A Dickensian industry

To quote from Charles Dickens' Tale of Two Cities, "It was the best of times; it was the worst of times." There is perhaps no better way to sum up the volatile nature of the present service provider market.

Nineteen ninety-nine seems like a distant memory now. Those were the best of times, when valuations were sky-high, stock portfolios ballooned, and there seemed to be no end in sight to the amount of money service providers would spend on next generation gear to handle the exploding demand for Internet access and IP services.

It all seemed too good to be true. And it was…Cisco System Inc.'s announcement late last week that it would cut 8,000 jobs brought home just how severe the business climate is out there. Cisco was our safety net, our warm blanket, our new "widows and orphans" stock that promised a comfortable future because business would always be good on sunny Tasman Drive in San Jose.

We didn't flinch when Lucent two months ago announced it was eliminating 16,000 jobs; Lucent had its own internal issue to deal with and their problems couldn't possible reflect an impending slump in the industry.

We based our confidence on Nortel, which in January guided to another 30 percent growth year for 2001 after the market rebounded somewhat in the second half. Then Nortel dropped its bomb earlier this month that 10,000 jobs would go and revenue forecasts would be halved because that second half rebound wasn't coming.

Then WorldCom said 6,000 people would be let go there. And 3,000 from JDS Uniphase. And 5,000 from Intel. And a warning from Yahoo!

Our Cisco teddy bear turned into a ferocious grizzly last month when in turned in a disappointing second quarter and said subsequent quarters would be flat to down. And then Cisco announced the first workforce reduction in its history last Friday.

It is the worst of times.

Investment firm UBS Warburg believes the current slump will extend through 2002, not just through this year as most had expected. Nineteen ninety-nine won't be seen again until at least 2003, according to Warburg.

Business is usually good if there is a business case for the kinds of equipment service providers are not buying. Is there a business case?

Is there a voracious appetite out there for the types of services that require vast amounts of bandwidth to be unleashed and information to travel at the speed of light? Or is the slump more a reflection of customers - service providers and enterprises alike - trying to fulfill their own shareholder obligations before they can even think about upgrading their networks and services?

Or is this equipment just too expensive? RHK says there's a wide gap between service provider costs and revenue growth. Guess which one is higher? I welcome your thoughts.

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