Chapter 21 Capitalists behind the Iron Curtain Michael Shiff will tell you he coined the term “Personal Earth Station” which described Hughes Network System’s small ground terminal refered to as a VSAT for “Very Small Aperture Terminal”. No question Mike was instrumental in its success; however, he did not have the Hughes pack mentality and soon broke out. For this, he teamed with George Sun from their SBS experience to form International Information Systems (or IIS) who was able to leverage family to introduce VSATs to the People’s Republic of China. IIS was successful in selling a HNS VSAT system to China Ministry of Posts and Telecommunications (MPT). Merrill Lynch provided cash flow funding and was rewarded with a successful entrance in to the China financial services market. With his work done in China, Mike focused on bigger game; the Soviet Union. I was just a simple pawn in his grand scheme to control the entire world. 1. A Capitalist’s Guide 2. Escape from Moscow 3. No Man left Behind A Capitalist’s Guide In 1988, there is no question China was light years behind industrialized world in telecommunications. Its population of roughly 1.0 billion at the time equaled the number of long distance telephone calls each year. This means on average each Chinese pop makes one long distance call per year; taking it a little further, half never make that call. No matter, China needed to join the modern world fast. VSAT could provide immediate connectivity for business and IIS could provide those VSATs. There are several anecdotal highlights pertaining to China worth discussion: 1. In 1988, TA was just starting out in shared executive office space on the 12th floor of a Bethesda building. One Saturday, Mike needed to borrow our shared conference room to meet with the visiting Deputy Prime Minister of China . Prior to a meeting in Bethesda he got a call from the US Department of State that IIS was not on the “official” visit schedule and to please push the Prime Minister along as he was needed for dinner with then Vice President George H. Busch! My guess is Mike was not on time for his birth! 2. On another occasion, Prime Minister…the Prime Minister of all China… asked Mike the difference between AT&T and IIS. His response was the AT&T network is terrestrial; IIS uses satellite. It passed! 3. The Great Wall is truly great! And Chinese food is hands down better in China than in the USA 4. When a new ambassador arrives at his post, his first meeting is expected to be with the government of the host country. Prior to that formal meeting we had dinner at the City Club in downtown Washington. The ambassador, who had an American university degree and no accent, hypothesized he might be recalled for breaking protocol because he hadn’t yet had his meeting with the President of the United States… you guessed it! Number 41, George H. Busch again. China was deployed and any profits were poured into proposals and plans for more systems with little luck. The China MPT was slow to market. This opened the door for Hughes, the IIS equipment provider, to become a direct supplier to other Chinese entities. As a result, the IIS role in China was destined not to grow. A second opportunity involved the good ole Union of Soviet Socialist Republics (USSR) 0r Soviet Union for short; you remember them! It seems that under the communist rule of Mikhail Gorbachev in 1990, the Soviets had a problem. The Berlin wall had fallen the year before and their system was under attack. It didn’t help that the banking system took weeks, if not months, to resolve a simple transaction. VSATs could provide real-time connectivity between the 6,000 Soviet banks and its central bank, Merrill Lynch had the applications software and processes, and Deloitte & Touche, who integrated the Merrill Lynch computers and was, at the time, the second largest professional services network in the world by revenue and had 182,000 employees could provide the host and terminal hardware and software integration. Terminals coming off lease could even be used. Of course, IIS would assume overall system management. This was a chance, just like that of Newman on Seinfeld, for me to realize my lifelong ambition; to be a banker. It sounded like a plan; however, this might be a good time to review IIS capability! Done! There isn’t any; Mike didn’t even draw a salary and IIS was only part-time. It seems Mike made contact with a Soviet official who bought the pitch. The plan was to travel to Moscow and deliver an offer they couldn’t refuse. All I could think of is I hope we don’t start a war! The team consisted of: • Mike Shiff, IIS President who could describe the Merrill Lynch relationship and put forth the proposal • Doug Lilley , graduate student at Georgetown University’s prestigious Foreign Service international business school understood Russian. It also happens that his father, James Lilley, was US Ambassador to China at the time. • Our trusted attorney du jour and member of the Virginia House of Burgesses . His name escapes me as I had never met him. I think he was chosen because he agreed to travel for expenses alone. • And me, whose job was to provide some kind technical credibility. We were concerned that top scientists in Moscow might barrage us with technical questions. It never happened. The first few days we were treated to a tour of small town and had the opportunity to talk to with a clergyman who had lived through decades of communism. We also got a tour of what only the year before was a secret missile factory and got to hold rocks returned from the moon. On one Sunday, we saw a huge protest in the streets that demanding more freedom . We visited a large satellite research center. In general, the people we met with were attached to the central bank, satellite communications agencies, or security . And they were selling to us, it seemed! Leading the Soviet side was a direct report to the chairman of the Soviet Central Bank, the equivalent of our Federal Reserve. He and his staff spoke very good English. You could feel an intense urgency; I assumed this was normal at high levels within the Kremlin. In reality we were on the cusp of an incredible, incomprehensible change. When it became time to present the IIS solution, no overhead projector was available. What kind of place is this! Our graduate student managed to find the only projector in all Moscow at the American Embassy . A benefits analysis was provided and the project was laid out to show system operations, transaction control and responsibilities of IIS, Merrill Lynch, and Deloitte. In addition to applications and business benefits, we discussed geographic coverage, design limitations, deployment, system management, and service. At one point our host wondered if they could provide the VSAT antennas. Sure; and cabling too! They wanted to know if they could sell their antennas to western service providers. Sure! The numbers were cranking. How many VSATs were deployed each year? The excitement was building. They would manufacture thousands of antennas and sell them with a profit. It would be a great business. They did not seem to grasp that the market sets the price with profit being the difference between the market price and their cost to market. It was said it over and over again. Finally, after what I remember as several hours, one of the brighter engineers uttered, “Then it’s possible to lose money!” “Yes, that is capitalism!” The look on everyone’s face was puzzlement. Groups broke into Russian. There was never discussion of selling antennas again. At the time, Soviet money was worthless internationally though it was well accepted that the Soviets had a significant amount of gold on deposit. The plan proposed was that the Soviets would deposit $10 million in gold with Merrill Lynch in London for one year; then, IIS and Merrill Lynch would provide a project plan with systems design developed by the team and return the gold. It would be funded by the “float” at 11% at the time and subsequent implementation would be funded by the increased velocity of the transactions. Brilliant! It was never explained, but I don’t believe Merrill Lynch had planned on investing everything in the derivative market. This is what I learned from my visit to Moscow: Moscow is cold in December ● Moscow is cold and grey in December ● 10 days in Moscow in December is a long time ● Red Square with St Basil’s is absolutely beautiful ● A Russian Soldier will sell his entire uniform inclusive of hat, coat, boots, and medals for $100 because he can always get another uniform but not $100 in hard currency ● However, it is impossible to buy a computer cord ● $1 will get you a taxi for most of the day ● Russians like vodka ● Pizza Hut was a good place to eat when you are travelling with someone who is a vegetarian ● Western hard currency customers are seated first and served immediately in restaurants while Russian stand in long lines ● I believe Russians stand in long lines to even use the bathroom ● Expensive hotel rooms are about the quality of a good YMCA room ● Breakfast included means hard bread, and piece of mortadella ● 1 Kg of beluga caviar can be purchased for $50! The next meeting I attended was at Merrill Lynch’s executive dining room at the top floor of the World Financial Center in New York City along the Hudson. It was hosted by the Chairman of Merrill Lynch for the Chairman of the Soviet Central Bank and included key staff members, Deloitte and IIS (I believe we mustered 5 people using new math). The view of New York Harbor with the Verrazano Narrows Bridge and Statue of Liberty was gorgeous that clear brisk evening. Two sailboats could be seen working their way toward the bridge. One was His Eminence the Shepherd; how appropriate! The story ends on these notes. 1. The Soviets did not have a vast horde of gold and never showed any of it 2. The USSR dissolved into 16 countries on December 26, 1991. We could only solve the least of their problems. 3. The group we dealt with built and launched two satellites. I saw them in 1994 in Geneva. They received revenue but never made a dime in profit. They are still in business! 4. Just like Newman on Seinfeld, I always wanted to be a “banker”. This is as close as I got.
Posted on: Sat, 31 Aug 2013 13:07:35 +0000