An investor's perspective on the year ahead

Building and improving today's Internet infrastructure will be the dominant investment theme this year. The companies of interest to venture capitalists will be those that address issues such as bottlenecks in the wide-area infrastructure, getting better performance from the Internet, and improving network availability and reliability.

Optical networking will continue to grab the attention of Wall Street and venture investors. The wild success of Sycamore Networks in the public market, as well as the $3.25 billion that Nortel Networks paid for Qtera and the $15 billion that JDS Uniphase paid for E-Tek Dynamics, are sending strong signals that optical technology could be crucial for Internet growth. With its promise of a millionfold increase in telephone network capacity, optical technology would be able to handle the dramatic increases in Internet traffic.

Optical technology also will help relieve congestion in metropolitan-area networks, where corporate networks and the Internet meet. The growing use of virtual private networks, along with the push by application service providers (ASP) to host enterprise applications off site, means that many of the services corporate users want now reside outside the LAN. Therefore, expect to see lots of innovation in the optical area.

The need for high-bandwidth services to second-tier cities where companies have satellite offices is being addressed by several technologies, including SONET, Gigabit Ethernet, digital subscriber line and wireless technologies. All will be fully exploited by the telephone companies in order to get the required scale as the number of users increases.

Communications services will also continue to be a major area for venture investing. Enterprise network managers are faced with more complex decisions about network platforms, service types and features, and an ever-increasing number of vendors all with their own service levels, billing cycles and network reliability. Communications management and integration products are emerging to deal with these issues.

Netsourcing, the outsourcing of a business's information technology and networking for electronic business applications, is another communications service that will continue to grow. By outsourcing these applications, companies can reduce their technology investments and get to market faster.

How enterprise applications are delivered will also develop more fully this year. Storage subsystems, server software and network equipment will not only be deployed within corporations but also by ASPs. This "rent-an-app" approach will continue to create opportunities for venture-backed companies.

This year will see a lot of approaches being tried to strengthen the infrastructure of the Internet. Pay close attention, because these approaches will eventually affect corporate networks as well.