Industry Snapshot
Network equipment makers are the
computer industry's hightech plumbers. Without them, data
would clog computers, and the Internet would be a pipe dream.
Their hubs, routers and switches are the backbone of corporate
networks, of the networks that let companies ship data across
the globe and of the links that let ordinary people connect to
the Web. As a result, they seem to have customers everywhere:
corporations, Internet Service Providers (ISPs), phone
companies, even home users. And as the data demands of each
multiplies, the push for faster, better, cheaper gear heats up.
The scenario adds up to a big opportunity for network
equipment makers. But all is not well for networkers. They're
looking for new ways to sustain growth while creating new
products. Strong players are buying the weak to expand their
product lines, and suffering hiccups along the way.
Once-thriving leaders like Ascend Communications, Bay
Networks and Cabletron Systems have all seen profits tumble.
3Com is expected to suffer a 92% drop in profit for its
November quarter. Only leader Cisco Systems seems
untouched. "The industry has matured," said John Armstrong,
an analyst at researcher Dataquest Inc. 1. THE BUSINESS
Investor's Business Daily
Mon, Dec 15 1997
The networking industry is divided between two broad areas - local-area networks
(LANs) and wide-area networks (WANs). LANs link PCs so users can share files,
software, printers and the like. WANs connect LANs and remote users to far-flung
sites.
The makers of routers, hubs and switches sell to companies that operate LANs and
WANs. Routers tell data which direction to head in, and are the core of the
Internet. Hubs act much like an airport hub, sending out data. Switches add
capacity to a network so data may run faster. Network interface cards (NICs)
connect PCs and servers to the network. * Name of the game: Today, it's Internet
use. A few years ago, business users drove demand for network gear. While
they're still the top buyers, it's the 43% of U.S. homes and those around the globe
with PCs who are fueling new demand.
2 THE MARKET
Networking itself has changed. Years ago, only business and government could
afford a router's $500,000 price tag.
Until about two years ago, nearly all of a network's traffic was between workers
toiling within the confines of one building.
But ISPs and phone companies have changed that.
Sales to the Internet accounted for nearly 12% of the $18 billion in networking gear
sales in 1996, according to Dataquest. ISPs and phone companies want to offer
speed and reliability. To do so, they must invest.
As a result, where LANs once dominated networking, data traffic today is 80%
remote, says Bob Machlin, Ascend's marketing vice president.
Still, corporate users "will be the locomotive that pulls the train," said Ed Kozel,
Cisco's chief technical officer. Business has moved into e-commerce in a big way -
to sell products and provide support and marketing.
Cisco is a good example. It's sold about $2 billion worth of products online this year.
Dell Computer sees half of its orders arriving online by 2000.
3. THE CLIMATE
Equipment makers don't want to sell just boxes. They want to help build networks.
So they're buying and allying with others.
Merger mania ratcheted up this year. 3Com bought modem maker U.S. Robotics
for $6.6 billion. Ascend snapped up WAN specialist Cascade Communications for
almost $3 billion.
Ex-AT&T unit Lucent Technologies is buying closely held Livingston Enterprises of
Pleasanton, Calif., to beef up its remote-access products.
The deals reflect a sense of urgency among the key players to provide a broader
package of products and services. But they've also led to missteps.
3Com warns it will report revenue for its Nov. 30 second quarter of just $1.2 billion
- $400 million short of analysts' estimates. Too much inventory from the U.S.
Robotics merger and a price war in remote-access products are partly to blame.
4. TECHNOLOGY
Few companies demand newer, cheaper technology faster than those whose
futures are tied to the Internet, whether it's ISPs or the phone companies to which
they connect. Customers - people and businesses - want faster, cheaper products.
And they're getting them.
Long-promised gigabit Ethernet technology will hit the market in force next year.
It's 10 times faster than the current technology.
This summer a new hybrid product, called a routing switch, emerged from R&D. It
joins the speed and flexibility of switches with the power of routers, says William
Hawe, Bay Networks' vice president of architecture.
"It's a transition that's bringing a lot of energy," he said.
In addition, Internet protocols are making their way into LANs. The line between
the Internet and WANs and LANs is blurring as local networks adopt Web
technology.
"It's surfaced as one of the new technology waves we've seen," Dataquest's
Armstrong said.
Socalled "push" software, which brings content to targeted users on the Web, will
be integrated into local networks. Companies will use the software to automatically
deploy updates of software.
Also, technology that allows voice, video and data to run over a single network will
be the buzz next year. Companies want to save money and cut down on managing
separate systems.
5. THE OUTLOOK
Although the industry hit a rough spot this year, it should smooth out by early '98. *
Upside: Equipment prices are falling and opening new markets. The
small-to-midsize business market is taking off. Networking is making inroads in the
home. New technology such as the routing switch and products that merge voice,
video and data networks should spur sales. * Risks: Still, '97 has shown networkers
aren't invincible. High growth can't always make up for price wars. Mergers
continue to be the norm and can derail momentum.
Once tied to North American sales, network companies have worked hard to go
global. That'll hurt as Asian economies falter.
- Michele Hostetler
(Copyright Investor's Business Daily, Inc. 1997.
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