Startups Challenge Cisco and Lucent
From "The Street.com"
By Kevin Petrie
Staff Reporter
3/1/99 3:30 PM ET
Excerpts:
To be sure, telephone carriers might use these startups as "pawns" to extract price
concessions from their old suppliers, warns Hilary Mine, vice president of Probe
Research.
Several new startups propose a solution that could shake up the established powers:
hybrid switches that not only cut costs but work snugly with telephone infrastructure,
rather than replacing it, to combine advanced new data and voice services. That's an
"absolutely logical product" for Cisco or Lucent to build, notes Barry Fidelman,
partner with the venture capitalist Atlas Venture.
But Cisco engineers are still learning voice technology, and Lucent has its work cut
out trying to finish acquiring Ascend (ASND:Nasdaq). That might explain why
Fidelman has planted money in Westford, Mass.-based Castle Networks, which
already has carriers testing its switch. Castle is not alone -- its peers Sonus, Salix,
TransMedia and Taqua are preparing similar products.
All five startups, many with almost zero revenue to date, are trying to make capital
out of the confusion of carriers that want to branch into Internet services but are
reluctant to junk their current systems. The startups are expected to ship some of
their products commercially as early as this summer. One of their suggested features
will allow a customer's car, home and office to be united with a single phone number.
The most promising of the group is Castle, founded in 1997 by veterans of networkers
such as Cascade, now an arm of Ascend. With plenty of influential backers, industry
consultant Dan Taylor of Taylor & Associates says, the rest of group should keep
large rivals "on their toes."
This all adds up to a competitive threat to Cisco, which has the money and the
tendency to acquire its problems.
"There's no question [that] they should buy one of these companies" later this year,
says analyst Paul Johnson with BancBoston Robertson Stephens. Cisco engineers
lack expertise in voice technology, he says.
Cisco declined to comment on potential rivals.
Another pressure for the startups is that Wall Street has little tolerance for short-lived
technology. Two years ago, upstart Ciena (CIEN:Nasdaq) beat the big suppliers with
a new optical fiber system. For a while Ciena was perceived as a major threat. Kathy
Szelag, Lucent's vice president of marketing in optical networking, notes that Ciena's
"creative energies" prompted Lucent to accelerate its optical development.
Ciena's leadership only lasted a short while bigger rivals rebounded with price cuts
and broader offerings.
Last summer Ciena lost prospective business with AT&T (T:NYSE) to Lucent,
encouraging Tellabs to cancel its merger with Ciena. Ciena profits fell 94% in a year,
and despite a sharp bounce in recent months, the stock is down 70% from last
summer's highs. Another example: In 1996 VocalTec (VOCLF:Nasdaq) introduced a
new "gateway" that links corporate phones to the Internet, only to see big guys like
Cisco absorb the market by building gateways into their existing product lines.
The big guns can use a tactic often employed by IBM (IBM:NYSE) -- they promise
customers they'll have a product long before it's available. If they don't make the
deadline, they can just buy the startup.
Given the track record of Lucent and Cisco, such an option may not be out of the
question.
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