Information Technology: COMMUNICATIONS
CRAIG McCAW: THE PROPHET OF TELECOM
The reclusive billionaire has a vision--and five new companies
On a typical summer day at his corporate offices outside of Seattle, Craig O. McCaw is nowhere to be found. Instead, the reclusive billionaire who helped create the cellular industry is on his yacht, the Cellular One. His favorite spot to weigh anchor is deep in a bay called Desolation Sound, an hour north of Vancouver by seaplane. The closest town of any size is Campbell River, B.C.--a community of 28,851 that bills itself as the "Salmon Capital of the World."
The perfect retirement? Not for Mc Caw. After selling his McCaw Cellular Communications Inc. to AT&T for $11.5 billion in 1994, the wireless pioneer is back, at the age of 49, quietly building new businesses more furiously than ever. From his 77-foot yacht, he's juggling five new ventures with an even more ambitious goal than when he envisioned a cellular world: This time, he wants to spread the benefits of the Information Age around the globe and to all Walks of life. "He's building a new telecom world. People don't realize it yet, but he's putting all the pieces together," says Sanford Rich, senior vice-president at GEM Capital Management Inc., which holds stock in one of McCaw's companies.
What McCaw has been assembling is a new empire with staggering potential. He has major stakes in companies that will be able to deliver high-speed digital connections from almost anywhere--underground, atop skyscrapers, even space. His lofty goal is to offer the world's most complete array Of communications services, including local, long-distance, wireless, and satellite connections. Just this year, he unveiled a cutting-edge company that could have a nationwide fiber-optic network with more capacity than AT&T, MCI Communications, Sprint, and WorldCom combined. "I'd just as soon be retired, but that doesn't seem to happen," says McCaw with a wry smile. "We just keep having these ideas."
He's only half joking. McCaw is the reluctant visionary in the world of communications. The entrepreneur seems to feel both blessed and burdened by what he calls "these ideas"--as if they're a gang of personal demons. He loves to be able to create services to make people's lives better, but he hates much of the baggage that comes with empire-building. He abhors meetings, and he doesn't like going to the office much. "He's a free spirit," says James L. Barksdale, Netscape Communications Corp.'s chief executive, who worked at McCaw Cellular. McCaw shuns publicity, especially since his 22-year marriage to his college sweetheart ended in a messy divorce last year. He refused to sit for a photo for this article, although he agreed to a rare interview.
Despite his reticence, McCaw's grand plan to build the next generation communications powerhouse is beginning to emerge. The names of his businesses say it all: There's Nextel, Nextlink, Nextband, and Internext. Only his 288-satellite venture Teledesic didn't get the "Next" label--perhaps because in 1994 it was the first piece to be founded.
The strategies of McCaw's most established companies are disarmingly simple: Selling primarily to businesses, three-year-old Nextlink Communications Inc. provides local phone service in competition with the Baby Bells, while the older Nextel Communications Inc. markets a cellular-like wireless service. Together, they serve 2.1 million customers.
But those initiatives are McCaw's Trojan horse. They provide him with aggressive sales forces that get him in the door with corporate customers. Once inside, the entrepreneur will try and sell Space Age data-communications services that could leave other telecom players in the dust. Already, Nextlink is working out how it can sell Nextel's wireless service to its customers. Later, both Nextlink and Nextel are likely to market lightning-fast data connections from Teledesic, which plans to be operational by 2003. Teledesic, in turn, will allow McCaw to plunk down a small Nextel wireless network in the middle of nowhere and carry traffic out via satellite, allowing him to serve regions none of his rivals could touch.NEW-AGE EXEC. Nextband Communications LLC, a company McCaw launched just this year, will kick in much sooner. Next year, the company will offer high-speed Net connections over radio waves to offices that can't be reached economically by satellite or fiber. And Internext LLC, the 15,000-mile fiber-optic network McCaw is building in the U.S., will be one of the most sophisticated digital communications systems going. Initially, it will have the capacity to handle some 300 million voice conversations simultaneously--more than take place at any one moment in the U.S. "It's like building a 1,000-lane highway," says Wayne M. Perry, CEO of Nextlink. "You can do things nobody ever thought of before--like having one lane where you can drive your Ferrari 300 miles an hour."
But McCaw doesn't want to cater just to Ferrari drivers. Indeed, this time he aims to make communications just as accessible to someone in a remote South American village as it is to someone in teeming London. Call him a New Age executive--an entrepreneur who is as interested in righting social wrongs as he is in racking up profits. Some might even say he's downright odd. He once suggested to government regulators that they should reserve radio spectrum for telepathic communication. For years, he would hold his hands up to people in his office to feel their auras, says McCaw lieutenant Bob Ratliffe. And last summer, after agreeing to help pay for the killer whale used in the movie Free Willy to be flown back to Iceland, he swam with the whale and called it "a high point of my life."
McCaw has yet another radical notion. The former history major at Stanford University thinks the Industrial Age is "one of the low points of human evolution" because it has forced people to pile into cities, leaving relatives and friends behind. That has created shortages of space in urban areas and developed countries, while leading to a breakdown in the family structure. At the same time, Third World countries are losing their leaders of the future to developed countries. "The worst sort of imperialism is the brain drain of the best and the brightest," he says.TOO PHILOSOPHICAL? So McCaw is out to change the course of the Information Age. Because information flows more freely than physical resources like steel or timber, it can be distributed to people anywhere--from South Africa to Siberia. By using Teledesic's satellites to extend the Internet, African artisans can sell sculptures directly to U.S. collectors, cutting out middlemen and making a profit, too. The migration patterns of the past 200 years--toward urban areas and developed countries--would stop. "The real potential of the Information Age is that people can live where they like," he says.
Does that make Teledesic an altruistic venture? "In any business, you want to have some socially redeeming value," says McCaw. But he insists the satellite venture will pay its own way, primarily by charging businesses for high-speed connections in remote locations. "We recognize that we can do something really good and, by the way, not have it viewed as some charitable project that will require someone to pour in huge amounts of money," he says. "It's absolutely the right thing for the world and a good thing for us."
Maybe so. But there are some who think McCaw has grown far too philosophical during his days in Desolation Sound. To be sure, his five major ventures are all compelling business ideas, and no other telecom mogul is attempting to string all the pieces together to deliver communications to every pocket of the globe. But unlike the days when McCaw was carving out new cellular ground, others also see the opportunities ahead. And now, McCaw faces competitors on every front, from scrappy Qwest Communications International Inc. to the giant Bells.
His ventures all carry substantial risk, and, with the capital markets in turmoil, the biggest hurdle may be persuading skittish investors to fork over the bundles of cash necessary to fund all the futuristic ventures. The numbers are daunting: Teledesic needs to raise an additional $7 billion; Nextel plans to spend at least $3.5 billion in 1998 and 1999; and Nextlink expects to spend $1 billion this year and next.
The piece that's most vulnerable is the linchpin of his empire, Teledesic. While the system will cost at least $9 billion, no one really knows how big the market for its services will be. Moreover, launches of communications satellite systems are problematic. Globalstar Telecommunications Ltd. in San Jose, Calif., lost 12 satellites worth $160 million in a Sept. 10 launch. And the Internet market that McCaw is targeting is going through tumultuous change. "If you tell somebody in this industry that you're going to deliver a service in five years, you hear a lot of low groans," says John W. Sidgmore, vice-chairman of rival WorldCom.
Yet McCaw isn't worried. He argues that the market for satellite services will be big enough for all the competitors--and that should help him attract capital. Merrill Lynch & Co. estimates demand for multimedia services via satellites will hit $5.6 billion in 2003, rising to $37.5 billion in 2007. "The challenges are not on the market side," insists Teledesic President Russell Daggatt.
McCaw has some marquee backers who agree. Microsoft Chairman William H. Gates III has chipped in more than $10 million, and Saudi Prince Alwaleed bin Talal bin Abdulaziz Alsaud has invested $200 million. In May, Motorola scrapped its own plans for a data-satellite network and took a 26% stake in Teledesic. Alwaleed expects the project will yield annual returns of 30% to 40%. "The real payoff is in the long term," he says.
The confidence of such monied investors is bolstered by McCaw's track record. Back in the 1980s, analysts thought cellular would never become a mass-market service. McCaw was ridiculed for paying $20 per potential customer for wireless licenses, driving his company deep into debt. Then McCaw sold his company to AT&T for about $250 per potential customer, personally making about $1.5 billion. "You don't cut Craig McCaw short," says Samuel Ginn, chairman and CEO of AirTouch Communications Inc., a competitor of the former McCaw Cellular and now of Nextel. "He has the talent to see things that other people don't see."BOLD. That McCaw sees the world through wide-angle lenses reflects an upbringing that was grander than most. His father, J. Elroy McCaw, was a pioneer in radio and television who bought the Boeing mansion in the tony Highlands area of Seattle. Young Craig and his three brothers grew up with servants and a private cook. Elroy's biggest success was the purchase of WINS in New York City, which he turned into the country's first rock-and-roll radio station. He bought the station for $450,000 in 1953 and sold it for $10 million in 1962. As a practical joke, Elroy McCaw sent the then 13-year-old Craig into the bank alone to deposit the check.
From the get-go, Craig McCaw wanted to be just like his dad. At age 16, he spent most of his summer trying to learn his father's business by selling cable subscriptions door-to-door for one of his father's companies. "He wanted to get his hands dirty," says Steve Countryman, a high school friend who worked with McCaw that summer. "He was not wild and crazy as a teen." One day, Countryman pulled open a desk drawer and found McCaw's paychecks for the summer, all uncashed.
Later, tragedy struck. In 1969, 19-year-old Craig McCaw found his father dead of a stroke in their home at the age of 57. Creditors swarmed over Elroy's companies, and his estate was soon declared insolvent. The mansion, a Learjet, and other assets had to be sold. Still, the McCaw's weren't penniless: They owned the cable-TV company, Twin Cities Cablevision, and Elroy's life insurance brought them $2 million.
After Elroy's death, Craig worked hard to fill his father's shoes. He took a year off from Stanford to help his mother straighten out the family's affairs. When he returned to college, the Twin Cities general manager reported to McCaw in his dorm room. "Craig was always a lot more serious and focused than the rest of us," says Larry Leisure, a Stanford classmate. After graduation, McCaw took over the cable franchise. "He had spent the most time with his father and was following in his footsteps," says Countryman.
In more ways than one, Craig McCaw has inherited his father's big-picture view and bravado--he has long been comfortable borrowing huge sums of money to double his bets on companies. And like his father, vision, not detail, is his trademark. Even McCaw's biggest supporters say he is a "terrible" day-to-day manager. Besides not coming in to the office, he doesn't like bird-dogging critical details, such as budgets. He's the ultimate hands-off leader--he sets direction and then leaves execution to seasoned lieutenants. Daggatt once asked McCaw whether he should attend a communications conference. "How you waste your time is your business," McCaw replied.
Ironically, for one of telecom's leading executives, he's a lousy communicator. He avoids public speaking and is known for blowing the punch lines of jokes. He's also dyslexic, so he doesn't like to read long documents. One person close to the shy, unassuming executive labels him "charismatically challenged."
Still, McCaw inspires almost worshipful loyalty from those around him. Teledesic co-CEO Steve Hooper and several other executives all dumped senior positions at AT&T Wireless and took pay cuts to work for McCaw again. It helps that he has made many of those in his inner circle wealthy beyond their wildest dreams. Perry, for example, walked away with about $125 million in the sale of McCaw Cellular.
But it's more than that. McCaw has the playfulness of a kid. With friends, he disguises his voice almost every time he calls them--Daffy Duck one time, British royalty another. He loves to do spontaneous things, like fly his helicopter down to Oregon for seafood dinners. In the office, he will get into squirt gun or Nerf ball fights. The day he sold McCaw Cellular to AT&T, he skipped out on media interviews in New York. Instead, he bought a Rockettes Barbie Doll at FAO Schwartz as a gift for the daughter of one of his top execs who had had to miss a day with his daughter for the first time since his divorce.GOOD MOOD. It has only been since his own divorce last November that McCaw poured his energy into his new business ventures. McCaw and Wendy Petrak had grown apart over the years, friends say, and their differences were exacerbated once McCaw sold out to AT&T and the couple spent more time together. The separation dragged on for more than a year as the couple sparred over such issues as who would get control of their Hunts Point (Wash.) mansion. Finally, they reached a settlement giving Petrak more than $500 million in Nextlink and Nextel stock.
McCaw's new wife, Susan Rasinski, has brought out a different side of the man, friends say. Gregarious and outspoken, the former San Francisco investment banker has made McCaw much more outgoing and social than he has been in the past. Today, he invites friends from his companies to his home and yacht more frequently, and McCaw, who is childless, loves having his nieces and nephews visit. "I think he's very happy now," says Nextel CEO Daniel Akerson.
The performance of his businesses is adding to McCaw's good mood. Nextel, the most valuable of his holdings, at $1.2 billion, has been on a tear of late. Since beginning to market service two years ago, it has zoomed to 2 million subscribers, with a network spanning 400 U.S. cities. Analysts figure revenues will rise from $740 million last year to roughly $1.8 billion this year.
Still, Nextel needs cash to keep the growth going. In the U.S., Akerson plans to spend at least $1.7 billion this year and between $1.2 billion and $1.4 billion in 1999. Overseas, he will plow in $300 million to $400 million this year and next to expand the network. Yet analysts don't expect the company to start making money until 2001.
So far, investors are betting on McCaw. While the wireless industry is going through price-cutting, investors think Nextel will be somewhat insulated. The buffer: The company sells primarily to businesses, which rarely change carriers, and it offers a unique walkie-talkie feature called "Direct Connect" that allows an employee to push one button and talk instantly to some 100 co-workers. "What is underappreciated is their unique technology," says Michael Mahoney, a portfolio manager at GT Global Telecommunications Fund, a Nextel shareholder.
By contrast, Nextlink's local phone service is hardly unique. It does, however, have a couple of significant advantages in the $100 billion market: customer service and low prices. Michael Grabarits, owner of Pennsylvania's
ExecuTrain Corp., which trains people to use software, is a case in point. One of his pet peeves with Bell Atlantic Corp. was that he never knew whom to call when something went wrong. "I called in to a bank of people," he moans. Nextlink solved that by assigning one customer-service representative to his company, at the same time saving him 30% on his phone bill.
With its success so far, Nextlink is facing great expectations. The number of phone lines it sells hit 102,000 at the end of June, up 32% from just three months earlier. Revenues are expected to jump almost fivefold, from $57.6 million last year to $275 million in 1999, according to Bear, Stearns & Co. Nextlink is building so rapidly, though, that it is bleeding red ink. Losses totaled $129.3 million last year.
What are McCaw's chances for success? There's little question he will add to his fortune. His stakes in Nextel, Nextlink, and Teledesic are worth a total of $2.3 billion, and the values of Nextel and Nextlink are sure to rise if the companies continue their hot growth. But to create a new communications goliath, McCaw needs Teledesic. Without the satellite system, McCaw is left with a collection of me-too businesses.
That would be a cue for McCaw to repeat the past and sell out again. Nextel, for example, would fit perfectly with WorldCom, which focuses on businesses and has no wireless offering. "Craig always has a back door," says Barksdale.
McCaw knows his empire needs to be different. "There is a food chain," he says. "Time and technology are always driving you down the food chain and you need to innovate to stay up the food chain." Teledesic is his best shot at innovation. Without it, it'll probablytake a bit longer for the Information Age to reverse the "low points" of the Industrial Age.With Seanna Browder in Kirkland, Wash., with Roger O. Crockett in ChicagoReturn to top