Networking slowdown

For too long now we've based our view of the networking market on the growth rates of certain high-flying firms. Investors flocked to the high-tech market that could do no wrong. Stock analysts flocked (as in ‘sheep’) to a market where anybody could pick a winner in routers, hubs or switches. PCs were hot, and browsers were even hotter.

But the world is a very different place now. After the first quarter of 1998, we now have a pretty good feeling for the shape of things during the remainder of this "year before the Y2K eruption." Here are some things to look for over the next nine months:

1. Slower growth

   Anybody who tells you the networking market will continue growth rates of 30% or more is on drugs. Sure, Cisco may still grow at that rate, but it's unlikely too many other companies will. For example, 3Com reported only a 4% quarterly increase. Bay, meanwhile, just announced it expects its quarterly revenue to drop 10%.

   Financial and stock news from: Alcatel Bay Cabletron 3Com

   Second, expect to see losses. We've always had some money losers in the second and third tiers, but now we're going to see even the larger companies begin to report dour numbers (again, excepting Cisco and telecom equipment providers like Lucent that are moving into networking). Besides Bay, we've seen some major missed earnings from companies such as 3Com and Cabletron (which recently posted a $1.67 million loss. Is anybody really surprised that we have seen a wave of new layoffs, such as the 180 announced by Cabletron? Even Alcatel, which just landed a really choice part of AT&T's internal network, is planning to trim its work force in Europe later this year. Call it a refocusing of effort, a changing in worker requirements or a reduction in overhead expenses - the result is still the same.

   And look for the chickens to come out on Wall Street. For the past few years, we've had sheep on the Street: Pick the safe stocks, bet with everybody else. But now that the market is "maturing," there are fewer and fewer safe picks. Interestingly, it appears that the Wall Street investors have found Herculean strength in their ability to prop stocks up. When companies like Bay and 3Com surprised them with poor earnings announcements, their share prices actually rose over the next few days. The rationale from the Street? That the stocks had already taken into account this anticipated level of performance. But if that is true, then why were all the investment firms caught by surprise by the poor earnings?

2. Cisco gets cagey

   Cisco financial and stock news

   What a tough situation Cisco must be in. On the one hand, the traders recognize that this present market is very unstable and that Cisco is only slightly less vulnerable than its boyhood companions. On the other hand, the Street views Cisco as the safe bet and is continuing to push its stock higher and higher. Further, users are agreeing that safer is better and are continuing to buy Cisco gear.

   Cisco’s dilemma? How to look somber and grave when talking about the status of the market while giggling all the way to the bank.

   However, even Cisco has to face reality sooner or later. MPLS is looking more and more like "Tag Switching Minus" (I can hear the competition now – "MPLS: All the taste of Tag with a third less functionality").

   But the only people who seem to be saying Cisco's still as sure a bet as ever are people who own large chunks of its stock.

3. The top tier changes

   Like a hungry pack of wolves, Lucent, Nortel, Ericsson, Siemens, NEC and Alcatel are waiting at the edge of the woods for the first real opportunity to break into the traditional networking space. They will have to be real careful, for all the reasons cited above. But as the original "LAN-pack" of vendors gets cheaper and cheaper, look for these traditional telecom players to try to snap up a few and take on Cisco (which, in absolute terms, is smaller than any of the telecom vendors). Even Cisco lists these players as its main competition in the future, although that may show some wishful thinking, given the strength of players such as Ascend in the provider market - and the size of companies such as Lucent.

4. Y2K continues to depress everybody

   Wanted: Y2K whistle blowers Network World, 1/12/98.

   The big concern here is paralysis by inaction or overreaction. Already we have seen some fairly wild moves on the part of people trying to counter Y2K meltdown. The Taiwanese government, for example, is threatening to shut down any company that can't prove Y2K compliance by mid-1999. And British officials are suggesting extended holidays around Jan. 1, 2000, to minimize the impact of anticipated failures. Even if these represent the extreme, hysteria end of things, the end result is the same: users are spending less on basic networking and more on Y2K preparations (including lawsuits and contingency plans).

5. The advertising gets crazier

   Burn, Baby, Burn The Apple TV ad (4.3M file)

   This is the year of the "Intel copy" advertisements. However, vendors need to realize that Intel did not get where they are today by their advertising alone. Sure, most computer users can identify "Intel" as a big part of their computer. But an equally large number are confused over the fact that their computer is an "Intel" and yet it has a Compaq label on the front. At this point it is worth noting that the new Apple "flaming Intel" ad is very good. Too late, but very good. Let’s see, we’re comparing a chip company to a computer company – what’s wrong with this picture?

So if the first quarter of 1998 is any prediction (and it may not be, after all), we are in for a very interesting nine months.