Networking Frontier: Data For All
techweb.com
August 03, 1998, Issue: 801
Section: Opinion/Editorial
Vadim Zlotnikov
While the deflationary impact of semiconductor overcapacity on the PC
industry has clearly been overanalyzed, the implications for the networking and
communications industry are less frequently discussed but equally important.
The nirvana of the communication industry is ubiquitous data
access-transmission at data rates sufficient to support full-motion video.
Although it is interesting to ponder the societal implications of such a network,
we are more concerned with the near-term transitional issues. The firming of
protocol standards, a semiconductor capacity glut and increased competition
are driving annual declines of 30 percent to 40 percent in the
cost-per-communication port.
The lower cost and increasing commoditization of enterprise networking has
profound implications for the suppliers and resellers of hardware, as well as
service providers.
At the high end of the food chain are telecom and WAN equipment suppliers,
such as Lucent Technologies, Northern Telecom, Tellabs, etc. These high-end
vendors serve relatively price-insensitive markets and offer sufficient product
differentiation so that lower semiconductor costs can be largely captured in the
higher profit margins, rather than passed on to the end user.
On the other extreme, network interface card, hub and certain switch
providers have seen a significant deceleration in sales growth, from mid-30
percent to about 7 percent, despite strong unit volume, due to the need to
pass on lower semiconductor prices.
Lower price, however, did not cause a collapse in profit margins, as the
software content of the networking gear kept products sufficiently entrenched
and differentiated.
This will change during the next few quarters, creating opportunities for
vendors and resellers.
In particular, much of the networking growth is occurring in the consumer, and
small- and midsize-business markets. Unlike the major corporations-which
must ensure compliance with legacy networking solutions and which are
frequently unable to easily switch suppliers-smaller accounts can more easily
take advantage of lower prices.
This in turn will permit companies like Compaq and other PC vendors to
move aggressively into some of the networking areas by undercutting the 35
percent to 50 percent gross margins enjoyed by networking vendors.
Standardization of Ethernet on the motherboard will further reduce the
cost-per-port and enable penetration of new markets.
Since most small and midsize accounts do not have a sophisticated network
administration staff, the onus will fall on resellers to develop the skills
necessary to install and support a highly networked environment.
If one were to take this opportunity a step further, it is easy to envision a
scenario where resellers use the networking expertise and lower capital
requirements of building a communication infrastructure to offer their small-
and midsize-business clients outsourcing services.
For example, resellers and certain PC vendors may be well-positioned to
offer Web hosting, intranet outsourcing, network-compliance testing and
multiple other services that will be demanded by small and midsize businesses.
VADIM ZLOTNIKOV is the technology analyst for Sanford C. Bernstein &
Co., New York, covering the PC and semiconductor industries. He welcomes
comments via E-mail at zvadim@bernstein.com.
Copyright r 1998 CMP Media Inc. |
