Game over: Demand is dead

We're screwed. There's no other way to put it. Who's "we"? The network/datacom/telecomms industry. And why are we screwed? Because demand is dead. Kaput. Moribund. Innovation has never been better, and demand has never been worse.

The industry owes its presence to venture capital. But venture capital returns are tanking and will be for the next five years. During the boom, venture capital raised $US100 billion per year, which financed 5000 new companies each year. Today, venture capital is financing 445 IT security companies and 60 radio frequency identification companies. There are three times as many venture firms and 10 times the capital of just 10 years ago. Capital is not the problem; demand is and will continue to be.

The two markets that we could always count on -- telecomms carriers and enterprise network users -- are sitting on their hands and their cheque books.

The hype machine that worked so well for so long is broken, maybe forever. We told enterprise network users that information was a strategic asset and the CIOs overbought; we told the world that Y2K would kill them and they bought even more; we said that every existing company would be "Amazoned" into oblivion unless they got a black belt in spending by Webifying their applications and they bought. Then the corporados reined in their spending and told their CIOs they had to make do with flat budgets, or else.

OK, so hype is dead. Is that our only problem? No. Our problem is that the technology stock market is acting rationally. That's a problem? You bet. We need enough irrational valuation so that new companies can sell at 10 times sales or get merged for at least five times sales. But today, the average IPO is at 2.5 to three times sales, and merger prices are half that. It takes $US100 million in capital to build a carrier-class equipment company and $30 million in capital for an enterprise software company to break even. If the payoff is only three to five times the investment, then the industry is screwed. Why? Because only 10 percent of the companies get that far.

The carriers are investing next to nothing in their wireline operations and not all that much in wireless.

Enterprise network users aren't buying much of anything, either. Game over.

Howard Anderson is senior managing director of YankeeTek Ventures, a venture capital fund for early-stage technology companies

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