ITPRC NEWS - December 2000
What the Heck Just Happened?
By Irwin Lazar
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.
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.
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 firstname.lastname@example.org.
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