmission services would fall to unimaginably low levels. With its state-of-the-art infrastructure, PSINet would prosper, dooming old-line phone companies, whose systems were so antiquated and expensive that they couldn’t survive the coming collapse in rates and revenues.

Schrader wasn’t boastful or bombastic. He just spoke like a man who had seen the future, and I believed him. Here in Virginia, I figured, traditional phone companies such as Verizon and others were toast. I did have enough sense to regard the stock valuations of PSINet and other high-tech companies as unsustainable. But I never once doubted the power of the Internet to overthrow the old corporate order. A new generation of business leadership had emerged and Bill Schrader would lead us to the Promised Land.

Today Schrader is looking like a prophet — a false one. Over the past 12 months, PSINet has racked up record losses — $1.3 billion. Despite growing revenues, cash was running short. Schrader was selling off pieces of the company to survive. After peaking around $60, PSINet was recently trading just above $1 a share. And stodgy old Verizon? It’s reporting record revenues and earnings. As one senior telephone executive has observed, guys like Schrader are learning that there’s more to operating a telecom company than stringing fiber-optic lines together.

There are more lessons from the dot-bomb fiasco:

• Never mistake having a high stock price for being brilliant, especially if your company isn’t actually making money. You’re not smart. Investors are greedy and stupid.

• Look for the exit when executives start dabbling with pro sports franchises. Schrader signed a $105 million deal to put PSINet’s name on the Baltimore Ravens football stadium; AOL’s Ted Leonsis and his tech buddies purchased the Washington Capitals professional hockey team; and Metrocall CEO Bill Collins and his pals tried to recruit a pro baseball team to metro Washington. Guys, you took your eye off the ball.

• Bail out when you hear that "profits don’t matter — only market share." I’ve heard that before, back in the 1980s when the Japanese supposedly were taking over the world. Their companies, too, sacrificed profit for market share. Look what happened to them.

• Most venture capitalists are overpaid. At least the old-timers knew what they were doing. By contrast, the Whiz Kids with their Wharton MBAs display a remarkable predilection for mindless, ovine behavior. First they funded hundreds of hare-brained e-tailing companies. Then they piled into the unproven "b-to-b" sector, which also belly-flopped. With sublime arrogance, they rushed lemming-like into the telecommunications and Internet infrastructure sector. They swamped what could have been a viable industry with overcapacity, guaranteeing red ink for years to come.

So who will lead tomorrow’s info-tech industry? We could be looking in the wrong places. Instead of being venture-financed, pure-play Internet and telecom stocks, the winners may emerge from existing Old Economy businesses. One that comes to mind is Capital One Financial, which applies data-mining technologies to financial services such as credit cards. Founders Richard Fairbank and Nigel Morris have used high technology to build a company which has a market cap of $11 billion. Its earnings are real, too: Cap One generated $470 million in revenues over the past four quarters. That’s more than all of Virginia’s publicly traded info-tech companies combined. Yet, Fairbank and Morris have kept a low profile. They don’t brag and boast and pound their chests. They just deliver the goods.