Must read article. Lucent: The Next Master of the Universe? (Part II)
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The Handwriting on the Wall: Data
Lucent's dominance in voice has come across loud and clear. Although
the infrastructure market on the voice side is huge, its high rate of growth
will eventually taper off as service providers' networks get built out, the
convergence of voice and data networks comes closer to reality, and
new technologies become more prevalent. Lucent is preparing for the
stagnation of growth of some of its traditional businesses and is
expanding its reach into what company officials see as the
next-generation technology markets.
One of those desirable markets is data networking. It's a smaller market
than Lucent competes in on the voice side, but is growing rapidly.
According to International Data Corp. (IDC), the global market for LAN
and WAN data equipment is expected to increase from $39 billion in
1997, to $55 billion in 2001. The highest-growth sectors are expected to
come from intelligent switching, network access, transport and optical
networking, network management, and support services.
Despite the opportunities in the data networking space, there is no
guarantee Lucent will make the cut. The market has some scrappy
contenders, such as Cisco, Ascend, 3Com, Bay Networks, and
Cabletron, which are already in tight with large enterprise customers.
Many of these companies have made serious headway with service
providers as well. Nortel, Lucent's hottest competitor on the voice side,
has also recently announced a major initiative to broaden its existing data
networking product base to service provider and enterprise customers.
Lucent executives can see the data handwriting on the wall. "[Data
networking] is both an opportunity and a defense for Lucent," said Carl
Pavarini, vice president of business development and operations for the
data networking systems group. "We see a lot of opportunity in this
market and we think it's attainable with the assets we have and the assets
we acquire. It's also a defensive move because over time, the data and
voice markets are going to converge and clearly we have to play in the
converging world. You cannot be just a voice player and then expect to
win in the converged world. Companies that win will have market
positions in both voice and data."
Mashima agreed that making a full-fledged run at the data networking
market is a bold, but critical, step for Lucent. "It is pretty aggressive for a
company of this size to be looking at what is out there in the next three to
five years--especially since we're still so successful in our core
businesses," she said. "When people ask if we will walk away from this if
we don't make enough money in two or three years, the answer is `No,
we can't.' Our core businesses will not exist if we are not successful in
this strategy."
Last fall, Lucent announced its data strategy with a promise to bring the
99.999-percent reliability, manageability, and world-class service and
support of the voice world to data networking. In October, the company
acquired Livingston Enterprises, a Pleasanton, Calif., manufacturer of
remote access equipment, for $650 million in stock. In December,
Lucent purchased Prominet Corp., a Gigabit Ethernet switch provider
based in Marlborough, Mass., for $200 million in stock (see "Buying Into
a Data Strategy").
Products from those acquisitions, combined with home-grown
technologies from Bell Labs and ATM offerings from a 1996 acquisition
of Agile networks have given Lucent a strong
data story to sell, analysts said. "They said they want to address things
like intelligent networking, network management, access, and support
services and they've come out with or acquired products in each of those
areas that have actually given them a pretty impressive data offering,"
said IDC analyst Esmeralda Silva.
The Yankee Group's Ladan Mestchian agreed that Lucent leapfrogged
ahead in some key areas. "This time last year, they only had a big carrier
infrastructure switch," she said. "But with the in-house development and
the acquisitions they are making, they have covered a lot of ground
quickly."
Bell Labs has also produced a strong product in the MX1000 ATM
edge switch, which began shipping in the first quarter. "Right now, it's
only supporting ATM but I think it will move on to support frame relay
and IP," said Mestchian. The switch was developed internally, but more
than 50 percent of the engineers working on it were hired away from
Lucent's competitors. Pavarini said customers can expect more and
more internal development from Lucent, but further acquisitions will also
help round out the product line. "The more you get to the core of the
wide area network, the more we tend to rely on our own internal
competencies," Pavarini said. "The closer you get to the desktop, the
more you'll start to see some of the products we've acquired or have yet
to acquire."
Playing Hardball
Although analysts agree Lucent has made a good start, many say the
company faces some tough--even potentially fatal--challenges in data
networking. "They've had an abysmal track record," said Dataquest
analyst Brett Azuma, pointing to the shortcomings AT&T Network
Systems had with its attempt at data networking several years ago. "In
the data market, the trend has been to get the product quickly and patch
it up later, and that is antithetical to the Lucent/AT&T approach of
making sure a product is 100 percent before they ship it out. With some
of their early forays, their products actually fell a bit short of the mark, so
they weren't first and they weren't among the best. There was a schism
that was hard to reconcile."
To that, Lucent executives say, this time, they are playing hard ball. "With
AT&T, data networking was just something on the side, somebody's pet
project," Mashima said. "This time around, there is a belief from the top
executives down that this is a very critical area for us. It's getting a lot of
attention and a lot of backing." She also pointed to the nearly 500 people
Lucent hired away from its data networking competitors. "Having people
who believe we have to be in this business to survive as a company is
what makes the difference," she said.
Although the internal backing is there, Cooperstein of Forrester Research
predicts that data networking will remain frustrating for Lucent. "They are
going to struggle to understand a business that is not 99.999-percent
reliable, so they will over-engineer everything they do," he said. "It will
take them too long to get to market, so they will keep missing deadlines
that the traditional data companies will hit. It's a mindset change for
Lucent, and although I do see some changes taking place, it's going to
take them a long time to get there."
Mashima acknowledges that breaking away from Lucent's gold-plated
mindset is difficult. "As soon as we put the Lucent logo on anything,
whether it is developed in-house or acquired, people expect a certain
level of reliability and manageability," Mashima said. "So we're making
sure we don't have such burdensome processes that it takes three years
to get a product out. But at the same time, [we] are giving our customers
the same value proposition we have delivered in the past. We're making
some great inroads in achieving that balance, but it's a focused effort. It is
not going to come overnight."
Lucent may also have a difficult time selling its data products because it
doesn't have established sales channels in that area. While Lucent's
Pavarini said the company has decided to build its own sales team rather
than purchase a company to acquire sales channels, analysts said that
may be a bad move. It may take the acquisition of a company such as
Ascend or Bay Networks to get those channels, according to
Dataquest's Azuma. "Distribution is going to be the number one issue for
them," he said. "They really need channels, especially into the enterprise
where they don't have the experienced sales teams."
Lucent has been building up its direct sales force to the enterprise. This
was bolstered by the small but strong Prominet sales team. But training
turnaround time may not be fast enough. "If Lucent is going to be
successful in the local area in the long term, they will ultimately have to
buy an installed base and sales channels," Theodosopoulos of UBS
Securities said. "I don't think they have the time to build and train their
own sales force because their competitors are not standing still."
Lucent may have an easier time penetrating the service provider market
with data equipment because the company sees many of its existing
customers looking for a supplier that can provide a full range of voice and
data equipment--something Lucent was unable to provide. It is also a
less mature market, so Lucent's strategy to build its own sales force
instead of acquiring one could work. "They are launching several
products this year and if they are successful, I think they can sell them on
their own," Theodosopoulos said. "If they are not successful then they
will have to make an acquisition there as well." Mashima agrees that
winning on the service provider side may be easier because of Lucent's
existing customer base on the voice side. "Those networks are very
complex in terms of management as well as administration," she said.
"That's something we understand better than anyone and our customers
know it."
Make no mistake about it: Lucent is not starting on the ground floor. The
company sold almost $1 billion worth of data networking equipment in
the last fiscal year through some of its existing products and partnerships
with companies such as Bay Networks. But executives realize they must
be data-driven. "We believe over the next three years we need to be a
pretty big player in data networking," Pavarini said. "We don't have to
be number one, but we clearly cannot be number seven or eight."
No Optical Illusion
Lucent's restructuring has given new focus to several other divisions.
New emphasis has also been put on optical networking, a hot and
growing market, and Lucent has recently made some impressive
breakthroughs that threaten to leave the competition in the dust. In
January, Lucent unveiled a global WDM system, the WaveStar OLS
400G which provides up to 400 Gigabit-per-second capacity over a
single strand of fiber. The system can be configured to handle up to eight
fibers for a maximum of 3.2 terabits per second of voice, video, and data
traffic. AT&T will be the first to test and deploy the new system. Bell
Labs has also demonstrated an experimental ultra-wideband optical fiber
amplifier that can boost lightwave signals carried simultaneously over 100
or more channels.
"If you look at the [optical fiber] market in 1996, it was $500 million,"
said Harry Bosco of the optical networking group. "Over the next few
years, we think it's going to go to $5 billion and it could even go to $10
billion. The whole telecom infrastructure is going to be changed by this
kind of stuff. It's going to drop the ceiling on the cost of bandwidth."
Microelectronics is another strong area for Lucent; this division
accounted for 18 percent of Lucent's sales in the last fiscal year. The
group was buoyed by the sale of the K56flex modem chips to Compaq,
Hewlett-Packard, IBM, and NEC among others. It is also Lucent's
strongest international division, with 53 percent of its revenues coming
from outside the United States. Those domestic and international sales
should get a further boost after the recent approval of an industry
standard by the International Telecommunications Union.
Lucent's wireless group has also been impressive, growing at a rate of
almost 50 percent in fiscal year 1997, after faltering in 1996 because of
the market's transition to PCS networks. Lucent claimed a 36-percent
share of the $5.3 billion domestic PCS market and more than 60 percent
for the CDMA segment, according to Salomon Brothers. "They have
made incredible progress in capturing market share in the wireless area,"
Salomon Brothers' Levy said. "They were there early in the game and
dropped the ball. Now they are coming back hard." According to a
market forecast by Salomon Brothers, Lucent's domestic wireless
infrastructure business, estimated at $2.3 billion in fiscal year 1997,
should grow by almost 20 percent per year to approximately $4.4 billion
by the year 2000. Although Lucent has yet to win any significant
international contracts--80 percent of the division's sales are
domestic--the international market is ripe for plucking as CDMA and
TDMA products catch up with GSM.
Lucent looks at wireless communications as just another network, and at
the heart of Lucent's wireless systems is the 5ESS switch, the first
scaleable switch that handles both wireless and wireline traffic. "Because
it handles both types of networks, you can run any and all applications on
the same 5ESS switch at the same time," said Bob Sellinger, marketing
director of wireless systems. "That makes it extremely flexible for any
carrier that wants to offer a mix of services."
Lucent also recently introduced the first elements of a global wireless
network architecture called Flexent that will allow CDMA operators to
leverage their existing infrastructure while migrating to third-generation
systems. "Some of our competitors have announced that third generation
will be accomplished through a parallel network," Sellinger said. "We see
a graceful evolution that protects the investment of the installed base."
After the 5ESS switch, Lucent is probably best known for its PBX
products, which helped the business communications systems group
grow 16 percent in fiscal year 1997, to account for 24 percent of
Lucent's overall revenues. Despite occasional industry reports that the
PBX is dying, Lucent has seen no slowdown in sales and is increasing the
capabilities of its Definity product well beyond its standard voice roots.
"The industry said the PBX is dead, and if it is, let's keep it that way
because voice is growing unbelievably," said Tom Cornelius, Definity
ECS market manager.
Cooperstein of Forrester agrees that reports of the PBX's demise are
greatly exaggerated. "People aren't getting rid of their PBX because it
works well," Cooperstein said. "It is a 10-year buying decision and they
really don't want to muck around with voice because when all is said and
done, when the data network goes down, they can still pick up the phone
and call someone to fix it."
An evolution is occurring: The PBX is opening to allow other developers
to create applications. Lucent hasn't been on the leading edge of the
change, but does realize change has to happen. "We've added a variety
of services to the PBX," including videoconferencing, file sharing, and
Internet telephony capabilities, Cornelius said.
Lucent owns more than 30 percent of the market for premise switching
systems, but to keep that kind of market share, the company may have to
look beyond its traditional direct selling operation. "For them to continue
growth domestically long term, they will have to start using dealers and
distributors," said Vince Rafferty of Phillips InfoTech. "You may not be
able to develop those channels as quickly as you may like because
everyone else is competing for them as well. I think they understand that
just because their name is Lucent doesn't mean the distributors are going
to jump into their arms."
One push that could help Lucent keep its edge in PBX sales is the
company's 1997 acquisition of voice messaging provider Octel. Octel
has a stronger presence in the Fortune 500 companies in voice messaging
than Lucent and this edge could help the company win PBX sales away
from its competitors. Analysts see the Octel acquisition as a good move
for Lucent, but worry that one side of the customer base may become
alienated. "They've got to make sure that it becomes one company pretty
quickly. They are still selling two separate product lines that don't
necessarily work well together. If it doesn't come together quickly, I can
see that delaying a lot of purchasing decisions," said Forrester's
Cooperstein.
Tackling the Net
An Internet group wasn't formed in Lucent's reorganization because
company officials see the Internet as a blanket that covers all of the
divisions, from K56flex modems in microelectronics to call centers in
business communications systems and security products in
communications software. What's more, many of the new ventures spun
off by Lucent are sharply focused on Internet business opportunities.
Analysts point to Lucent's Internet Call Center and Internet Telephony
Gateway as proof that, unlike its parent, Lucent is not afraid to take
chances. "The fact that they got the Internet Call Center out there and are
experimenting with things today that are going to be successful in the
future is a good sign for Lucent," Cooperstein said. "The Internet
telephony gateway is another example of exploiting an opportunity that
the other big switch vendors are not. They aren't letting opportunities
pass them by."
TeleChoice analyst Rebecca Wetzel agreed. "Lucent isn't just talking,"
Wetzel said. "Every national and regional carrier and ISP is testing
Lucent equipment in one way or another. With the telephony gateway,
they could have a jump on the competition. If they can come up with a
product that will enable business-quality IP telephony, they may actually
speed up adoption."
Maintaining the Momentum
For a two-year-old company with a 120-year-old heritage, Lucent has
been surprisingly successful in forming an identity that is vastly different
from that of AT&T. But analysts say Lucent can't rest on its laurels.
"They've done a lot to change their culture," said Forrester's
Cooperstein. "But they still have a lot of work to do to continue to be a
top-tier player."
McGinn said Lucent has been lucky to be in the right industry at the right
time. But he agreed that there is still a lot of work ahead. "You will
constantly see Lucent re-inventing itself to remain uniquely positioned to
deliver communications networks and technology when the customers
want them," McGinn said.
There are still strong family ties: AT&T remains Lucent's biggest
customer, with sales and services to the carrier accounting for nearly 15
percent of revenues. Sales to the RBOCs also remain strong, but analysts
say it is a good sign that Lucent's customer base is expanding to include
the new breed of carriers. They worry, however, that Lucent may have
become complacent, given the predictable buying patterns of large
service provider customers. "As Lucent gets into the data networking
market that has fits and starts--it zooms up for a few weeks and then
drops back down--there is going to be quite an impact on that nice,
steady demand curve the company has had," Azuma of Dataquest said.
"Lucent is going to have to learn to respond to that feeding-frenzy
mentality pretty quickly or there could be some problems."
To achieve its full potential, Lucent must leave home; that is, increase its
share of the global market to reduce its domestic dependency. To date,
Lucent's international sales have been spotty, with 75 percent of
revenues coming from the United States. "They have an inconsistent
track record internationally," said Theodosopoulos of UBS Securities.
"Some quarters are good and others are bad. They can't have that kind
of inconsistency if they want to be the global player they say they want to
be." Fiorina, president of the global service provider business, agreed,
noting that Lucent has embarked on a sales and marketing effort to
increase the company's presence in the high-growth markets of Europe
and Asia.
According to many accounts, 1997 wasn't an exceptionally strong year
in data networking, so there is still time for Lucent to make its mark in
that area. But Lucent isn't the only company with momentum, and its
strongholds are being attacked from all sides. Nortel has re-emerged
with new initiatives in the data networking market. Cisco has consumed
companies to become the dominant data player on the enterprise side,
while also planting a flag in the service provider market. Siemens,
Ericsson, and Alcatel are making strong moves into the U.S. market on
the voice side. Although Lucent has done a lot of talking about being a
player in the converged world, the time to talk is over, Fiorina said. "We
have to execute now, in all areas of our business," she said. "Our success
depends on how well we can do that."
The competition may just be beginning, although Lucent may feel like a
master of the universe given its current success. n
Susan O'Keefe is the staff editor at Telecommunications. |
