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In the beginning, there was only one network and it
was good. Voice and data coexisted peacefully, and
both service providers and enterprise vendors knew
their place. Then came the great flood of the Internet
and many were washed away. Where once there was only a
few companies providing products for both the
enterprise and carrier, as well as data delivery and
application, now there were many. Some of these
companies grew and gobbled up smaller ones, others
spun off different versions. AT&T begot Lucent who
begot Avaya who bought Quintus...and so on.
In the worlds of both voice and data, there is the
beginning of a great schism between two opposing
groups: application and transport. Yes, this metaphor
is getting rather tiresome but there is a point. There
are now two types of voice and data products: those
that deliver content (data and/or voice), and those
that add value to or manipulate that content. This is
more than a simple division between LAN (local area
networks) and WAN (wide area networks). I'd like to
explore the concept that the products sold by these
two different types of companies are different at the
very core level.
CONTENT DELIVERY
The most recognizable of these content providers are
the vendors that create WAN infrastructure and those
who deliver it. Companies like Lucent, Cisco, JDS
Uniphase, and others have made fortunes building the
pipeline that carries content to the end user. Using
technology like optical switching, these vendors are
creating the new railroad of the 21st century. These
are the channels that deliver content of the Internet
and the world of telecommunications. Not surprisingly,
until recently these companies have been the darlings
of the financial world. Anyone selling a product or
technology to enable the movement of information
suddenly had a market cap in the billions. And why
not? They were the pioneers of the new economy. They
were the ones to make it all happen. Much like the
railroad tycoons of the 1800s, these companies were
the ones that made the commerce possible.
CONTENT VALUE ADD
Conversely, content value adders are not nearly as
concerned with the delivery of voice and data, but
what to do with it. These are the application vendors
like Microsoft, 3Com, Avaya, and Siebel, just to name
a few from different regions of the market. They take
the content and manipulate it into a more palatable
format. Some examples of these types of products
include Web browsers, enterprise network equipment,
PBXs, ACDs, and CRM systems. The defining factor among
value adders is that they don't just move information
from point A to point B, they implement some form of
intelligence to the equation. Voice calls can be
routed to the correct extension, or even by the needs
of the caller. Messages are stored, prioritized, and
sent accordingly. Information is organized into
categories and formats that make it much more
valuable. And that is the key word: value.
Unfortunately, many of these companies and their
products have not received their fair share of media
attention and stock valuation. Not to underestimate
the value of the "content delivery" companies, but
there would be no need for them if it weren't for the
applications, the value add. The broadband buildout is
a result of the new and innovative applications and
the need for them to communicate. It's not the other
way around, with applications being built to suit the
needs of the new broadband. My school of thought is
one that is shared by many application vendors. It is
that the upper level of the value chain is where the
real innovation lies. By thinking of the content
delivery as the foundation for all products, it is
easy to understand that refined enterprise
communications and the end applications are truly the
differentiating factors.
- Content Delivery: By offering high speed
access and cheaper communications through
broadband technologies, content delivery vendors
have created the new railroad. This is the
foundation that makes other products possible.
- Enterprise Communications: At this level,
information, be it voice or data, is refined and
delivered to the proper user or device. This is
where the rubber meets the road; if enterprise
communications are not clean and simple, even the
best application will go unused.
- Value-Added Applications: These are the
products that make us want to use the Internet,
communicate more, and spend more money. These
products have the greatest form of differentiation
and are what the customers ultimately see. Even
with the fastest connections and most phone lines,
businesses would still be in the Dark Ages without
the applications.
COMMODITY PRODUCT?
This brings us to the question of where the true value
lies. The stock market would have us believe that
content delivery is most important. I don't mean to
devalue these companies in any way, but I disagree. I
believe the most important part of the chain lies
first in the applications, and next in enterprise
communications. As I mentioned, these are the products
that are most visible and ultimately create the user
experience. Where would today's business be without a
strong enterprise voice system like a PBX or LAN
telephony network? How about without a CRM system or
some sort of salesforce management? Admittedly, none
of these technologies would be possible without the
content delivery, but where is the differentiation?
I believe that content delivery (broadband data and
voice) will slowly be commoditized. No one ever asks, "Wow!
Is that Qwest bandwidth? Does it use a Lucent Stinger?
It sure tastes better than mine." Content delivery is
comparable based on the amount of bandwidth or lines.
Much like a public utility, it is a commodity product.
No one cares where their power comes from (except
maybe in California), only that it is there on demand.
Thus, these companies will ultimately be competing
based solely on price. And a business model based
exclusively on pricing is not a good one.
Until recently, the market disagreed. Lucent spun
off Avaya (their enterprise division) in hopes that,
unencumbered, Lucent would garner the high stock
valuations of broadband companies. The plan failed
miserably. At the time of this writing Lucent is
trading around $10 a share, down from a 52-week high
of $67. Avaya by contrast is trading at $17 a share,
still down from a year high of $26 but not nearly as
severe as Lucent.
In no way do I have a derogatory opinion of content
delivery companies. I do believe, however, that we
need a balance in our focus. To conclude, I hope the
market learns that the demand for bandwidth caused by
applications is equally as important as the supply.
Brian Strachman is senior analyst, Voice and Data Communications,
Cahners In-Stat Group. To correspond with the author, please send your
comments to brians@instat.com.
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