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By John Dix
Network World, 4/20/98

Think quick, who's bigger: Coca-Cola or Compaq? Anheuser-Busch or Microsoft? Bethlehem Steel or Cisco?

If you picked the household names, guess again.

Microsoft vaulted over the beer baron last year, with revenue growing 31% to $11.4 billion vs. Busch's $11 billion; Compaq rocketed past Coke with $24.6 billion vs. $18.9 billion; and Cisco leapfrogged the steel giant with $6.4 billion vs. $4.6 billion.

OK. It's a trick question. The mainstream companies over the years have spent millions on name recognition, so the tendency is to associate them with bulk. But the fact that these and other network players are outpacing national corporate icons says something about the mainstreaming of technology and the vibrancy of the industry. Heck, based on early 1998 results, Microsoft has even passed McDonald's.

Not all of the network vendors that made the Network World 200 this year fared as well as these perennial powerhouses. In fact, as a group the NW200 only mustered cumulative revenue growth of 9.8% last year, inching up from $609 billion to $669 billion. That compares with 12.5% growth for the NW200 as a group between 1995 and 1996.

But there was a sizable contingent of big winners. Some 85 companies on the NW200 grew 20% or more in 1997. Forty-six companies in that group grew revenue 40% or more, and 12 companies grew 100% or more. Interestingly, while profits for the group were up 8.5%, nearly a third of the NW200 companies reported losses last year. Many of these companies are indeed in dire straits (Novell and Apple come to mind), but for others - particularly upstart telecommunications concerns - being in the red is simply a result of feverish investment.

The Big 10
'97 rev. rank	'96 rev. rank	Company (Click for more info)	'97 rev. in mill.	% inc.
1	1	IBM	78,508	3%
2	2	AT&T	51,319	2%
3	3	Hewlett-Packard	42,895	12%
4	4	Bell Atlantic	30,194	4%
5	5	Motorola	29,800	7%
6	7	Lucent Technologies	26,360	13%
7	9	Intel	25,070	20%
8	6	SBC Communications	24,856	6%
9	10	Compaq Computer	24,584	23%
10	8	GTE	23,260	9%

Witness ICG Communications, No. 99 on the NW200. Revenue at this little competitive local exchange carrier was up 43% last year to $273 million, but the company posted a loss of $327 million, much of it related to acquisition expenses.

Does that worry investors? It doesn't seem to. The company has a market capitalization (the value of its outstanding stock) of $1.4 billion.

In fact, market capitalization is a new field we added to the NW200 this year as a quick and dirty way to summarize public confidence in a company's position and financial stability. Broadly speaking, the greater the difference between a company's revenue and its market cap, the brighter the future looks.

Nowhere is this confidence more rampant than in the case of Microsoft. The world seems to think the sky is the limit for the Redmond rocket. As of this writing, Microsoft's market capitalization is $199 billion, some 18 times revenue.

Compare that with, say, General Motors. With $177 billion in sales last year, GM is the largest company in the country. But its market cap is a mere $46 billion.

While the discrepancy can be explained away in this manner and that, suffice it to say that puny Microsoft, whose sales were 94% lower than GM's, posted net income in 1997 of $3.5 billion, more than half of the $6.7 billion in profits GM generated.

Even when you do more of an apples-to-apples comparison, one high-tech company to another, it is clear the world likes Microsoft's prospects. IBM, the No. 1 company on the NW200, posted revenue of $78 billion last year, but its market cap is only $99 billion. And $5.6 billion Oracle, the second-largest pure software play, only commands a $29 billion cap.

The most significant change is the timing of delivery. Whereas in years past we published the NW200 in January, from now on we will publish it in April so we can base the list on actual year-end data. Publishing in January required finalizing the research in November and using projected year-end numbers, some of which ultimately did not match reality.

Is the NW200 a perfect representation of everything networking? Not in the true sense of the word because 1) we include only U.S.-based companies, 2) we exclude companies whose primary customers are other vendors or residential consumers, and 3) we include some computer companies because of their influence in networking and exclude those with little vested interest.

Perfect? No, but the only network industry list of its kind.

What the numbers tell

Let's see, the Pacific Telesis Group and SBC Communications merger was consummated, as was the NYNEX/Bell Atlantic deal; BT bailed on MCI after WorldCom came riding into town on a barrel full of stock; AT&T drop-kicked its CEO and finally brought in some fresh blood; various regional Bell operating company attempts to break into long distance were quashed; long-haul newcomer Qwest started to make established players sit up and take notice; and digital subscriber line (DSL) technology had the industry all a titter.

Ivan Seidenberg, the former NYNEX chairman who is now Bell Atlantic's vice chairman, president and chief operating officer, proclaimed at the ComNet conference in January that the telecom reform act is working: "We've seen $60 to $70 billion worth of market activity driven by the act.''

Much of that probably can be chalked up to merger play among entrenched carriers, but there is significant activity among smaller players that are building fast.

Take Intermedia (No. 104). This Southeast regional carrier that specializes in frame relay-based Internet access services posted revenue of $248 million last year, up 140% from the year before. And it is still going great gangbusters.

Then there are more ambitious companies such as Qwest. Although it was excluded from the 1997 NW200 list because its primary business is selling fiber capacity to other carriers, Qwest recently acquired LCI International for $4.4 billion and is making a run at the corporate user business.

Combining LCI's network assets and customer base with Qwest's high-capacity fiber backbone - which will span 16,000 miles and reach 125 cities when completed this year - will be a potent mix. Look for Qwest to be something like the 40th largest company as measured by the NW200 next year.

Last year also saw the emergence of carriers - all too small to show up on the NW200 radar - that are using DSL and discounted RBOC lines to offer multimegabit services. A handful of these may crop up on the list for 1998.

DSL is expected to succeed where ISDN failed because, for one, the local carriers have now pushed their fiber loops closer to users and the industry is getting a boost from Compaq, Microsoft and Intel, which have agreed to deliver DSL-compliant products.

"I have a lot more faith in what Compaq and Intel can do with DSL than [in] what Lucent and Nortel could do with ISDN,'' Bell Atlantic's Seidenberg says. But we aren't there yet. "DSL is still too expensive and not scalable at the cost points we need,'' he adds.

The other telecom technology news of note didn't really break until January, when newcomer Level 3 started talking about IP-everything backbones. A "start-up'' with $3 billion in capital, Level 3 is headed by James Crowe, former CEO of MFS. The idea is to build a nationwide $9 billion IP network, initially offer data and fax services, and ultimately add IP voice to the mix.

Whether Crowe is successful or not, the bold vision has sent all the big carriers back to their boardrooms to study the implications. Of that crowd, the newly combined MCI WorldCom would be best positioned to ride the IP wave, should it develop, given the strength of its various Internet resources. In fact, as of this writing, those very resources have lawmakers pondering whether the merger would give too much control over the Internet to a single source.

LAN ho

3Com CEO Eric Benhamou downplays the concerns, saying he learned what to avoid by studying the failures of other mergers. But the numbers have yet to bear him out.

Recombining 3Com's and U.S. Robotics' fiscal 1997 results leaves the merged company with $5.6 billion in revenue and $500 million in profits last year (the deal was finalized after 3Com closed the books on 1997 last May, so the numbers on the NW200 chart are different).

In the first nine months of fiscal 1998 sales were $4 billion, down 4% compared with the recombined numbers for the same period last year, and the company reported a net loss of $33 million because of charges associated with the U.S. Robotics merger. Excluding those charges, 3Com would have posted net income of $180 million for the first nine months of 1998. That compares to $274 million in profits in the same period last year.

But it's even more complicated than that. That $274 million profit in 1997 reflected charges from earlier mergers. Excluding those charges, 3Com would have posted $501 million in net income in the first nine months of last year.

When you exclude all charges in 1997 and 1998 to try to get an apples-to-apples comparison, you see income at 3Com for the first nine months of this year is down 64% compared with last year.

Benhamou still has some fine-tuning to do.

Profit problems aside, there's that little matter of having to keep up with the Joneses - in this case, archnemesis Cisco. The router king's revenue was up 56% last year to $6.4 billion. Had 3Com not bought U.S. Robotics, it may have risked becoming an also-ran.

That risk is staring Cabletron and Bay Networks in the face. Although revenue at Cabletron was up a respectable 28% last year to $1.4 billion, the company is steadily losing revenue ground to Cisco and 3Com, ground that will be increasingly hard to recover as the larger companies get stronger. While bigger than Cabletron, Bay< only managed to eke out a 2% increase in sales in 1997, inching up to $2 billion and posting a loss of $285 million in the process.

Cabletron and Bay are looking to new management to inspire growth, or at least they were. Cabletron just parted ways with Don Reed, the CEO it brought in seven months ago to bring big-business thinking to the New Hampshire hub maker. Co-founder Craig Benson says he and Reed decided Benson was the better person to implement the Reed vision.

Things are more stable over at Bay. CEO David House celebrated his first anniversary there in November to the applause of analysts and customers alike, who say he is bringing Bay back.

Since the company's fiscal year ends June 30, the NW200 figures show little of what House has actually accomplished. For the first six months of fiscal 1998, Bay posted sales of $1.2 billion, up 20% compared with the same period last year. It posted $89 million in profits, compared with a loss of $167 million for the same period in 1997.

As part of its rebuilding effort, Bay last year acquired Gigabit Ethernet maker Rapid City Communications in a deal worth $155 million, which should help earn Bay a respectable showing in what will become an increasingly important race.

Rebuilding is also the watchword over at Novell, where CEO Eric Schmidt is valiantly trying to restore confidence in the badly shaken stalwart.

Although Schmidt was able to return the company to profitability in the fourth quarter last year (ended Oct. 31), losses in the two preceding quarters added up to $78 million worth of red ink on the year's revenue of $1 billion.

Most telling: The billion dollars in sales in 1997 was for all product lines - including NetWare, GroupWise and BorderManager - whereas two years earlier, Novell sold $1 billion worth of NetWare alone.

And while Schmidt has since put up another profitable quarter, the numbers continue to slide. First-quarter 1998 revenue of $252 million is down 7% from the previous quarter, largely because of weakness in the Asia-Pacific region, the company says.

Of course, many of Novell's problems can be blamed on the ascendency of Microsoft - and NT, in particular. It has become increasingly hard to fight Microsoft, not only in terms of marketing clout and installed base, but from a pure research and development perspective. One investment banker estimates that there is more than $20 billion worth of work involving Windows and Windows NT going on across the industry today.Compare that to Novell's $200 million in R&D in 1997.

In fact, by some accounts, Microsoft has become the largest software developer in the world, bypassing IBM for the first time ever. Annex Research (www.djurdjevic.com) says annualizing Microsoft's first half 1998 revenue (the company's fiscal year ends June 30) results in $13.3 billion, whereas IBM's 1997 software revenue was $12.8 billion.

Another company riding high on the PC wave is Compaq, which surged ahead 23% last year toclose with sales of $24.5 billion. But even more impressive than the raw growth is what the company hopes to do next.

After acquiring Tandem last year, the company in January announced plans to absorb Digital. That addition would give Compaq a large base of enterprise customers, a world-class, worldwide service organization and a slew of NT developers that is rivaled only by the group Compaq has already assembled.

The merged entity could end up with revenue of around $35 billion, making it close to half the size of IBM. And more deals are probably on the way. Who's next? Maybe Sun - to further reduce Compaq's reliance on Microsoft and Intel.

The Compaq/Digital alliance is one of those things that could change the chemistry of the industry this year, like the MCI/WorldCom deal. Done right, acquisitions such as these result in the whole being greater than the sum of the parts. Less clear is whether 3Com teaming up with U.S. Robotics offers similar leverage.

One thing is clear: The urge to merge is doing anything but abating. The industry is still hellbent on the idea that bigger is better. We can expect to see the trend extend throughout this year. This is particularly true in telecommunications, where the big guys will continue to chase other big guys and small fries alike, and in data communications equipment, where Cisco, 3Com, Bay and Cabletron will be casting about among newcomers, looking for the next great advance.

And Microsoft? Acquisitions or not, next year it will probably be bigger than Walgreens, Alcoa and Goodyear.