The attack of the Defenders

Each January, I draw up a list of the most important people in the communications industry - and then I go visit them. This serves a very useful purpose at The Yankee Group: It gets me out of the office so that the people who really run the place can do so.

Now, after several years of doing this, I have decided that the communications industry consists of four groups:

The Defenders. Companies that own the market and have an installed customer base. Examples: Bell Atlantic, AT&T, Nortel Networks, Lucent.

The Attackers. New kids on the block. Have little or no market share and few customers. Daring; first to try new technology. Examples: Qwest, Level 3, Packet Engines, Xylan, eTrade.

The Arms Merchants. The new technologists, most likely venture capitalized. Offer a new way to do things - often their services are substantially less expensive and sometimes riskier. Sell solutions to Defenders and Attackers. Past and present examples: Banyan, Kenan, Oracle, Sybase, Vocaltec, Open Market.

The Customers. The enterprise customers who themselves are Defenders in their own markets. Examples: Citicorp, Merrill Lynch, General Motors, General Electric.

Now, when I visit the Defenders and ask about the Attackers, what do I hear? Defenders go through four stages, as predictable as a sitcom. In the first stage, the Defender makes light of the Attacker, questions its motives or rails against the injustice of it all. The Defender also talks about "level playing fields" and just basically goes into denial. "No," the Defender tells me, "we aren't threatened. Yes, our technology is better and we provide better customer service."

In the second stage, the Defender gets angry and questions the legitimacy of the Attacker and the benchmarks against which it's measured, and implies that Wall Street has its head up its rear for even listening to the Attacker's claims.

Stage Three is modest acceptance, wherein the Defender assumes that some of the Customers may actually like the Attacker and the technology it offers, whether it be packet switching, client/server, object computing or whatever. The Defender then reasons, "Well, if the Customers are going to buy it, they might as well buy it from us," and cuts an OEM deal so that its Customers won't wander off the reservation. This is known as a strategic alliance. Strategic alliances almost always fail.

The final stage is when the Defender realizes that the Attacker has won and the Defender, in danger of losing its biggest customers, buys the Attacker.

Example: Lucent sees Cisco and Ascend gaining market share, so it buys companies such as Yurie Systems at 20 times sales. IBM doesn't understand T-l multiplexers, switches and structured wiring, so it cuts OEM deals, which are too little, too late.

Fortune favors the bold! The Attackers sign OEM agreements because they have more technology than distribution, and they need the volume manufacturing to keep their profit margins up. The Customers first go to their traditional suppliers, which tell them they don't need this new technology. Then the suppliers tell the Customers their own technology will be out "soon" and try to cover themselves with OEM deals.

But the Customers soon realize that they themselves are committing career-limiting acts if they rely on their traditional vendors.

So who am I visiting this year? Raw Attackers and savvy Counter Attackers, which are Defenders that recognize their vulnerability and are doing something about it. Look at Mike Armstrong at AT&T: His base business, long distance, is low margin, high investment - so he goes out and buys Teleport, an Attacker; TCI, a cable giant but a potential telecom Attacker; and Vanguard Cellular, a wireless Attacker. But more than anything, I want to see those smart Customers that seize on the new Arms Merchants early.

It's going to be an interesting year. Oh, and if you are in Boston and visit The Yankee Group, don't look for me - I'll be out of town.