May 8, 2002 Networking Show Is Missing Last Year's Vitality By Mark Boslet LAS VEGAS - (Dow Jones) - Just a stroll across the exhibit floor at this year's Networld+Interop trade show here is proof enough the 16-month-long networking-industry slump is not at its end. Crowds that reached 61,000 last year will be lucky to total 45,000, and exhibitors are down to 600 from 800. Even vendors in the hot security and wireless markets complain of budget-constrained customers, some inside large corporations with the wherewithal to buy what they want. The descent of this once prosperous industry may have stalled, but no one yet sees the upswing. At industry conferences during the past month and in interviews with executives, few leaders are able to predict a rebound in the sluggish market anytime soon. Cisco Systems Inc.'s (CSCO) Chief Executive John Chambers offered his sobering assessment on a conference call discussing his third quarter results, even as he hinted that some corporate customers were spending more freely. "When the economy picks up, so will networking spending, with a slight lag time," he said. "Enterprise (or corporate) customers have tight control or freezes on their spending." The troubled environment is pushing network operators to do more with the gear they have and to run equipment closer to capacity, at some carriers above 35% of capacity instead of 20%. It has pushed companies close toward financial disaster. It also has made smaller, less expensive products such as stackable switches from Cisco and Extreme Networks Inc. (EXTR) - more popular than their bigger, faster counterparts. In Cisco's third quarter report, for instance, the powerful 12,000 GSR switch router saw a 10% decrease in sales. "There was a lot of spending over the past couple years and there is clearly a lot of overcapacity," says Roger Novak, general partner at Novak Biddle Venture Partners. 'We think telecom is not coming out of it until 2004." Even that may require a round of consolidation among ailing U.S. telecommunications carriers, with three or maybe four companies remaining, says Novak. The industry "if anything, just gets worse by the week," says Mark Saul, general partner at the venture firm Foundation Capital. With companies such as Williams Communications Group Inc. (WCGRQ), Global Crossing Ltd. (GBLXE) and Yipes in bankruptcy and others, including WorldCom Inc. (WCOM), suffering from weak demand, who is going to buy new equipment? asks Saul. Even the healthier SBC Communications Inc. (SBC) recently cut back on this year's wireline capital purchases. The industry's fallout was evident at this year's Networld show. Managers searched for ways to inject their networks with greater intelligence, adding hardware and software to better disperse traffic and caching equipment to store heavily used material closer to the people who need it. Telecommunications buyers shied way from replacing existing switches with new, faster models. Corporate customers were equally cautious. "I've never run into a customer, even the large ones, who isn't concerned about budgets all the time," says Randy Rosenbaum, an inside sales representative manning NetIQ Corp.'s (NTIQ) Networld+Interop booth. Despite the thin checkbooks, network managers clearly were window shopping. High on their wish list were security technologies: intrusion-detection software for picking up network trespassers, virus protection and VPNs, or virtual private networks, that create private tunnels through the Internet. Netscreen Technologies Inc. (NSCN) showed off an all-in-one product with a firewall, or network sentry, a VPN and traffic-management abilities. The company's booth was busy. The promise of transmitting phone calls on IP, or Internet data, networks also attracted attention. Voice over IP is taking starting to make inroads at medium-sized companies, those with 400 to 500 phone lines, says Frank Dzubeck, president of Communications Network Architects, a Washington, D.C. consultancy. Systems are cheaper, smaller and, most importantly, they can use a company's existing phones. If a company doesn't have to replace its phones, it can save a lot of money, Dzubeck said. The technology has matured, agreed David DeLorenzo, senior product manager at Avaya Inc. (AV). More companies are taking a look at it, he says. Wireless technology - known by the software standard 802.11 - created buzz. The technology is being used to connect laptops, desktop computers and other devices to networks wirelessly and at increasing speeds. Several standards, a, b and g are slowly converging. But the adoption of the technology has been held up by security concerns. Those concerns may finally lessen by early next year. In nine months, the IEEE standards body will issue two security protocols for 802.11, says Sean Maloney, an Intel Corp. (INTC) vice president. The industry ships about 1.5 million chips for wireless products each month, of which about 80% end up in homes. Business sales have picked up in the past couple months, says Bruce Sanguinetti, chief executive of chip maker Bermai Inc. of Palo Alto. Many businesses are waiting for the faster 802.11a chips, which will become more plentiful this year. Networld may also prove a turning point for the introduction of gigabit switches in the traffic-burdened cores of corporate networks. The price of gigabit switches - which move 1 billion digital bits a second - has been falling, making them more attractive. Intel, meanwhile, unveiled a high-speed, gigabit network connection card for desktop computers that is hopes might spur adoption. The card will sell for the same price as today's slower Ethernet cards. Dell Computer Corp. (DELL) agreed to use it. Gigabit is the "technology that will get us out of the recession," Maloney says. However, "the switch market has never led. It has always been trailing behind the desktop." Despite the interest in new technologies, no one expects a rapid change in industry sentiment. A year ago, "people were ready to take risks and build systems as fast as possible," Eli Fruchter, chief executive of Ezchip, a subsidiary of LanOptics Ltd. (LNOP) said last month. Now, "they are not rushing." Fruchter tries to be circumspect. "I've seen ups and downs, and we are now in the middle of a down period, but it will change," Fruchter says. There is demand for bigger, faster networks. Many analysts agree. At least in the corporate marketplace, "the spending environment is probably close to stable, if it's not stable," says Pacific Growth Equities networking analyst Erik Suppiger. "I wouldn't expect any sharp deterioration, but I wouldn't expect any sharp improvement in the near future."