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How to Stay Ahead in a World of Disruptive Innovation: Part 4

Date posted: 13th November 2015

Part 4 “I Don’t Want to Burst Your Bubble…The Rise and Fall of the Internet’s First Generation”

“I wish I was born ten years sooner” – Children of the 1980s

Last week we discussed the return of IBM as the dominant force in computing with the IBM PC. We also analyzed the precursor to the modern PC the Programma 101 from Olivetti which kicked off the PC era 20 years before it “began”. By the end of the 80’s IBM was still the standard but in base technology only; by then the IBM branded PC that pioneered the era had faded. As the new decade dawned Dell and Compaq were rapidly growing selling IBM compatibles in conjunction with the new centralized software based standard from Microsoft.

While all that was happening in desktop computer hardware a fast moving force would soon set in motion the need for rapid investment in enterprise IT infrastructure.  That is of course the growth of the internet which originated as a U.S Department of Defense invention back in the 70s but took full force in the 90s and became basically “universal” in the 00s.

The world of IT in the 1990s was moving faster than it ever had before with rapid-fire acquisitions, and speculation of the future potential of the commercial internet and infrastructure that supports it. We now of course know that the bubble came crashing down in spectacular fashion come 2001 however an interesting foreshadow to today’s IT war came out of the bust with Cisco and Amazon surviving stronger and longer than most of the .COMs.

At the time was known as the online bookseller from Seattle and Cisco was the networking equipment powering millions of .COMs and other companies. Today’s part 4 “I Don’t Want to Burst Your Bubble…The Rise and Fall of the Internet’s First Generation” will take a look at the rise of networking as part of core IT infrastructure and will set us up for the wars that are being fought in today’s 3rd platform of IT.

Inflating the Bubble…

Market speculation in the future potential of the internet, a booming United States macro economy, low interest rates on capital all contributed to the rapid growth of money flowing through business in the 1990s. At the same time businesses were sitting on massive piles of cash, a series of networking companies were forming and merging together in order to provide the infrastructure needed to power the expected growth of the internet as a business tool and later consumer offering.

Following a series of rapid-fire consolidations through the early part of the decade two companies stood out above all others as leaders of networking infrastructure we all know and use today. One (Cisco) survives today as the king of the OGOs, the other (Nortel) which through acquisition pioneered high-speed Ethernet failed in epic fashion.

“Get Large or Get Lost” – Tulip Mania and the Collapse of Nortel

The internet bubble is somewhat over-subscribed in folklore as being unique to the era or a special “new economy” speculative bubble. Some of that is of course fueled by the changes in communications and access to media now possible because of the internet. In fact how would a history of the internet even be possible without the internet? Think about that a bit this weekend.

Anyhow what happened in the late 90s was not the first time a “new economy” boomed and busted, as we know now it was not the last time either (i.e see Mortgage Crisis). In fact the roots of 90s internet speculation can be traced back to events that occurred in The Netherlands during the 17th century.

During that time a phenomenon occurred that we now know as Tulip Mania. Tulip Mania began with the introduction of a new flower (the Tulip) from the Ottoman Empire brought to The Netherlands in 1593. The timing of this introduction coincided with the beginning of the Dutch Golden Age an era of increasing wealth in the nation. As the new flower differed from other plants of the time it was seen as a status symbol. As the Tulip is a slow growing and seasonal flower it had to be purchased in futures thus driving up prices as demand increased. The rarity in turn had a multiplying effect as more entered the market further driving the market up to a peak in 1637.

The 1637 peak would be the end of Tulip Mania though as demand eventually peaked at the height of supply some actual product, some futures. Almost overnight the entire market dried up leading to those with actual supply selling for pennies on the dollar and those betting on futures to lose everything.

Now how does this related to Nortel in the late 1990s?

  • Increasing wealth in the “United States Golden Age”
  • A new “technology” development is seen as a status symbol and is enhancing business results
  • Pennies on the dollar survival vs. betting on future inventory and losing
  • Unfulfilled potential and over extension as reality sinks in

Nortel can trace its roots back to 1895 Toronto as part of the Bell System of companies. However the part of their history that is relevant to our discussion starts in 1998 so we’ll just skip the first 103 years for purposes of concisely telling this story.

The story of what became Nortel Networks begins with the merger of two networking pioneers SynOptics Communications and Wellfleet Communications into Bay Networks. SynOptics was an early pioneer of 10 Mbit/s Ethernet and the modular hub that would later serve as the backbone of the internet boom networking market. As the potential for these technologies increased in the mid-90s aggressive mergers were to come as SynOptics merged with Wellfleet to form Bay and later Bay Networks was acquired by the newly renamed Nortel Networks for $9 billion

However there was a big problem and that is where we come full circle. While Nortel was rapidly growing and acquired the pioneering technologies of networking their expenses were speculating on an incredibly massive and somewhat delusional future. In other words they had too many Tulips on the balance sheet.

After the Bay Networks acquisition the company employed over 94,000 people on a $250 billion market cap. For comparison their closest competitor Cisco’s bubble market cap was $500 billion twice Nortel but with only 30,000 employees. Nortel also produced most of their own equipment speculating on futures with higher inventory whereas Cisco went with a strategy resembling a just-in-time approach leaving them with significant infrastructure in place post-boom but the ability to phase that down through the decade the followed.

When all was said at done Nortel’s inefficient management and over-speculation on the future would be the death of the successor company for networking standards. Once again the inventor and pioneer lost to a more flexible, nimble competitor.

A Seattle Bookstore plants its roots…

Amazon really doesn’t become part of our IT infrastructure story until the 2010s of course however they got their start right along with the others during the boom days of the 90s. Jeff Bezos founded Amazon as an online bookstore in 1994 claiming the business was part of his effort to avoid any regrets for not participating in the internet boom that he and others predicted was coming.

We start each article here at Netfast IT Business Review with a quote. Today’s is not really a quote but rather a concept of right place/right time and Amazon was essentially that at least in its early days. By being a pioneer in online book sales Mr. Bezos and Amazon were able to take a massive market lead before anyone else had a chance to even start. This enabled to be one of the only companies to survive and later thrive using the strategy of “get large or get lost” combined with a business model focused highly on innovation, customer satisfaction and later diversification of offerings.

By first being right place/right time and consistent execution and success on an unconventional profit-less business model Amazon was later able to penetrate a huge new market (IT infrastructure) 20 years after their founding. Thus the Seattle Bookstore that drowned the human network actually was a bookstore’s business strategy taking down the IT giants of today.

Surviving the fallout post-pop…

Cisco and Nortel were of course not the only players in 90s/00s networking. After the bubble burst and took Nortel with it a bevy of companies were still forming albeit in a smaller scale to take advantage of the growth in internet bandwidth requirements.

One of the first to take on the Cisco was Juniper Networks. Juniper came about in 2000 to chip away at Cisco’s dominance of the remaining market. The Juniper vs. Cisco war that was to come was driven by Juniper’s perceived superiority in shifting software to hardware and the speed enhancements that came along with their innovation. This chip-away strategy took about 30% of Cisco’s former monopolistic market share which has never fully recovered. Additional competition came down the line too from the company now known as Alcatel-Lucent (another Bell company child) which combined with Juniper’s chip-away strategy drove Cisco to shrink their networking business from the high flying days post-Nortel.

A massive re-brand and diversification into video and unified communications was to come but Cisco never again reached the heights of the early 00s. The company successfully diversified into video and unified communications through the latter part of last decade but mostly lives on today as the relic old-guard OEM (OGO) enjoying its 130 billion market cap and massive presence in legacy networking from the high-flying days of yesteryear.

High Alert days for the OGOs…

Cisco undoubtedly left the internet boom as the winner albeit post-peak in networking infrastructure technology, competitor Nortel collapsed in massive fashion and their incredible market share would ensure survival through tough times ahead. Competitors such as Juniper and Alcatel-Lucent would chip-away in the decade to follow with faster routers to support larger customer requirements however the market leader was already so far ahead survival was guaranteed.

However comfort does not live forever and the infrastructure that most of today’s companies relies on OGOs live on is in great danger of being washed away but new disruptive innovation. Just as Juniper chipped away at Cisco in the 00s with a shift from software to hardware defined today’s cloud and software focus is taking things back the other way with virtual and SDN routing appearing to be the wave of the future.

As we recommended early in this series “Learn how to swim before the rain clouds wash you away…..” and now as we get closer to current day we are beginning to see 2015’s war shape up with a collection of massive old-guard IT companies and their associated value-added resellers in the cross-hairs of next generation virtual, cloud and software defined options that focus on business needs rather than vendor needs.

What’s Next?….

Our series highlighting the history of IT has moved up toward the current day. Our story traveled back in time to the first platform of IT, the IBM mainframes of the 1960s; we went into the era of the PC, server applications and physical networking otherwise known as the second platform. Our hope here is that we’ve given a great background on the chains that tie together the past 40 years and set us up for the years to come.

Now that we have entered the present day next week we will take a look at the four pillars (Mobility, Social Networking, Big Data Analytics and the Cloud) of  IDC’s 3rd platform of IT. Come back to Netfast IT Business Review next week for “Riding the Tsunami Wave – Improving Agility and Competitive Advantage with IDC’s 3rd platform”

About Author

Joe Asady is the founder and CEO of Netfast Technology Solutions ( Netfast is a leading Cloud Managed Services provider for New York City area mid-market business enabling customers to accelerate Digital Business Transformation with managed cloud and mobile solutions.