Bathwater Blues
Mark Hoover, President, Acuitive, Inc.  

But for the past few months, all you heard in the business and industry press is how all the dot coms and ISPs are failing, how the ASP business model isn’t working, and how networks are overbuilt.  The reflection of all those part-truths is that fewer people are buying (and paying for) computing and networking equipment, which has created a ripple effect through the industry and a stock market crash, fueled by a seemingly endless string of earnings warnings from a broad range of companies.  Obviously, this is not news to any of you.  We are all living through it.

But most of the discussions and hand wringing and stories of doom going on today are just an over-reaction to the excess hype and expectations of yesterday.  Rumors flying around of Lucent filing for bankruptcy are just as ridiculous as the frenzy that drove that stock to over $80/share as recently as a year ago.  Back then the thinking was the market for optical systems, fueled by continued triple digit growth in internet traffic, would be roughly infinite, and that somehow Lucent would own 250% of the market share (splitting the infinite market with Nortel, Cisco, Ciena, Sycamore, Fujitsu, and about 350 “red hot” start-up companies).  Now the thinking seems to be that networks are massively over-built, that there is enough capacity for the next ten years, that Lucent can’t build any product in a timely manner, and that people are going to lose interest in this networking fad and go back to Faxes, paper Purchase Orders, Telegrams, and Pony Express for business communications.  

Except for one item in the previous sentence, this is absurd.  Reality lies somewhere between these extremes.  Many of the problems of the current stock market are not related to the reality of business today, but that reality as contrasted to the extremely unrealistic projections made in the past years.   What really hurt was that there were enough proof points during the “age of irrational exuberance” to convince people that any investment result less than 400% appreciation within 18 months was a failure.

The situation we are living in now is not that difficult a business environment; it just seems so because we are all hung over from the financial partying of the past few years.  Coming back to reality is tough. And in doing so, we tend to over-react and under-think, in terms of painting too many items with the same paintbrush.  The adage “throwing the baby out with the bathwater” comes to mind. 

Several very important, very real, and sustained market trends have recently received black eyes due to recent over-reaction to the previous hype, combined with the stock market pummeling some of the leading vendors in these spaces.  Two that come to mind to me are B2B and broadband.

To me, all of the technological evolution of the past couple of decades has been leading up to the B2B (or E-Business) revolution.  The ROI of improving the efficiency of internal processes, procurement processes, supply chain processes, reverse supply chain processes, customer interaction processes, etc. is humungous, creating a huge opportunity for enabling technologies and products to achieve these ends.  The repetitive word in the previous sentence is “processes.” That means it is not just about technology, but also about people, methods and procedures, ecosystems, and other societal factors. This means that even if the perfect technology existed, such changes wouldn’t occur over night.  One has to be patient in situation such as this. And one also has to expect there will be a lot of washout of approaches, products, and companies as the world works to figure out how to get this stuff right.  So I view the fact that today 12 percent of companies are sending invoices electronically and 17 percent are paying online as a tremendous measure of B2B progress because I know hard it was for each and every one of those companies to true up their legacy systems to play into this new world.  Yet they did it. And they did it for a good reason.  I think that such companies represent only the leading edge of a massive shift of business processes to automated and networked systems. 

But companies in the business of enabling B2B, either as a product or a service, once considered the darlings of the industry, are getting hammered in the stock market and in private placements.  Some of this is explicable, in that there are multiple hundreds of companies in this overall space and figuring out who competes with who and who complements who is mind-boggling.  Clearly, some washout and some consolidation are needed. But still, there remain some significant problems to solve and some hugely significant payoffs to those who recognize and solve the problems. So all of the existing and future companies that are developing good products and services in this space, learning from their own mistakes and the mistakes of others as they go along, remain very interesting to me in spite of recent market decapitations.  

Broadband is happening. Many web sites have been reporting to me that 20-25% of their users have broadband connections.  However, I notice a shift in inflection when these reports are made.  Last summer it was “growth in broadband users has tripled in the last two quarters to 20% of our user base.”  Now it is “broadband users represents only 24% of our user base and thus we are shutting down our non-profitable video-on-demand service.”  What’s wrong with this picture?  Broadband is alive and well and rapidly increasing in deployment. Lots of products are being built, shipped, and installed.  The perception problem is related to the assumptions that went into various business models about the revenue generating impact associated with broadband.  In this example, the culprit is video and the fact that people have lots of tried and true options for accessing video services. The advent of broadband in and of itself is not going to rapidly or radically change the way people want to receive baseball games, Baywatch, and a long list of movies that were not successful at the box office, at least in the last five years.  Nor does the advent of broadband necessarily represent an opportunity for service providers and content providers to make money for what was previously free or very cheap.  But the demand for broadband at the user level does not depend on these factors and that’s why DSL routers and Cable Modems continue to be installed as fast as the various service providers can get to it. 

The other factor that has resulted in the rose-colored glasses being taken off when perceiving broadband has been the struggle or outright failure of the so-called Data CLECs.  Once the “golden boys” who were going to take advantage of the lethargy of the ILECs and make DSL happen for us, they are now considered flawed entities.  But again, not because broadband isn’t happening, but because their business models didn’t allow them to make money at it. Acting as an intermediary between ISPs and residential customers for the provisioning and management of DSL access to the ISPs turns out to not be a very profitable approach, especially if the ISPs can’t pay their bills.  So it looks like the ILECs will wake up and leverage their considerable resources to make DSL happen, perhaps matching the continued growth of Cable Data services, perhaps exceeding it. There is still a lot of work to be done here and I expect that in a few years we’ll have 75% penetration of broadband of one type or another in the U.S.   This is why I am still very interested in any business plan that crosses my desk that starts out with “Assuming broadband access is prevalent…” or “To help ensure universal access to broadband services…”   Of course, what comes after those intros is critical, but at least they’ll get a read from me if they are operating somewhere in the broadband space.