John Dix: Industry shake-up likely rooted in psychology

If ever there was a tumultuous year in the network world, 2001 would be it. From the imploding economy and the resultant strain it put on IT budgets, to the pounding many industry players took, and the reshaping of some basic industry sectors.

All the guys in the Rust Belt must be giggling. High tech is finally getting its comeuppance. Welcome to the real world.

Even though industry bellwether Cisco Systems Inc. finished the year (in July) with revenue up 18 per cent to US$22.3 billion, it had to swallow a US$1-billion loss in the process. But that’s nothing compared to the red ink that rivals Lucent Technologies Inc. and Nortel Networks Corp. posted. Lucent finished the year in September with sales down 26 per cent to US$21.3 billion and a net loss of US$16.2 billion. Nortel has only reported nine months of 2001 but has already racked up US$25.4 billion in losses.

(Clearly Cisco has benefited from the fact that it has a large enterprise focus, compared with Lucent and Nortel, and more limited telecom exposure.)

Surely economists will study these turbulent times for years, trying to figure out what begot what. Did the dot-com meltdown cause the telecom imbroglio, which then shook the stock market, which caused the correction, which lead to the erosion of consumer confidence, which drove down spending, which pushed all varieties of companies into contingencies and the country into recession?

Bill Rouhana Jr., former CEO of Winstar Communications Inc., a once high-flying CLEC now in Chapter 11, asks if a company such as Lucent is racked by the market or racks the market. “What happens to human psychology when one of the most valuable and most widely held companies is suddenly on the verge of bankruptcy?” he asks. “That kind of change is so fundamental, so challenges your basic beliefs, you can understand why investors change their point of view about things.”

But regardless of cause and effect, the $74,000 question is, When and how do we climb out of this mess? Even U.S. Federal Reserve Chairman Alan Greenspan seems to be short on answers for that one.

About the only thing that seems clear is continued uncertainty about the near-term future. For every ray of hope comes a new cloud. Then again, Cisco’s Q1 ’02 revenue was up three per cent sequentially from the previous quarter…

Dix is editor in chief of Network World (U.S.). He can be reached at [email protected].

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