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November 8, 2001
BOSTON -- Concerns about the financial climate in the telecom industry dominated the discussions here at the Next Generation Networks (NGN) conference, as networking industry experts assessed the new post-bubble realities of networking technology.
One primary theme cropped up repeatedly throughout the conference: Incumbent carriers now have more power, and they are slowing the pace of startup technology development.
"The momentum is definitely swinging back toward the incumbent carriers," said John Fryer, vice president of marketing for NetPlane Systems Inc., a developer of telecom management and provisioning software.
So what's it mean? Well, for startups, unfortunately, it means they must readjust themselves for the longer development cycles called for by the carriers, including RBOCs (regional Bell operating companies), IXCs (inter-exchange carriers), or -- a new term introduced at the conference -- MXCs (money exchange carriers, or any carrier that still has money). The carriers themselves, which are slashing expenditures in their efforts to return to profitability, are in no hurry to install cutting-edge startup technology.
"The bar for startups is now much higher, and it will be that way for a long time," said Roger McNamee, an investment partner with Integral Capital Partners and buyout firm Silver Lake Partners, during a panel discussion. "The cash they need is enormous. This isn't about time to market anymore, it's about last man standing."
The humility was widespread. Dan Smith, CEO of the once high-flying Sycamore Networks Inc. (Nasdaq: SCMR), spoke somberly of the post-bubble environment and the new need to focus on the short-term economic benefits of new optical products.
"This is the worst business climate we've seen in 50 years," said Smith. "The financial bubble appeared and then disappeared. We're moving away from things that are speculative to things we can really analyze in a quantitative way. We need to show carriers how they can take incremental steps to decrease costs and increase revenue."
So, how is that to be done? According to Smith, it will mean installing optical DWDM technology to reduce costs in existing network links, rather than building new networks from scratch.
Discussions tended to center on the precarious health of the telecommunications carriers, which lies at the heart of the current slowdown. In addition to the need for more efficient network operations, questions about the restoration of growth focused on the pace of growth in network demand and the need for new capacity, as well as on new pricing models for data services.
Answers were scarce and not very heartening. For example, despite the steady growth of IP traffic, carriers do not seem to be making any money from it. Paul Roche, a principal at the management consulting firm McKinsey & Company, told the audience that U.S. IP traffic grew 177 percent from 1999 to 2000, while carrier revenues grew only 3 percent, from $109 billion to $112 billion.
"Despite robust traffic growth, backbone revenue is expected to be flat," noted Roche.
A panel on the pricing of Internet services and telecommunications produced an even grimmer picture. As bandwidth moves toward wholesale commoditization, carriers are scrambling to come up with new pricing models for communications services -- and don't appear to agree on how to do it.
"Basic bandwidth is a commodity service," said Andrew Odlyzko, professor and assistant vice president for research at the University of Minnesota's Digital Technology Center. "You can fight it, but you're not going to win." Odlyzko believes the money lies in providing "edge services" that hook consumers up to new applications using that bandwidth.
What about the technology? The hottest topic: RPR vs. metropolitan Ethernet. During a panel on reslient packet ring technology, its proponents tried to assuage the controversy that has followed Cisco's heavy involvement in RPR (see RPR: RIP?).
"I think because we are the new kids on the block, people just wanted to kick the tires a little bit and see if we hold up," says Mike Takefman, chairman of the Institute of Electrical and Electronics Engineers Inc. (IEEE) 802.17 RPR working group and manager of engineering for Cisco Systems Inc. (Nasdaq: CSCO). "It's healthy for there to be some skepticism at this point."
While the CEOs and the financial people talked about the new realities of the financial markets, rank-and-file employees buzzed about the lack of jobs. "I'm just happy that my security badge works every morning," said one Nortel Networks Corp. employee at a cocktail party.
— R. Scott Raynovich, Executive Editor, and Marguerite Reardon, Senior Editor, Light Reading
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