One recurring question I am asked is, “OK, I understand that the communications industry and its traditional suppliers are toast. What’s next?”
It’s true that the overbuilding of the CLECs and the “creative accounting” at Global Crossing Holdings Ltd., and perhaps Qwest Communications International Inc. and WorldCom Inc., have cast a pall on parts of the industry. But it’s not true that the entire industry is in the sewer.
Years ago I was at Nortel Networks Corp. presenting my analysis to their top 400 executives and was asked about the falling market for enterprise-level customer premises equipment (CPE), an area that Nortel claimed to dominate. “What about Cisco Systems Inc.?” I replied. “Aren’t routers communications equipment that is owned by enterprises?” To Nortel, the answer (then) was “No.” They had defined the market too narrowly – just PBXs and call centres.
A few months ago, I did the keynote speech at Check Point Software Technologies Ltd.’s users meeting. Check Point is the single biggest mistake in my venture career. I had the opportunity to invest in it in 1994, when sales were US$2 million. Last year, Check Point earned US$322 million on US$528 million in sales. Most high-tech companies may make five per cent to 10 per cent profit; here is a company earning 60 per cent.
What I found at the Check Point users meeting were all my old enterprise CPE users – who were now building firewall protection for their Fortune 500 companies, a market that Check Point dominates. Firewalls let companies protect their networks from outside attacks and inside snooping, and everyone needs one. The corporate network goes far beyond a company’s buildings; it extends to everyone who works at home. Right now there are 28 million telecommuters in the U.S. There are 15 million people who subscribe worldwide to high-speed Internet service. Check Point owns about 25 per cent of the firewall market, but there is a bigger opportunity out there: public firewalled networks.
What we have are enterprise solutions – Cisco or RSA Security Inc. or McAfee Security will sell you some software or a black box. But what the market really needs isn’t a lot of expensive hardware at the customer site, but rather a network that has this capability built in.
I have previously written about 802.11, or Wi-Fi, and its ability to provide inexpensive network access. The downside is that Wi-Fi is porous to cyber attacks. The industry solution is to sell lots of US$300 CPE boxes to workers at home to protect their network.
We have seen this before: lots of equipment at the premises that does the work the network should have done. But what companies want is that same kind of firewall service inside the network – or a specially designed and built network that has all that functionality. Actually, they want both to buy a carrier service that gives them that protection, or a CPE option.
The result may be the same old network that has a new life, or a completely new network that has a different price and feature set. Either way, those who define networks too narrowly will continue to find commodity pricing, creative accounting and negative growth. Same clowns, different circus.
Many companies buy a few hundred firewall boxes for their key employees, but what happens when 10,000 employees require protection? Are companies going to spend US$3 million, or are they going to go to their carriers and demand a service that provides that protection?
The key for the communications industry is to develop a suite of services that are definitely not commodities. As long as there is excess capacity, some fool will drop the price. On the voice side, we have seen distinctive services such as caller ID and 800 services. On the data side, the killer app is going to be industrial-strength, ruggedized, secure services. This market is the province of the box vendors and the software jocks. But tomorrow it’s going to be a network service, and for my money, it can’t come too soon.
Anderson is senior managing director of YankeeTek Ventures, a Cambridge, Mass. venture capital fund for early-stage technology companies. He also is founder of The Yankee Group and the William Porter Distinguished Lecturer at the Massachusetts Institute of Technology. He can be reached at firstname.lastname@example.org.