Though Northern Telecom's acquisition of Bay Networks appears to usher in a new era for the network industry, the union still has to win over some sceptics.
The deal is predicated on the belief that users will rely on IP networks for transmitting everything from data to voice and video.
And with IP as the common protocol for connecting businesses and business applications, enterprise and service provider networks are no longer separate and distinct.
"It should change the landscape," said Craig Johnson, principal of PITA Group, of the Nortel/Bay deal.
But for all the apparent synergies - Nortel is the number two supplier of telecommunications equipment to carriers, while Bay is a leading data network supplier to the enterprise - scepticism about the deal abounds.
Nortel stock dove 15 per cent when the deal was announced, effectively erasing almost $US2 billion of the transaction's initial value of $US9.1 billion. And Bay shareholders have already begun suing Nortel, alleging that the company's 35 per cent premium on Bay stock is insufficient.
And it's not just Nortel and Bay stockholders who may have trouble with the deal. Private capital sources have also expressed scepticism.
One analyst who asked not to be identified said that at a recent venture-capital dinner he attended, the moneybags panned the anticipated deal.
"They said anybody who buys Bay or 3Com we would consider to be stupid companies because anybody who's talented has left and started other companies," the analyst said.
Perhaps. But there's a lot of that going around.
Nortel's purchase of Bay is only the first in an anticipated series of marriages between data and telecommunications giants.
Lucent Technologies has been on a tear, buying up ATM, Gigabit Ethernet and remote access vendors, and analysts said the company is not done.
Observers also expect Alcatel, Ericsson and Siemens to bid for the likes of Ascend Communications, Cabletron Systems, FORE Systems and 3Com.
"If you're 3Com or Cabletron, you have to be walking around with a smile on your face right now because somebody from Lucent is going to be knocking at your door," said Rick Malone, principal at Vertical Systems Group.
If there is one catalyst behind this tidal wave of industry consolidation, it is the World Wide Web. The Internet is forcing voice-proficient telecommunications companies, such as Nortel and Lucent, to bulk up their data arsenal because they recognise that IP is the next dial tone.
"Data has a growth rate of 30 to 40 per cent per year, and it's driven by the Web," said Nortel CEO John Roth. "The IP component is growing more like 70 per cent per year. That's really the segment we're focusing on."
Nortel rival Lucent will also focus on that segment as Lucent responds to this deal, which analysts say the company will be forced to do.
Because it lacks basic LAN and WAN infrastructure items, such as shared Ethernet hubs and low-end routers, Lucent has relied on a 1995 agreement with Bay to provide complete multivendor network installations to customers. Lucent's NetCare network-integration and support division has handled many of these projects.
The Bay relationship has been critical for Lucent to maintain its foothold in the enterprise while it rolls out its own product lineup.
Lucent has nearly 2000 salespeople trained to sell Bay products, analysts from Gartner Group 's Dataquest division estimated. And NetCare is the largest single provider of continuous support to Bay customers.
The big dilemma
The dilemma: Bay's new owner is Lucent's long-time arch rival for circuit-switching gear in enterprise and carrier networks. What's more, both Nortel and Lucent have announced almost identical plans to break into the "Big Four" pantheon of internetwork vendors - which Nortel will have achieved if the Bay acquisition goes through.
"It's clear that [Lucent's] relationship with Bay, once this thing closes, is dead," Malone said. "[Lucent] will have to respond with another set of products that replace Bay's. It just can't go on selling Bay equipment if Bay is owned by its number one competitor."
A Lucent spokesperson said the company will continue to support its current Bay installations. He also insisted that Lucent will indefinitely continue to sell Bay products as part of its multivendor packages. Most analysts found that last part hard to believe.
"They're going to have to sever that relationship," said Peter Bernstein, president of Infonautics Consulting, a research firm in the US.
Dataquest also rushed out a client alert predicting that Lucent's relationships with Bay will be terminated as soon as Lucent is able to announce a "viable strategy" for complete LAN/WAN networks.
"It's simple," said Dataquest principal analyst Christopher Thompson. "Nortel doesn't want Lucent in its customer base, and Lucent doesn't want Nortel in its base."
Thompson agreed that existing Bay customers under Lucent support contracts will not be let go. But he predicted they eventually will migrate to Nortel support contracts.
While Lucent will be forced to respond to the Nortel/Bay union, Cisco Systems may not have to. As the worldwide leader in data networking for the Internet, the game is coming to Cisco.
"Cisco has seen this type of market movement coming a long way off," said Fred McClimans, CEO of Current Analysis, a consulting firm in the US. "Cisco had already started down the road to [playing a bigger role in] the carrier space way back with its acquisition of StrataCom and then more recently with the partnership with Ciena. In fact, we expect to see that continue, probably through a strengthened partnership with Tellabs."
Indeed, Cisco Chief Technology Officer Judy Estrin said her company will now look to Tellabs, which recently acquired Ciena for more than $US7 billion, for wavelength-division multiplexers. Wall Street analysts say it's possible Cisco will acquire Tellabs.
Barring an acquisition by Lucent, which many analysts anticipate, Ascend needs to continue to upgrade its carrier-class remote access, switching and routing offerings, McClimans said. Ascend must also work more closely with enterprise network companies such as 3Com and Cabletron.
One positive of the deal is that Bay and Nortel executives said there was virtually no overlap in each company's product offerings.
Yet Nortel CEO Roth said 25 per cent of his company's business is in the enterprise, where Bay is the third-largest provider of LAN equipment. And Bay has been attempting to bolster its service provider presence with limited success, analysts said.
Areas for potential overlap are in dial-access and high-end routing.
Nortel acquired Aptis Communications, a maker of high-density dial access concentrators. Bay, which also courted Aptis, offers the Versalar 5399 concentrator, which is a lower-end remote access offering.
For high-end routing, Bay is developing an OC-12-capable router for ISPs that's expected in mid-1999.
Nortel, Bay executives define the deal
Nortel CEO John Roth and Bay Networks CEO David House took time to discuss the deal with IDG's David Rohde and Jim DuffyIDG: The merger announcement was all about IP networks. But Nortel's flagship enterprise product is the Magellan Passport ATM switch. Are you afraid that your enterprise products will get lost in the shuffle?
Roth: Passport is really a frame relay access device, even though it's based on ATM technology. And frame relay is a prevalent [WAN protocol].
We're taking the point of view that lots of different protocols and products will continue to exist. We also believed that quality of service is important, and that's what our technology provides.
But many ISPs don't like ATM because they believe the overhead in every cell - the so-called cell tax - makes it inefficient compared with transporting native IP packets. Do you agree?
Roth: The cell tax is not a big issue. For example, when you put [ATM on the enterprise], people see a 40 per cent savings in their long-distance because you get the tremendous efficiency of [interleaving voice and data traffic].
Bay is developing a high-end router for ISPs, yet Nortel has a 20 per cent stake in Avici Systems, which makes terabit routers for the Internet. Which way is Nortel going to go?
Roth: We haven't made a decision there. [Bay CEO] Dave [House] and I both have to look at what we've got under way and the potential of both.
Avici's got some neat hardware but is very, very short on software code; Bay has got three million lines of software code that's appropriate.
House: Our strategy has been to develop products where we have the capabilities and acquire them where we don't. Acquiring hardware platforms to marry with our software would be something, certainly, that we would consider in our acquisition strategy.
We also have internal developments. It's a question of the right set of platforms and one unified set of routing code.
The growth in data networking is really in the public carrier market, whereas the enterprise seems to be levelling off.
Was entry into the enterprise market part of the rationale for acquiring Bay?
Roth: Nortel's business is about 75 per cent carrier customers and 25 per cent corporations.
Bay represents two real values to Nortel. One of them is the Bay technology and leadership at router technology, and the other is the evolution of router technology as it moves up the layers.
The question now is, how do we apply that to the traditional Nortel business of carrier-class networks.
As IP traffic becomes a larger and larger portion of the total traffic in the public network, it becomes appropriate to push the kinds of technologies Bay has into the public network. That is a major reason for my interest in Bay and its technology.
The other one is that it really does strengthen Nortel's offering in the [WAN], where we at this time only go to the doorstep of the customer.
On the other side of the WAN product is a whole series of LANs and routers, which Nortel really has little visibility on.
This is, of course, an area where Bay is quite a strong player.
House: What we see is the lines between the LAN and the WAN blurring and evaporating.
Customers are looking for complete end-to-end IP integrated networks. Cisco, with its StrataCom acquisition, was able to offer a more complete solution than we were able to offer.
Now we can go to the enterprise customer and offer a solution that is significantly more complete than what our leading competitor can offer.since you began your tenure at Bay 18 months ago, Bay never made a serious run at Cisco; your third-quarter financials [a $US144 million loss] indicate that Bay is susceptible to market volatility, whereas Cisco seems immune; and now you're no longer an independent company. Do you consider your tenure at Bay a success?
House: Absolutely. I think any time you can double the stock price in 18 months [you've] got to be returning a lot of value to the stockholders. That's the ultimate measure, and I think that's an excellent performance.
Quip-filled debate pits ATM defenders against opponentsby John GallantIn the end, the high-profile debate over whether the "ATM Forum ruined ATM" generated more heat than light and did little to sway the admittedly biased audience at the recent ATM Year 98 conference in the US.
But the quip-fest, which pitted two opponents and two proponents of ATM and the ATM Forum, was notable for the stinging quality of the barbs exchanged by the participants.
The spiking got off to an early start when Tom Lyon, founder of Ipsilon Networks and now an executive with Nokia, which purchased the IP switching company, said ATM was the product of "drug-induced decisions". Among those hallucinatory choices, Lyon said, was the decision to standardise on a 48B cell payload. He labelled it "a bad compromise made early on".
In addition to slamming the technology, Lyon lambasted the ATM Forum, saying the group had failed to define initially what problems ATM was trying to solve for customers and, thus, what it should ultimately become. "Is it a switching technology? A Layer 2 protocol? A quality of service mechanism?" he asked. That "fundamental failure", according to Lyon, led the Forum to tackle too many challenges and to allow ATM to become too complex.
"All the industries came together around ATM and said 'look how cool the future will be'. Tune in, turn on, switch cells," Lyon said. "But we all know there are horrible consequences with drugs. We got a whole new revolutionary network architecture when all we needed was a way to evolve our infrastructures. You see, a funny thing happened on the way to the Forum. There was something for everyone in those standards and early implementation agreements."
Lyon concluded that the ATM Forum had created a camel with 10,000 humps. He brought his overall message home with a vivid analogy: "The ATM Forum is like a teenage girl who can't say no. Pretty soon there are lots of undesirable guys hanging around and then nine months later you wind up with a product that no one wants to support."
Those undesirable types were the non-technical marketing and business executives Lyon says swamped the ATM Forum seeking approval for all sorts of nonessential ATM add-ons. "The engineers checked out and trouble checked in," Lyon chimed.
Not to be outdone, opponent Robert Sansom, vice president of architecture and one of the founders of Fore Systems, was more than happy to pick up on Lyon's camel reference, saying that ATM is indeed like a camel, albeit a beast with only one or two humps. "The camel is a pretty well-designed animal. It can go without water for 51 days or so," Sansom said.
Sansom admitted that the Forum could have done some things better, such as involving component vendors in its discussions earlier on and handling the debate over traffic management specifications better. But he said the Forum had done a "pretty good job" developing key ATM specifications such as LAN Emulation and Multi-Protocol over ATM that are helping customers build stable, scalable networks.
On a less cerebral note, Sansom added that FORE is "from Pittsburgh and we don't do drugs there", and he mock-mistakenly referred to Ipsilon, Lyon's former company, as "Exsilon" - an apparent reference to Ipsilon's failure to live up to the early hype about IP switching. He also jabbed at the Ethernet community's holier-than-thou attitude on standards making, citing the failure or slow development of key specifications, such as the Multi-protocol Label Switching (MPLS) standard.
ATM alive and well
Sansom had help from George Dobrowski, the president of the ATM Forum, who said that ATM is not ruined at all, in reference to the fact that ATM is estimated to be a $US5 billion a year market. "ATM is surviving and thriving. It is fast, reliable, standard and scalable. It is IP-, SNA-, voice- and video-friendly. It supports non-stop nets that don't have to be upgraded every two years. It's true that we have taken on a broad scope of projects, but all that work is paying off now."
How did that come to pass? Not surprisingly, Dobrowski gives credit to the Forum, while admitting that the organisation could have handled itself better in some areas, such as combating the hype about ATM-as-panacea that has come back to haunt the technology. He blasted right back at the IP camp, saying standards makers there are also threatening to add too much complexity.
"There is a mushroom cloud of specs," Dobrowski said. "All of these specs will tax processing power. How will we support all of them and how will all these RFCs and specs interact? There's quite a challenge ahead there."
Dobrowski answered Lyon's query as to just what ATM is, saying ATM is a "transmission and switching protocol" and the perfect vehicle for IP traffic. But Lyon wasn't the lone voice criticising ATM and the ATM Forum.
Cohort Gordon Stitt, president of Gigabit Ethernet vendor Extreme Networks, said the ATM camp failed to foresee the dominance of IP and the impact of Moore's Law, a reference to the fact that many routing functions can now be handled inexpensively and powerfully in hardware. More importantly, Stitt said ATM was designed to serve two masters - local area network (LAN) and wide area network (WAN) users. But it can't. "It is a principal tenet of networking that LANs and WANs are fundamentally different. ATM has struggled to meet the needs of these two diverse markets."
In fact, bringing the telco world into the equation slowed down the rate of innovation in the ATM world, according to Stitt. "The ATM Forum wasn't in a hurry compared with the Gigabit Ethernet market, which is dominated by small companies who have to get their products to market quickly. The telcos have plenty of time to wait. They're looking at this in terms of years.
"ATM is simply too hard and complex," Stitt continued. "It may be all right for the telco backbone. The carriers can afford it. Most organisations can't. All the benefits the Forum discusses are for vendors. Users just want simple, cheap bandwidth to the desktop."
Stitt added that the Forum "tried to reinvent networking for the future. That's too hard and unfocused."
After the verbal fireworks, the audience seemed to feel that the ATM camp had won the day. But John McQuillan, founder of the ATM Year events, mused: "There has been a lot of acrimony over IP and ATM. ATM was perceived as a threat to IP. If we did it over again and we didn't threaten IP, life would be easier for ATM."