ITPRC NEWS - December 2000 - http://www.itprc.com/

If you are like me you woke up this morning thinking that you had been run over by a semi-truck. At least your portfolio seemed like that was the case. The industry giants that we know and love Cisco, Extreme, Foundry and Nortel have seen their share prices collapse in just the last few days. Even Juniper Networks, the darling of Wall Street and the heir apparent to Cisco in the Internet core has seen its stock drop over 30% in the last week. So what the heck is going on? Is the Internet craze over? Is the free spending to hire IT talent going to subside? Are we all going to have to get rid of our BMW's [disclaimer, the author does not own a BMW but would gladly take a donation]? What happened to retirement in the next three-to-five years? 

In my opinion, what is going on is the classic hype curve has fallen rapidly to earth. The hype curve is a bell shaped curve, with the arc of the bell sitting very close to the start point. Quite simply, when a new technology comes along, the hype takes off long before the technology is ready. Once the reality sets in, the momentum cools and we move into a period of slow and steady growth. We've seen this tune played out numerous times over the last few years. Remember when we were all supposed to be running IP-VPN's by now? How about that telephone on your desk, is it an IP phone yet? (All signs point to "no"). 

In the Internet infrastructure space we're seeing the same sort of crashing of the hype curve. A year ago we all expected that the rapid deployment of DSL and Cable Modem service would cause ISP's to have to rapidly expand their networks to meet growing bandwidth demands. Instead, what we've seen is slower than anticipated growth in DSL and Cable Modem deployments primarily due to operational complexities. In the meantime, we've seen drastic declines in the profitability of the cash cows that large service providers were using to fund capital investments - long distance voice. 

This double whammy has caused service providers to slow their investments in their network, which in turn has caused several hardware vendors to cut estimates for future growth. This picture hasn't been helped by the meteoric collapse of Lucent Technologies, one of the industry's former stalwarts. 

So what does the future hold? Some analysts predict that we're in the throes of a death spiral, where new startups including metropolitan area fiber service providers such as Yipes!, Cogent and Telseon will drive prices so low that legacy carriers won't be able to compete and will find themselves fighting for their very survival. Other analysts predict that we're in for a long period of slowing growth, as large service providers simply don't have the cash flow to rapidly expand their networks to meet growing customer demands. In either scenario, the future for hardware stocks looks bleak. 

The other contributing factor to this equation is the rapid growth in bandwidth availability as a result of new technologies such as wave division multiplexing and gigabit (and soon 10 gigabit) Ethernet. The thought here is that bandwidth is getting so cheap, there isn't enough profit potential to justify massive infrastructure investments. 

But the bright spot in this equation is that the demand is still there. Companies are still growing their networks (when was the last time you heard of a company announce plans to reduce its internal data network?). New services are still required. Internet usage continues to increase. There is a whole third world out there that has yet to come on-line. New service providers, using cheaper, simpler networks will grow to meet these challenges. 

So don't jump out of your lifeboat yet. We may have seen the last of the 300% annual increases, but if you are Cisco, Juniper, Extreme, Foundry or Nortel, you knew this was too good to last anyway. The future may mean slower growth, but it still means growth. And as we've all seen over the last few years, growth is good. Welcome to the era of the new blue chips.  

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Irwin Lazar is the owner of the ITPRC and a Senior Consultant with The Burton Group (www.tbg.com) where he specializes in network architecture and strategic planning. He is also the conference director for MPLScon 2001 and he runs the MPLS Resource Center (www.mplsrc.com). He can be reached at ilazar@tbg.com. 
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