We really need to find a new common enemy to fight

I am going to let you in on a secret: there never, ever was a Y2K problem. Never. And almost all of us knew it. But we knew if we kept our mouths shut, money would pour in like rain.

If you are a CIO, you need a common “enemy” to suck out extra funding from your corporation, and Y2K was this common enemy. Your legacy systems and applications were getting old. But if you funded their replacements, the cost got charged to your profit centre.

So, clever you – you waited. Along came the specter of Y2K, and the suits in corporate suggested that if you needed extra funding, just ask. So you took the money, built networks and added new applications.

Years ago John Chambers told me that Cisco Systems Inc.’s routers would work just fine through the year 2000. But he wasn’t going to “certify” them because everyone was upgrading to his new, higher-powered and higher-cost certified Y2K-compliant products. If your salesforce automation application was getting a little long in the tooth, you could just declare it Y2K noncompliant and spend some of the manna from corporate heaven on a new one. This extra funding gave most corporations 50 per cent to 100 per cent larger budgets every year from 1996 to 1999.

The problem today is that companies and carriers have no new enemy. You need an enemy if you are going to get extra funding.

For a while after the Y2K party subsided, it looked like dot-coms might be the new enemy. Every company lived in mortal fear that some Internet upstart was going to steal its customers. The CIOs of North America marched back into the boardroom with their collective hands out.

At the same time, the venture industry was funding all these dot-coms – all of which had no systems and needed Sun servers, Oracle databases, Cisco routers, EMC storage and all sorts of systems integrator help from Viant, Scient, Sapient and Diamond Technology. Furthermore, salaries were going up double-digit numbers each year because these new companies were hiring personnel from the incumbents.

When it turned out that the dot-coms were dot-dead, the party was over. Funding and the Nasdaq crashed. Bummer.

The same scenario applied to the carriers. As long as the CLECs were prospering, the carriers were spending. The equipment vendors were giving overly generous terms to both the CLECs and the traditional carriers. They gave financing to the upstarts because they wouldn’t buy unless they got funding, and the carriers that could afford to buy wouldn’t unless there was a string of new carriers threatening at the gate.

Overpriced mergers were being done because every equipment vendor didn’t want to be holding a deficient technology card hand and felt that even a six-month delay would be devastating. Furthermore, because the mergers were done for mostly stock, every time a merger was announced the stock price of the acquiring company went up, making the acquisition essentially free. Cisco, with its 42 mergers during the past two years, was the poster child for the rest of the industry. The European vendors then felt they had to get into the game or forever be sucking wind – so in came Siemens, Alcatel and Marconi, overpaying with abandon.

But there were only a dozen or so real customers in the U.S. (that is, Verizon, AT&T, Telefonica, Williams, Sprint and Cingular) and only a half-dozen major suppliers (Lucent, Alcatel, Nokia, Cisco, JDS Uniface and ADC). If the major carriers slowed their purchasing, the suppliers no longer could grow at 40 per cent per year. When the growth stops, so stops Juniper, Sycamore, Sonus, Copper Mountain and everyone else.

Companies used to spend 2.5 per cent to three per cent of their revenue on computing and communications. That number is now 8 per cent. Carriers used to spend 10 per cent of their revenue on next-generation technology; it’s been running 22 per cent for the past five years. There are whole warehouses of technology that haven’t even been taken out of the box. We have built in so much extra capacity that we are now faced with a glut – and a glut means bulk pricing and commodity status.

Eventually we will put all this to use, but we should be searching for some common enemy we can all fight. We should find this enemy soon. After all, Y3K is still 999 years away.

Anderson is senior managing director of Yankeetek Ventures, a Cambridge, Mass., venture capital firm. He is also founder of The Yankee Group and the William Porter Distinguished Lecturer at the Massachusetts Institute of Technology. He can be reached at handerson@yankeetek.com.