Expect big changes for network equipment makers

Just when it seemed a measure of stability had finally been realized in the communications equipment business, the events of last year have positioned 2001 to be another year of frenetic changes.

The next 12 months may see the biggest set of changes ever in equipment provisioning. Expect even greater consolidation in the network hardware supply space, fewer vendor choices and the continuance of retransformation by communication equipment makers and service suppliers as the outfall of 2000 sets the stage for further scrambling by companies not just looking to grow, but simply to remain in business.

Blame a lot of the further chaos and uncertainty on years of unbridled optimism on the part of the financial analyst community, who’ve fuelled the investment move to mind-boggling valuations of communications equipment companies.

Growth rates for many equipment makers have been staggering, but have never justified the astronomical valuations. How is it, for example, that a company like Cisco Systems, that’s been a model of consistency but whose revenues come in at about US$20 billion annually, can achieve a valuation of more than US$1 trillion? The hens came home to roost in 2000, as investors finally questioned such frenzied investor behaviour and the long-anticipated “market-correction” downshift finally came about.

The communications equipment market has been the most rapidly advancing and highest growth sector in IT. The catalyst for change came with the advent of network convergence through IP technology, which saw the first shakeout of voice and datacom – namely, the decline of traditional stalwarts such as 3Com and Cabletron, coupled with the meteoric rise of Nortel and Cisco. Where stratification saw datacom equipment makers focus primarily on the enterprise, while voice providers served the carrier crowd, the advent of multiservice IP destroyed these customer barriers. Nowadays, all compete for every customer, be they consumer, enterprise, carrier or otherwise.

But the year 2000 witnessed even further separation between winners and losers. Nortel and Cisco continued to skyrocket in terms of profitability and market share, while former communication equipment powerhouses such as Lucent and 3Com floundered, largely as a result of identity crisis and an inability to quickly transform to address the new market dynamics.

The financial volatility of the IT industry and the communications market in particular was never so clearly illustrated than during last year. Consider some of 2000’s highlights, or rather, low points:

3Com took a US$54 million pro forma net loss and a continued downward slide in its stock price;

the news from Lucent got progressively worse as 2000 wore on. The company expects to report a “significant” loss in its next fiscal quarter and will look to reduce its costs by more than US$1 billion;

Foundry Networks Inc. was an up-and-comer only two short years ago. In 2000, this Internet router and switch maker saw its stock shed 57 per cent of its value.

So how is the networked world positioned for the year 2001? Expect an intriguing odyssey. The market currently shapes up with two reasonably strong contenders – Cisco and Nortel – and a bunch of floundering pretenders.

3Com is at a critical point in its history as a networking company. Newly created CommWorks underpins the direction the company will take. There are many questions regarding the new 3Com company, particularly how it will differentiate itself from the competition in order to present itself to customers as a compelling option and how it expects to achieve success in building core IP networks for carriers without the benefit of a direct services arm. As Nortel and Lucent will tell you – and Cisco is quickly learning – carrier customers want to deal direct when it comes to the services needed to construct communications networks.

European giants Alcatel and Siemens went opposite directions in 2000. Alcatel made headway in 2000 when it acquired Newbridge, gaining a foothold in the Canadian and U.S. carrier markets. Based on market perception studies conducted by IDC Canada last year, Alcatel’s reputation is growing in a positive way and the French company appears to be enjoying solid success in Eastern Canada.

Germany’s Siemens on the other hand still has the look of a company spinning its wheels and going nowhere. There have been few, if any, major success stories to speak of and Siemens simply does not have a compelling strategy that would clearly demonstrate how it will assist enterprise or carrier customers in the building of next-generation networks. It’s hard to imagine how the company can continue to do business in Canada if that doesn’t change. Count Marconi in this mix, but the company did little to advance its market share and reputation last year.

Speculation is that Lucent may be a blockbuster acquisition target, fuelled by a belief that the company’s current low stock valuation makes it affordable. Rumours have suggested Nokia, Alcatel and Nortel as possible suitors. Lucent’s future among the giants is clearly the most precarious. The company is in a shambles – bleeding financially, wrought with defections and its market share rapidly slipping. The year 2001 is a make-or-break timeframe for Lucent.

Enterasys and River Stone, the morphed Cabletron spin-offs, which serve enterprise and carrier customers, respectively, are at best holding ground, but not advancing much. A promised high-profile marketing effort designed to drive greater success through stronger brand awareness and recognition will be closely watched.