Dot.com virus signals Net build slowdown - Industry Trend or Event

As U.S. companies tighten their budgets in a sluggish fiscal quarter, web development plans are among the first to be curtailed.

Corporate networking planners and end-users in the United States are reacting badly to the dot.com bust. A study among senior information technology managers by investment bank Bear Stearns & Co., conducted at the end of last year, showed that businesses were planning a 37% increase in Internet-related spending for 2001. But just two months later, projects are being placed on hold and corporate Internet spending is being re-evaluated.

"The Internet is still key, but there's [been] a big slowdown," said Robert Fagin, Internet infrastructure and services analyst at Bear Stearns. The abrupt turnaround in plans tracked directly with the decline of Nasdaq, the New York-based technology stock market, he added.

Dot.coms may have taken a hammering in the second half of 2000, with almost three-quarters of business-to-consumer sites failing, but until recently it looked like companies would continue to up their spending on Internet infrastructure and services into 2001.

As recently as mid-December, IBM's chairman and chief executive, Lou Gerstner, was expressing confidence in Internet buildout.

"The infrastructure today cannot handle what's coming," he said, "I've seen projections of 1,000fold increases in Internet traffic in the next few years, and that's probably reasonable."

U.S. end users take fright

The slowdown in the U.S. economy. coupled with downwardly spiralling valuations of telecom companies, has stalled some Internet-related projects.

The headache for infrastructure and service providers is that while they have been amassing debt, wholesale bandwidth prices have fallen dramatically. According to investment bank Merrill Lynch & Co. in a research report issued last month, US West Inc., of Englewood, Colorado, recently paid a $3 million fee to application service provider USinternetworking, of Annapolis, Maryland, for early termination of a contract. The New York-based securities firm said this did not bode well for other Internet infrastructure companies.

Even the biggest equipment vendors, such as Nortel and Lucent, have made redundancies as operators tighten their belts and the once-darlings of Nasdaq, the optical equipment startups, have been failing to make their initial public offerings.

The reversal in plans was somewhat surprising, Fagin said, because the survey covered so-called bricks and mortar businesses including Fortune 500 corporates, and not the collapsing dot.com startup sector.

"The billion dollar question is how quickly budgets can re-accelerate," said Fagin at Bear Stearns.

"The conventional wisdom at companies is that things were bad in the fourth quarter of 2000 and will continue to be, but with the Federal [Bank] helping out with rates, it should look better in the second half," said Fagin. He cited one source who told him in December that seven of 15 major projects being tracked were put on hold in a three-week period. "These were good solid corporate projects, not dot.coms."

Another IT manager at a Fortune 500 company said that big companies cannot re-accelerate quickly because they will have to go through another rebudgeting process. Even if the economy stabilizes, a comeback in spending will not occur until the third or fourth quarter, he said.

Among the companies immediately affected by the downturn in spending plans have been infrastructure and content delivery specialists RealNetworks, CacheFlow, and Inktomi Corp.

"In the past, customers have purchased products in a single transaction for as much as a year or more of requirements," said David Peterschmidt, president and chief executive of Foster City, California-based Inktomi Corp. "The spending pattern that is emerging [now] is one where customers are purchasing products for the next 90 to 120 days to stagger their expenditures."

COPYRIGHT 2001 EMAP Media Ltd.
COPYRIGHT 2001 Gale Group