Are networking's salad
days over?
By Ben Heskett
January 8, 1998, 11:55 a.m. PT
news analysis No one disputes the long-term
potential for the networking equipment market,
generally considered the fastest-growing segment of
the high-technology industry.
But a series of issues, including short-term
worldwide economic concerns, market maturity, and
millennium madness, could wreak havoc on an
industry sector not used to long stretches of
diminished returns.
The last 12 months were far from a banner year for
the networking equipment segment. Of the large
networking players--Cisco Systems (CSCO), Bay
Networks (BAY), 3Com (COMS), Ascend
Communications (ASND), and Cabletron Systems
(CS)--not one was immune from the general malaise
affecting the industry.
Even the dominant and always profitable Cisco felt
the pinch of slow international sales, and its stock
dipped temporarily as a result.
Some feel that this past year is just the opening
round in a prolonged period of retooling for
networking equipment companies that could extend
for several quarters to come. "It's not going to be the
go-go years it was in the past," said Craig Johnson,
an analyst with industry researcher Dataquest.
A recent report by market watcher In-Stat found
that the networking hardware market grew 16
percent in 1997 to $26.4 billion, a far cry from the 48
percent growth experienced in 1996. The 1997
growth figure is the lowest ever for the networking
industry, according to the firm.
As companies announced their financial results
through the year, a common thread permeated the
discussion: softness in Asia-Pacific markets,
especially Japan. That trend could continue well into
the new year.
"It's a moving target--you don't know how much
worse it's going to get," said Martin Pyykkonen, an
analyst with Furman Selz.
But geographic issues will not be isolated to Asia,
according to Johnson. A forthcoming report by
Dataquest will point to various worldwide economic
hot spots that could affect short-term gains by
networkers.
Those include the following:
The impact of Europe's move to a common
currency, a transition that could siphon significant
chunks of money away from information technology
rollouts.
The saturation of infrastructure equipment in North
America, where the leading firms are basically
battling to unseat an entrenched vendor for large
network upgrades, rather than initial network
investments. In this market, Cisco remains the
eminent force, presenting challenges for others that
expect to reap large domestic rewards.
Continuing austerity measures being implemented
in Brazil, one of the dominant technology purchasers
in South America. South and Central America
continue to be reasonable areas for growth by
networking firms, according to Dataquest, but fragile
economies could dampen profit expectations here.
"It's a coalescing of many factors: maturing markets,
commoditization, head-to-head competition, and
macroeconomics," Johnson noted.
Another factor that seems to be having a ripple
effect across numerous industries is the Year 2000
issue. The millennium bug stems from decisions by
programmers of the 1960s to save memory space by
using only the last two digits of a year, instead of all
four, when referring to the date, a kind of shorthand
that programmers continued to use until very
recently. But when "00" comes up for the year 2000,
many computers will view it as 1900 instead, causing
widespread problems.
The Gartner Group estimates the costs of dealing
with the Year 2000 bug to be between $300 and
$600 billion. Another researcher also has noted that
companies are generally not far along in IT planning
for the new millennium. The result? Dollars normally
spent on new infrastructure equipment will likely be
used for Year 2000 compliance. (See related story)
This is not to say that the networking segment will
take an abrupt nose dive in the marketplace.
Networkers will continue to benefit from an
increasingly Net-centric world, as reported earlier by
CNET's NEWS.COM. But the financial community
may need to rethink its short-term expectations for
once high-flying networking stocks, according to
some observers.
In the long run, networking firms could still be a good
bet for investors. BancAmerica Robertson Stephens
analyst Paul Johnson said in a report published in
June 1997 that "the networking industry is in the
seventh to eighth year of a 20-year investment
cycle."
While hot markets within networking will continue to
abound, success stories may more likely come from
smaller firms like Yurie Systems (YURI). Emerging
technologies such as hardware that supports
gigabit-speed Ethernet--the prominent networking
pipe in corporations--could also provide a boost for
some.
As a consequence of market maturity, however,
large firms may generate more revenue through
acquisitions rather than new markets, analysts say, a
sure sign that what was once a "Wild West"
atmosphere in networking may be waning. |
