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After The Hype is Gone
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
December 6th, 2002


By Brent Holliday
Greenstone Venture Partners

“Time passes and you must move on,
Half the distance takes you twice as long
So you keep on singing for the sake of the song
After the thrill is gone” – Eagles, After The Thrill Is Gone

 

It will be a few more long quarters before we see consistent news that the economy for technology start-ups is improving.  If you are one of the survivors (you have funding until mid-2004 or you will hit the magical “cash flow breakeven” mark before that point) you might start busying yourself at some point with the strategies for success instead of the strategies for survival.  Through the last 5 years of boom and bust we (the technology community as a whole) have become pretty cynical.  Great hopes have become great hypes and markets with so much attention and investment went nowhere.  Now, as you start to feel the bottom is past and the future is rosier, you should be smarter about market opportunities and not chase the herd down a rathole, right?

 

If there is a lesson to be learned by the stories outlined below, it is that you need to ask your customer about the emerging market and then ask yourself if the customers are prepared to adopt the new new thing and if so, on what time frame.

 

Let’s do a quick shopping list of some of the great hypes and then follow up with an assessment of each of these opportunities today and where they might go tomorrow:

 

1)   3G – High speed wireless data anywhere a cell phone works.  By high speed, people touted true 3G as 1.5 Mb/s or faster.  The pervasive network would allow new applications and great leaps in productivity and flexibility of work.

2)   Voice over IP – Data traffic outstripped voice traffic sometime in 1999 and the future of all IP networks was driving a new voice  and multimedia convergence from the desktop to the core of the network.  Voice calls would be free.

3)   Optical Networking In the Metro Area – Optical networking in the network core lived up to the hype as great amounts of investment in fiber and associated switches, components and systems were implemented.  But the metro area (any urban area) was where the benefits of optical networks (DWDM, Gigabit Ethernet) would trump the existing Packet over SONET infrastructure delivering massive bandwidth for less cost.

4)   The Common Data Standard – The lesson of Y2K was that out-of-date software systems that needed massive integration to were a huge cost and should be abandoned.  New common standards like data description (XML), data integration (SOAP, ODBC) and development platforms (J2EE, .Net) would make integration seamless.  Any application will talk to another application without costly integration.

5)   Network Security – With the common use of the Internet for business and home use and its dominance as a transport standard, the holes in its security became exposed.  As it was never intended to be secure, the doomsayers laid out a bevy of issues that lead to solutions for authentication, protection of sensitive traffic, protection from outside threats and the malicious viruses.

 

There are others of course: JINI, Inifiniband, Fiber-to-the-home, Multiservice IP, Storage Area Networks, Peer-to-peer, etc.  Each of which had its 15 minutes of cover stories and millions upon millions of investment and development.  Some are panning out, some are not.  None lives up fully to expectations.  The future is bright for some opportunities and standards.  Why do we get disappointed and cynical about the new new thing?  Our world of instant communication allows us to quickly drive a global hype machine and then summarily trash the idea as old and not feasible because customers aren’t buying it.

 

As a leader of the next generation of technology companies, you need to look through the hype and the scorn and find out what is really changing business.  The only place to find that out is to engage with the users.  {By the way, huge companies like Microsoft, Sun, Intel and IBM can do missionary work, educate a market and drive demand for some of the new things. It certainly doesn’t work every time for them, either. But you can’t and you won’t.  Your job is to see where the traction for new standards and new ideas really is and then move rapidly to develop and position your product}

 

So where are we now on the five things I highlighted?

 

1)  3G – Implemented? Yes, but at huge up-front costs that may have killed any chance of its success.  The auctions for spectrum alone were a completely greedy cash grab by government. 
Met specifications from the hype technically?  Not even close.  1xrtt is 56 kbps at best, 1/40th of the projected speeds. 


Customer traction/uptake?
  Slow to nothing yet.  Might gather momentum in the consumer space due to entertainment, but business use is dismal.  Qualcomm, Nortel and Nokia are the tech heavyweights betting big on 3G.


Competition or substitute that is delaying adoption?  802.11 (Wi-Lan) is the substitute that is being adopted by business users.  It is free spectrum and has better bandwidth than current 3G.  Security concerns are a problem for Wi-Lan, though.  Lack of a killer business application is also delaying 3G.  There is no compelling reason for me to be connected at all times, save e-mail and calendaring which are available for far less on 20 year old wireless networks like Mobitex.


Do we bet on the future of 3G? I wouldn’t in the near term (<5 years).  Too many reasons not to implement 3G are apparent and there is no uptake from the business user.  However, the wild card is the consumer.  Perhaps the entertainment side (colour phones are here, about 2 years after Asia) will pull demand.  The safer bet for your business is in infrastructure and new data/voice network management issues that are emerging as carriers manage multiple network standards.

2)  Voice over IP - Implemented? Yes in the core of the network as carriers use it for cheaper long distance voice transport.  But in the enterprise and home, it has made no dent whatsoever.


Met specifications from the hype technically?
  Initially, VoIP was an industry joke due to its lack of performance.  The original spec to make data behave like voice circuits (H.323) was a bust, but the new standard, Session Initiation Protocol or SIP, appears to be a winner (native to Windows XP, for instance). Latency and jitter are still issues, but today’s technology and systems are nearly voice quality.


Customer traction/uptake?  Carriers have implemented systems at a good pace, even through the downturn.   But last mile VoIP has zero traction still.  Cisco is the technology market heavyweight throwing everything behind their Avvid system for VoIP in the enterprise.


Competition or substitute that is delaying adoption?  Clearly, the old voice circuit system, or POTS (plain old telephone system) works.  Why give up 99,999 dial tones out of 100,000 for a system that will give you 1000x less performance guarantees?  It is more likely that VoIP would roll out in 3G networks for wireless because we are used to crappy reception.  Interestingly, investment in that area is very slow.


Do we bet on the future of VoIP? What has been poorly communicated about VoIP is the functionality and productivity gains that it allows.  Would you sacrifice some quality for things like instant messaging on your phone (forget call waiting, you can see if people are on their computer, at their home, on their cell or only accepting voice mail)?  Also, VoIP may be foisted on you by the carriers once they realize the lower capex and operating expenses realized with a last-mile VoIP system.  I think that the short term (<3 yr) outlook for VoIP as an opportunity is bright.  But initial focus should be on infrastructure to help improve quality, availability and solve specific problems for the carriers.

3)  Optical Networks in the MAN - Implemented?  Yes. Sales of DWDM gear for the metro area were strong in 2001 and 2002, but still less than SONET infrastructure, the old technology.


Met specifications from the hype technically?
  Hell yes.  Technically, many companies proved that delivering IP traffic without using SONET is far less expensive and far easier to provision.  The stuff works.  New high speed next generation SONET gear is all the rage now as it interfaces the optical technologies to the existing infrastructure.


Customer traction/uptake?  The thinking two years ago was that carriers would junk the old infrastructure and adopt the new.  This is not the case at all.  The new optical network technology, well proven in the core, has made significant inroads.  But companies like Cisco have discovered that the hay is made today with special gear for the MAN that interfaces with the old gear.
Competition or substitute that is delaying adoption?  Carriers love their old gear and demand for bandwidth has not caused them to spend on the newer, more efficient network technology. 


Do we bet on the future of Optical Networks in the MAN?  Yes.  This is a short range success, especially in the next generation gear that does not make the old gear redundant.  This is a valuable lesson for other hyped technology areas.  Originally, the IP networking companies inhaled their own gas and believed that SONET was dead.  They believed that the compelling value proposition for optical gear was so strong, they could ignore the existing technology.  Always be backwards compatible and you will not be left in the cold like many networking companies were in 2000 and 2001.

4)  Common Data Standard - Implemented?  Yes, the standards are there and the tools to build applications include the standards. But the specs are continually evolving.


Met specifications from the hype technically?
  Sort of.  While the technology has allowed applications to talk to one another, there is a long way to go before integration is seamless.  With the half-baked standards (and the usual war between Sun and Microsoft), it is difficult to make it all work.


Customer traction/uptake?  The talk of web services has driven adoption of development tools in either the .Net or J2EE environments.  Many applications are being written today, but they will require modifications as the standards settle.  Since the idea of common data standards makes so much sense, the market traction is real.


Competition or substitute that is delaying adoption?  While the concept of XML was enjoying its 15 minutes of hype, people had trouble understanding what this meant for applications.  It was not until the integration standards and development platform standards were hammered out and put into use that people could see the power of common data integration.


Do we bet on the future of the Common Data Standard?  Applications must talk a common language.  It is simply too painful to create adapters and integrate software.  This is a good short term opportunity to bet on.  The whole puzzle is not finished yet, but great strides in standardization have made it easier to build applications that are highly reusable and can work in many different environments.

5)  Network Security - Implemented?  Surprisingly… not as much as you would think, given the mindshare.
Met specifications from the hype technically?
  Security is a funny technology in that it is constantly incrementally changed to stay ahead (or immediately behind!) the latest threats. For the most part, the technology has met expectations despite some very public failures of things like cryptography.


Customer traction/uptake?  Given that every CIO of every company considers network security to be a top priority and a great threat to business, you would think that security vendors are making out like bandits.  Well, it’s not happening.  It seems that CIOs are all talk and no walk.  Percentages of businesses protecting themselves with various security methods are low.


Competition or substitute that is delaying adoption?  It seems that the delay in adoption is similar to insurance or real world security systems.  Until something bad happens, it is not a priority.  So many people gamble on not paying for security and hoping that bad things won’t happen to them. In network security, unlike common house theft, you may not know that you are losing the company jewels and you may never know.


Do we bet on the future of Network Security?  As the economy improves, CIOs will be less reluctant to making the investment in security, helping this opportunity finally live up to its promise.  This continues to be a good opportunity but probably for those companies already building or shipping products.  The raw start-up in security might find it crowded.

 

Some of the great stories of “the next big thing” have panned out and some have a ways to go before being real generators of sales and profits.  Look carefully at the opportunities and find out how the standards are shaping up.  Things are getting better slowly, so make sure you are positioned correctly when the real opportunities are back.


What Do You Think? Talk Back To Brent Holliday

 



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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