Assessing the loss of two giants

In just two weeks, two of Washington's biggest and best-known technology companies - AOL and Sprint Nextel - have taken steps likely to diminish their presence in the Washington region significantly.

Sprint announced it is moving its executive headquarters from Reston to Overland Park, Kansas. And AOL's corporate parent, Time Warner, said it is separating the Internet company's advertising business and dial-up Internet access business, following the decision to move the corporate headquarters from Dulles to New York.

The Washington region, always thankful for the core of government contractors and the steady stream of federal dollars to power its economy, has for more than a decade tried to build a generation of technology and telecommunications companies catering to consumers. The loss of AOL and Sprint executives - even if it does not immediately mean many fewer employees - is without doubt a blow to that hope.

Will others rise to take their place?

The region's business boosters mourn the loss of top executives, but argue there's plenty else going on.

"This remains a very vibrant technology region and it is not defined by just two companies and we will go on and we will continue to grow," Bobbie Kilberg, president of the Northern Virginia Technology Council, told me.

Gerry Gordon, president and chief executive of the Fairfax Economic Development Authority, noted that just two weeks ago, Computer Sciences Corporation said it was relocating its headquarters from California to Falls Church.

But will CSC really improve the area's brand? There are already many consulting companies around the region. It would be hard to say that's the same as household names like AOL (once the No. 1 internet provider) and Sprint (the No. 3 wireless carrier). Many business executives hoped AOL would be the first of several giants to take off here. But that hasn't happened. As for Sprint, its troubles and now relocation come after a series of regional telecom giants -- MCI Worldcom the best known among them -- faltered.

There are two schools of thought to explain what's happening. One comes from Gene Riechers, a venture capitalist at Valhalla Partners in Reston. Riechers has been following the local tech scene for 30 years and has seen a cycle in which big companies are built up and then for various reasons come apart. The alumni of these companies go on to start new firms, some of which grow into giants.

"I don't have any reason to believe these cycles of creation and destruction will stop," he told me a while ago.

It has certainly been true for AOL -- Riechers and other local venture capitalists have backed numerous former employees -- and it's beginning to be true for Sprint.

Perhaps this description of the economic forces shaping the region -- which some call "creative destruction," though that's a term that's taken on many meanings over the years -- correctly describes what's going on here. Washington may be simply at a trough, with a fertile ecosystem of startups just waiting to yield the next big thing.

Or perhaps not. Perhaps Washington is not competitive with Boston, New York, Silicon Valley or Seattle near the home of Microsoft.

"The same thing is happening to Washington that's happening to every other city in America, where ever increasing consolidation takes the home firms away," Scott Cleland, chief executive of the Precursor Group, one of the best-known local telecom think tanks, told me.

"Washington companies have generally been the [target of acquisition] and not the consolidator," he added.

In the end, it may come down to whether local tech execs follow the path of Rob McGovern or Lawrence Roberts.

McGovern came to the area in the early 1990s to be part of the big business software company Legent. It was bought in 1995 by the much bigger Computer Associates and relocated to Long Island. McGovern and many colleagues stuck around. He founded CareerBuilder.com, one of the biggest job sites on the Web. Then it was bought and relocated to Chicago. He founded a new local dotcom, Jobfox, which has been gobbling up venture capital.

By contrast, Roberts was one of the founders of the Internet, as a telecom engineer in the area in the 1960s and 1970s. He was part of ARPANET, the Pentagon's research program that built the 'Net. Then he founded Telenet in the District and moved it to McLean. After that, it was bought by big telecom firm GTE, which was in turn bought by Sprint.

Over time, the entrepreneur decided it was Silicon Valley -- not Washington -- that offered him the best chances to grow. He founded companies on the West Coast building chips to speed up Internet connections.

"What drives people here is that this is where all of the manufacturing facilities and all of the supplying facilities and typically the venture capital is, so they can find all of the resources they need," Roberts said of Silicon Valley. "They don't need the government to help them."

By Zachary Goldfarb  |  February 15, 2008; 10:30 AM ET  | Category:  TechPost
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