Network innovation to slow, industry struggles

Nortel Networks announcement on Tuesday that it would slash 15,000 more jobs and post a US$3.6 billion third-quarter loss was just the latest in a string of layoffs, poor financial statements, and reorganizations afflicting the entire industry. As a result, many market watchers expect the pace of networking product innovation to begin slowing.

"Clearly, if you've laid off over half your staff, which Nortel has done since January of this year, your ability to generate innovation internally is impacted," said Chris Nicoll, an analyst at Current Analysis, a research firm in Sterling, Va. Nortel also announced President and CEO John Roth would step down and be replaced by Frank Dunn, Nortel's CFO.

Nicoll singled out converged voice-data networking equipment as one area that could be slowed by the industry downturn, especially for service providers.

"An awful lot of companies are working on softswitch voice convergence solutions, but we need to start seeing more market traction or that's going to fall off," Nicoll said.

Other technologies, such as photonic switching, ultra long-haul DWDM (dense wave-division multiplexing) solutions, and 40Gbps transport, may not be immediately affected by the industry contraction, because those technologies are relatively mature and several products are already in the pipeline, Nicoll said. But he added the next generations of those technologies could be slower to evolve.

Making matters worse, large networkers that have traditionally brought new products to market by acquiring technology from smaller companies no longer have as much flexibility to carry out acquisitions.

"Normally, you'd expect to see companies going back to the Cisco Systems Inc. model of acquiring innovation," Nicoll said. "However, with the economy the way it is, we're not going to see the lofty valuations we saw last year. Only when the market picks up and we start seeing buying signals from the service providers will we start seeing acquisitions again."

"When [networking] companies themselves are in poor financial positions, fewer investments or acquisitions are made," agreed Dave Passmore, an analyst at Burton Group research firm, based in Sterling, Va. "The networkers' stock prices have fallen so low that they can no longer use their stock as currency to acquire startups. And the startups were the source of a lot of the innovation."

On Tuesday, Cisco Chairman and CEO John Chambers said that the company would soon pick up its pace of acquisitions, planning on eight to 10 takeovers within the next year. But that is still a far cry from Cisco's glory days: The San Jose, Calif.-based giant completed more than two dozen buyouts in 2000.

One glimmer of hope for network innovation could be the smaller equipment makers, which stand to profit from the struggles of the industry giants, Passmore said.

"There's still an awful lot of startups out there that aren't dead yet, and a number of them will be bringing their products to market," Passmore said. "It's not like you can turn the financing spigot off and immediately see a cessation of all product development activity. There's a pipeline of companies that have already been funded, so you'll see innovation continue for a while."

For now, enterprises remain focused mostly on those networking products that promise to reduce their costs. According to Passmore, hot markets include VoIP (voice over IP) trunking technologies that enable voice data to be carried over existing IP data networks, and rate-shaping and policing equipment from firms such as Packeteer and Sitara Networks, which either reduce the need for bandwidth or forestall the need to buy more bandwidth.

"Companies are very interested in ways of saving money," Passmore said. "Products that are focused on cost reduction or cost avoidance are going to be big sellers to the current enterprise environment."

Indeed, many companies, such as Fusion, an enterprise software firm in Seattle, feel that they already have all the networking equipment they need and that the high bandwidth rates promised by new switches and routers are not compelling enough to warrant big investments.

"Our main concern is not with our infrastructure right now," said Anthony Falco, Fusion's vice president. "It's with good old-fashioned sales -- getting out there, hitting the streets, and getting our software installed."

Falco added that Fusion would only consider buying new networking equipment if the company were to grow in size. But even then, the growth would have to be significant, because Fusion's office is already so heavily wired that it could accommodate twice as many people as it currently does, Falco said.

Even the government sector, which some predicted would benefit from federal aid packages in the wake of the Sept. 11 terrorist attacks, are feeling the pinch. For example, the state of Colorado's need for high-end networking gear is severely limited, according to Jim Yamane, Colorado's deputy CIO.

"The majority of our expenditures are of an operational and maintenance nature," Yamane said. "We're trying to maintain the current environment."

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