How Newbridge lost its lead
The Kanata networking giant is still growing faster
than its markets, but a U.S. upstart has stepped to
the fore. James Bagnall reports.
James Bagnall
The Ottawa Citizen
MURRAY HILL, New Jersey - When
Newbridge Networks Corp. pre-announced
its second fiscal quarter results early this
month, the big shocker was the unexpected
slowdown in the U.S. sales of its flagship
product line.
Newbridge's 36170 asynchronous transfer
mode (ATM) switch -- which moves voice,
data and video traffic through networks at
high speed -- has been the company's
growth engine for the better part of three
years. On Nov. 2, the company revealed that
ATM revenues in the important U.S. market
had slipped below first-quarter levels.
More worrisome, Newbridge chairman
Terence Matthews didn't really have an
explanation for the slide, other than to point
out that the firm's next-generation ATM
products weren't quite ready for prime time.
He's scheduled to provide a more detailed
look at his business in a conference call late
this afternoon. In it, he will point out that
Newbridge's overall ATM business is still
quite healthy, with year-over-year sales in
the second quarter up 70 per cent, despite
the weakness in the U.S. That's slightly
faster than growth in the ATM carrier
market as a whole.
Even so, it's clear that Newbridge's
hegemony over the ATM market is under
assault. In the past few years, a fierce U.S.
rival -- Ascend Communications Inc.,
acquired earlier this year by Lucent
Technologies Inc. -- has successfully
challenged Newbridge's longstanding lead.
And Ascend has done it by pursuing
razor-sharp strategies. It got into the ATM
game later, when technical standards were
clearer. Ascend also went after
newer-generation carriers that Newbridge at
first left alone. And it was willing to do
mergers when Newbridge hesitated.
The result is evident in the latest survey of
ATM equipment markets by Vertical
Systems Group Inc. The U.S.-based
consulting firm, estimates that Lucent,
including Ascend, this year will grab a
33.7-per-cent share of the $1.7-billion U.S.
global market in ATM equipment sold to
telecommunications carriers such as Bell
Canada and Bell Atlantic. Newbridge will take about 27 per cent.
Newbridge spokesman John Lawlor says the Vertical Systems study appears to
understate his firm's ATM sales considerably.
For example, Vertical Systems estimates Newbridge's ATM revenues will be
nearly $700 million this year, while Mr. Lawlor says the true figure will top $1
billion. Even so, this year's numbers represent a sharp turnaround from 1998,
when Lucent and Ascend combined for only 21.4 per cent of the market and
Newbridge was the undisputed leader with 25.1 per cent, according to Vertical
Systems -- the company Newbridge quoted in its own literature aimed at
analysts.
Newbridge is still growing somewhat faster than the market as a whole, but
Lucent's ATM sales this year soared at four times the market average.
The trigger for this turn of events was most likely mid-January, when Lucent
announced it would shell out $20 billion U.S. to acquire Ascend.
"From that day, we have seen a halo effect on our sales," says Curtis Sanford,
group vice-president of InterNetworking Systems for Lucent and former senior
executive with Ascend. "We've had record quarters because we've been able to
cross-pollinate customer sets."
As an example, Mr. Sanford cited a $30-million U.S. contract for ATM gear
placed by Winstar Communications Inc., a New York-based provider of voice
and data services. Winstar, a major Lucent customer, topped up its equipment
purchases with the Ascend order shortly after the two suppliers announced their
merger.
The rapid rise of Ascend, which has been rolled into Lucent's InterNetworking
Systems group, is an object lesson for Newbridge.
As recently as the mid-1990s, the Kanata firm commanded a majority share of
the early global market for ATM switching gear.
Trouble was, Newbridge began designing its ATM switches before the industry
could agree on technical standards. Newbridge wound up developing two types
of ATM devices -- dubbed the 36150 and 36170. Both were aimed at major
telephone companies that had been buyers of Newbridge's other major
technologies.
Sales of the 36170 began soaring in 1995 and 1996 and helped Newbridge secure
a lead in the carrier market.
At this point, Ascend possessed no ATM technology. It specialized in remote
access devices it sold to a new breed of fast-growing firms known as Internet
service providers.
In 1996, Ascend began looking for a partnership with a firm that could give it an
entry into the telecommunications carrier market as well. The California
high-flyer conducted talks with, among others, Newbridge and Cascade
Communications Corp., a Boston-based developer of ATM switches. Mr.
Sanford said talks with Newbridge over a "non-equity" alliance continued "up to
the instant we acquired Cascade in late March, 1997."
One stumbling block with Newbridge was the reluctance of Mr. Matthews to sell
the firm, Mr. Sanford added. The result of the $3.7-billion U.S. Ascend-Cascade
merger was to create a potent rival for Newbridge. Ascend and Cascade began
selling into each other's base of customers.
More importantly, the newly enlarged firm carefully targeted a new market that
Newbridge was ignoring -- a new group of voice and data service providers
known as competitive local exchange carriers (CLECs). These were made
possible when the U.S. de-regulated part of the telephone industry, allowing
upstarts to create high-capacity networks from scratch.
"We formed a CLEC unit in early 1997 to try to get as close to 100 per cent of
this market as we could," said Mr. Sanford. Ascend's job was made easier by the
fact that many of the managers of the new CLECs emerged from the ISP world.
This emphasis on CLECs (or alternative carriers, as they're sometimes known)
helped Ascend immensely. Not only did it rapidly build market share in an area
where Newbridge was relatively weak, it wound up creating a firm that would
hold a lot of attraction for Lucent, the industry's biggest firm.
By 1998, Ascend had nearly caught up to Newbridge in the combined carrier
market for ATM switching. It had a 20-per-cent share, compared with 25 per
cent for Newbridge, and it did so on the basis of some pretty good technology.
When Alan Lutz took over as Newbridge president in mid-1998, he viewed
Ascend as Newbridge's "design" enemy, by which he meant technology design.
Then Ascend faced a key decision: Should it stand alone, or be acquired?
Interestingly, this is precisely the question that has dogged Newbridge for more
than a year.
Ascend at the time was the No. 4 networking company behind Lucent, Nortel
Networks Corp. and Cisco Systems Inc. "The decision was, 'Do we play for No.
4 or do we merge with No. 1?'," Mr. Sanford said.
Early this year, Lucent revealed it would pay $20 billion U.S. in stock for
Ascend. By the time the deal was formally approved, the value of the stock had
jumped to $24 billion U.S.
Considering that Ascend and Newbridge, currently valued at $3.3 billion U.S.,
were roughly the same size and made similar core products, that appears to
represent a big premium.
Lucent doesn't see it that way. "We've moved from having no position in data
networking for service providers two years ago to becoming the No. 1 supplier
worldwide by virtue of acquiring Ascend and others," said Lucent chief
executive Richard McGinn. "Ascend is the glue for all this."
Could Newbridge have played the same role for Lucent? "The fact that we
bought Ascend speaks for itself," said Mr. McGinn.
One of the reasons Lucent was prepared to pay well for Ascend was to gain
access to its base of customers in the CLEC and ISP industries. Newbridge
simply couldn't match this strength.
Today, Newbridge chairman Terence Matthews might shed some light on the
question of whether his company is also beginning to lose ground among the
U.S. telecommunications giants that have brought it this far.
His likely take will be that Newbridge's ATM momentum merely slowed in the
second quarter and will resume again when the new product cycle kicks in.
If he turns out to be wrong, he can blame the upstarts who joined forces when
he would not.
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