[Economist & today's IBD on Networking]
Roland --
Is the Economist available online? If so, could you post a URL? Just the same, I'll pick up a hardcopy to take on my trip tomorrow --- along with Dostoevsky's Brothers Karamazov, which for some bizarre reason I feel compelled to re-read. (Perhaps it's the Grand Inquisitor segment, reminding me of Wall Street Analysts.:))
If you haven't seen it, check out today's IBD. There's a full page on networking. The AOL version doesn't include the entire section, at least not yet, so you may have to find a hard copy. I'll post the second article, "Networking's Elite Forecast Ongoing Industry Feeding Frenzy."
A boxed quote is worth noting: "The graph shows the 7,321% move that networking stocks --- the best group of the '90s --- made from the beginning of 1984 to the group's peak in May 1996. The gains have created an industry with a market value of $74 billion."
Cheers!
Pat
<<<Consolidation has swept the industry as firms try to become soup-to-nuts operations capable of meeting a customer's every networking need. Will the culling of the herd continue? What about the pace of innovation - is it slowing or accelerating?
Networking's top honchos shared their thoughts on these topics with IBD. Chief executives Eric Benhamou of 3Com Corp., John Chambers of Cisco Systems Inc., Mory Ejabat of Ascend Communications Inc. and Chairman Craig Benson of Cabletron Systems Inc. took time from their busy schedules to provide their insights. They're joined by David Rynne, chief financial officer of Bay Networks Inc.
Also contributing to the discussion are two top networking analysts: Lee Doyle, vice president, networking, International Data Corp.; and Don Miller, director and principal analyst, networking services, Dataquest Inc.
Do you think the acquisition frenzy will continue?
BENHAMOU: Consolidation isn't over. It is reaching new highs right now. The stakes are extremely high. Everyone understands now how strategic our industry is in the 21st century. Everyone also understands the strategy of being a broad-based network provider is only a strategy available to a small number of players.
I expect we'll continue to make acquisitions. We're not looking at any one area in particular. We'll always do make-vs.-buy decisions on an ongoing basis.
BENSON: It seems to me that everyone has a fair amount of stuff right now. My own estimate is acquisitions have got to slow down. We've done five acquisitions in the last year. Outside of the networking business, that would be considered a frenzied pace. But for those in the networking business, it's tame. We do acquisitions on an opportunity basis. If the right one comes along, we'll do it.
CHAMBERS: I think the consolidation will actually accelerate. First, the customers are beginning to look (to a single vendor for their networking needs). Candidly, it's our success that's driving it. We had about a 15-month lead on 3Com and Ascend (in becoming a supplier capable of meeting a customer's every networking need). Now you've got Cabletron, Fore (Systems Inc.) and Bay playing musical chairs -and when the music stops, there aren't going to be enough chairs to sit on.
DOYLE: I think it's going to continue. I think there will continue to be a lot of smaller deals. And the bigger deals are still out there. But it takes time to put mergers together. We might see someone pick up Shiva Corp., based in Burlington, Mass. There are still a lot of companies out there. Bigger is better until proven otherwise.
EJABAT: In the networking industry, there's not many companies left to buy. I believe there will still be some acquisitions here and there. It's going to be more technology acquisitions than anything else. Companies like us and Cisco and possibly 3Com, we are going to focus on new technology and smaller companies to acquire. No. 1, we have to go through the integration with Cascade. (In March, Ascend announced plans to buy Cascade Communications Corp. for $3.45 billion.) I'm not sure at this point if we are going to do another acquisition or not.
MILLER: I think you'll see more of the same. I don't think you'll see it move any faster. But I think we'll continue to see acquisitions and mergers of all sizes. I kind of expect to see some new players enter the market. Northern Telecom Ltd. and Lucent (Technology Inc.) have been awfully quiet. I wouldn't be surprised to see them enter the fray. Lucent can still gobble up Bay. Nortel could gobble up Bay or Fore or Cabletron.
Then there's still the middle-tier feeding frenzy. It's like, what size shark are you? Are you a great white? Cisco's not even in the great white category when you compare it to Lucent.
In addition to the usual feeding frenzy, you'll see large vendors more proactive as venture capitalists. It's actually new competition for the Sand Hill Road gang. (Sand Hill Road is the area of Menlo Park, Calif., where many venture capital firms are headquartered.) They're seeding the start-ups. That's a different trend.
RYNNE: If you look at the big players, we're running out of us. So something tells me (the large acquisitions have to slow). But the venture capital community is rich in money and funding a whole bunch of start-ups. Most of those start-ups were never charted to go public. The IPO market is not all that supportive, in fact.
We expect there will be a variety of acquisitions and mergers of companies in their early stages. How has the competitive landscape changed, and what do you expect this year?
BENHAMOU: Generally speaking, the competitive landscape is probably harsher than it has ever been. Everyone understands how critical networking is. But at the same time, with the massive technology changes that are going on, there's more confusion than there has ever been.
BENSON: Believe it or not, there are still more than 200 competitors. So before all these acquisitions started, there were probably about the same number. It really hasn't changed all that much. But what was happening in the market before all these acquisitions started was that the bigger companies were continuing to grow while the smaller ones were not doing as well. That's what started the acquisitions. I think the smaller companies started to realize they needed bigger brothers to get to the marketplace. I think the networking business is maturing, and more is expected of the firms that are going to be in this business.
CHAMBERS: It's down to one or two major key competitors in each market segment. For companies playing across the whole spectrum, there's no one yet who can do it. Although Ascend with Cascade is attempting to do that in the service provider marketplace and 3Com is trying to make steps that way. Although (3Com's buying U.S. Robotics Corp.) did not move them a whole lot closer to that goal, in my opinion.
DOYLE: I think there's much more focus on the public channel. 3Com-USR is clearly the No. 1 player in that segment. Then there's the (corporate enterprise market) where Cisco plays very
BENHAMOU: Basically, there's a trend to scale the performance and bandwidth of networks. We're using two approaches for that. One is taking switching to the next step. The second is migrating technologies from the current speeds, say 10 megabit, to the next order of speed, like fast Ethernet.
The second thing that I find quite exciting . . . is fast IP (Internet protocol) Switching, which is basically taking advantage of the fact that more networks are moving IP traffic and more networks have switched paths to start switching IP traffic rather than routing it. This makes the switch infrastructures even more cost-effective.
I think that remote access continues to be one of the hottest segments in networking. It extends the reach of networks to absolutely anywhere.
BENSON: I think the biggest thing for '97 is going to be reducing the cost and complexity of networks and providing the people the service level they are going to come to expect. It requires the products to be more robust and it requires more support at the customer sites by the vendors themselves. Lastly, it requires software development to provide products that are more adaptable to customers' needs.
CHAMBERS: Gigabit switching for the second half of the year is hot. Voice integration underneath data is another hot area.
DOYLE: Gigabit Ethernet is at the product stage now. I don't see a blockbuster year for gigabit in '97. I think xDSL (modem) technology is going to be hot. It will be bigger in the business market than people think and smaller in the home market than they think.
EJABAT: Providing bandwidth and performance . . . because of all the people who are learning about the Internet. They are doing remote networking - calling from home or from other offices to the corporate headquarters. It's causing two problems for the network providers. One is they don't have enough bandwidth. They have to increase it. (Remote access) also causes routing congestion for the people that have older technology. They have to get into IP Switching . . . or go to ATM (asynchronous transfer mode) infrastructure for increasing their performance.
MILLER: Switching - it's faster and smarter. Faster is like gigabit Ethernet or ATM. Then on the smarter side, you're seeing a lot of layers (of) intelligence - called layer three switching. Some switches, like the Bay Networks switches, do IP forwarding, or auto-learn capability. They work with the existing network so you (can) dramatically increase the performance of the routed network.
A lot of the gigabit (Ethernet) start-up companies are coming to the table with a family of products, not just gigabit Ethernet. They have the mama bear, papa bear, baby bear family of high-speed products. Some of the claims are pretty bodacious. If they come true, it's going to pretty interesting.
RYNNE: What we think will turn out to be hot will be switching and layer three switching.
What I'm less confident in is the Internet service provider market. I think it will be hot. It's also going to be chaotic. It might be an area that's over-invested in for the short term where there's some boom and bust. >>>> |
