The Hype Chasm

Last Friday I had the opportunity to moderate a panel discussion on optical networking.

Given the big announcements last week from several optical networking companies – Sycamore Networks, Ciena, privately held GiantLoop and, of course, Nortel Networks – the session couldn’t have been more timely.

While most of the news was good – Sycamore and Ciena earlier in the week reported strong quarters, while GiantLoop raised $120 million in venture capital – it was Nortel’s sobering profit warning on Thursday that grabbed investors’ attention and helped push the Nasdaq down by 5% on the last day of trading before the long weekend.

Nortel, of course, is a major player in optical networking, which is now the Internet’s hottest sector. Which gets back to the issue of timeliness.

Despite the avalanche of interest surrounding optical networking, panelists at Friday’s event in Boston cautioned that the bandwidth-busting technology is still in its early stages. Equipe Communications CEO Dennis Rainville told the audience that optical networking is “still in its infancy,” while Bill Mitchell, vice president of marketing at Astral Point Communications, added, “I wouldn’t hold my breath waiting for an all-optical network to emerge.”

And therein lies the perilous dilemma that routinely faces Internet investors – the hype curve usually runs well ahead of the adoption curve. This can create a dangerous gap between when investors lay down their bets on a company or a technology, and when (if ever) the bet pays off.

Even worse, the early bets often are made at prices inflated by the industry’s hype machine – venture capitalists, underwriters, analysts, PR specialists and the media. That’s what the Internet stock bubble in large part was all about – premature and unrealistic expectations. How else to explain why some investors paid $240 per share in December 1999 for shares of VA Linux , a company that had less than $18 million in revenue during the fiscal year prior to its IPO filing and was losing money? Today, VA Linux, which is still deeply in the red, sells for less than $8 per share.

That’s just one example. Pick any other Internet sector – B2B software, portals, push technology, wireless, incubators, China – and you find cases where investors were persuaded to jump in well before it was wise. Sometimes it never was.

Optical networking is merely the latest great technology that promises to transform the Internet and the economy. There will be others. It’s up to investors to remember the lessons of the past year: Before you leap, make sure you’ve accurately measured the distance between Point A and Point B. Otherwise you may drop a lot of money along the way.

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