But Mr. Chambers may be overstating his case, at least for now: Cisco, based in San
Jose, Calif., has only recently linked the phones in all its own offices through the
Internet. And the company's best attempt so far at an Internet phone still requires a
circuit switch to route a call once it leaves the company's own computer network.
Lucent Bets a Packet on Bridging
Worlds of Phone and Data Traffic
By REBECCA BLUMENSTEIN
Staff Reporter of THE WALL STREET JOURNAL
NEW YORK -- The future isn't getting here as fast as expected, but the delay is buying
Lucent Technologies Inc. some time to resharpen its cutting edge.
Lucent, considered an ugly-duckling hardware business when it was spun off by AT&T
Corp. in 1996, has emerged as a high-technology powerhouse and one of the decade's
hottest stocks, defying predictions that the Internet would overwhelm the traditional
telephone gear it makes.
In fact, the Net, by fueling demand for phone lines, has propelled sales of Lucent's
bread-and-butter product, the circuit switches that route billions of phone calls a day
over local and long-distance networks around the globe.
Lucent is convinced, however, that the future belongs not to the circuit switch but to the
fancy packet networks sold by companies like Ascend Communications Inc., an
Alameda, Calif., maker of Internet switching equipment. In January, Lucent, conceding
it had fallen behind in its efforts to devise similar products, agreed to acquire Ascend for
$20 billion. It wasn't an easy decision for the Murray Hill, N.J., company, which bills
itself as the hub of the communications revolution.
Plenty of Promise
The new generation of networking equipment made by Ascend and such rivals as Cisco
Systems Inc. and 3Com Corp. sends information across phone lines more efficiently by
breaking the data into bits, called packets. The technology allows a single phone line to
carry many messages simultaneously, promising savings for phone companies that now
must allocate a separate line to each caller. The catch is that no one has figured out how
to make packet switches, used mostly to route data across the networks that form the
Internet's backbone, as dependable as the circuit switch, which can transmit only one
call at a time per line.
"If a few packets are lost or dropped in a data transmission, they can be re-sent," says
Frank Ianna, head of networks for AT&T. "You can't do that with a human voice," he
says.
But that hasn't stopped Lucent and other big telecom-equipment makers from racing to
acquire the new technology, for fear of missing the boat. Lucent has used its stock,
which has risen ninefold since the company went public three years ago, to finance
about a dozen packet-related acquisitions in the past 18 months, including the Ascend
purchase, which it expects to complete in two weeks. Meanwhile, Canada's Nortel
Networks Corp., France's Alcatel SA and Germany's Siemens AG have snapped up a
host of data-networking companies. The buying binge reflects the convergence of
telecommunications and computer technologies as consumers and businesses use phone
lines not only for voice calls but for transmitting an ever-increasing volume of data traffic.
"We have a foot in both camps," says Richard McGinn, the cerebral 52-year-old
chairman of Lucent, whose latest switches incorporate packet features.
That doesn't impress packet technology's most ardent proponents. "Lucent has to move
to the Internet world and realize that the circuit world is dead," says John Chambers,
president and chief executive officer of Cisco, who has antagonized telephone
companies by suggesting that most phone calls will one day be made free of charge over
the Internet.
Mr. Chambers, 49, insists that his company's Internet gear will be at the heart of any
sophisticated telecommunications network of the future. Cisco, whose devices allowing
computers to quickly send big chunks of data to one another have made it a high-tech
star, has increasingly pitched its technology to telecommunications providers. And it has
landed at least one big fish: Cisco is a primary supplier to long-distance carrier Sprint
Corp., of Westwood, Kan., in its ambitious plan to build a packet-based network from
scratch.
But Mr. Chambers may be overstating his case, at least for now: Cisco, based in San
Jose, Calif., has only recently linked the phones in all its own offices through the
Internet. And the company's best attempt so far at an Internet phone still requires a
circuit switch to route a call once it leaves the company's own computer network.
Company Profile:
Lucent Technologies
Lucent dominates the North American market for circuit switches, which accounted for
20% of the company's $30 billion in sales in the fiscal year ended Sept. 30; it says sales
of its flagship switch are up 30% so far this year.
A circuit switch, made up of a series of as many as 20 refrigerator-size boxes of wiring,
can handle up to 100,000 phone lines and cost upward of $10 million. By contrast, a
packet switch capable of handling 100,000 lines would be the size of a single
refrigerator and cost $1 million to $2 million. But such a switch would be equipped to
handle only data calls, and the customer would need to buy additional equipment to
concentrate all voice calls into one pipeline before the packet switch could process
them.
Exactly when the new technology's wave will crest remains an open question. Engineers
have been predicting the demise of the circuit switch since the 1980s.
"I remember that two years ago, everybody was saying that the crossover is going to
happen in the next 18 months," says Mike Margolis, CEO of Tekelec, a Calabasas,
Calif., maker of signaling equipment that spans both worlds. While resigned to computer
glitches, consumers take uninterrupted phone service for granted: "None of us is
prepared to reboot our phones five times a day to get a dial tone," he says.
Meanwhile, the circuit-switch gear Lucent has been cranking out for years turns out to
be pretty good when it comes to meeting most Internet needs. Next year, big telephone
companies are likely to spend $48 billion on such equipment, more than seven times
their spending on next-generation Internet data-networking devices, according to J.P.
Morgan & Co.
Hefty fixed investments account for much of that disparity. Telephone companies like
Bell Atlantic Corp. and SBC Communications Inc., which are spending heavily to add
capacity to their networks as more customers go online and buy wireless phones, are
unwilling to scrap the estimated $160 billion of network lines laid nationwide during the
past 75 years. That's been a boon for Lucent, whose earnings, excluding one-time
charges related to an acquisition, rose 52% last year to $2.29 billion.
"The global telecommunications network is the largest machine ever designed," says Ian
Craig, Nortel Networks' president for sales to phone companies. "Someone who says
this is going to go away overnight isn't credible."
Even some of the most advanced high-speed Internet access routes have circuits at their
core. AT&T, which is investing $114 billion in cable-TV properties in a bold bid to
convert cable lines to deliver telephone service, plans to rely on circuit switches to
complete the connections.
Circuits are even being used by startups building entirely new networks. Qwest
Communications International Inc., a pugnacious Denver company now building a
national high-capacity, packet-based network, has resorted to circuit switches to deliver
much of its voice traffic. "They're more reliable," says Larry Reese, Qwest's executive
vice president of network-engineering operations.
That reliability is built on dial tone. The familiar tone, which tells the caller that the switch
is ready and waiting to accept the numerals of a telephone number, was invented in
1891 by a Kansas City undertaker convinced that local telephone operators were
sending customers to his competitors. Using a crude tone, Almon Strowger designed the
first basic circuit-switch device that required no human intervention to route a call from
one place to another. Since then, the system has been refined, and engineered to
withstand power outages, earthquakes and similar shocks.
This is the bar that the new packet technology must clear, says Rashmi Doshi, executive
director of data services for Bell Atlantic, New York. With some new twists, he adds,
today's technology will do just fine for years.
A Major Endorsement
Others don't seem so sure. In what was widely deemed a milestone for packet
technology, AT&T, Lucent's biggest client, recently committed itself to buying only
circuit switches capable of carrying packets. And instead of handing an exclusive
contract to former unit Lucent, as it has in the past, AT&T is testing new switching gear
from Nortel.
AT&T's decision underscores how important Ascend will be to Lucent's future. But
bridging the phone-gear and data-networking worlds won't be easy. Lucent's first
challenge will be to integrate Ascend's technology into its product line in a way that
convincingly displays the Internet savvy so alluring to investors without detracting from
the customer appeal of its circuit switches.
"It's a delicate business balance to walk," says Daniel C. Stanzione, Lucent's chief
operating officer.
Ascend, whose sales totaled $1.49 billion in 1998, is likely to win away some of
Lucent's lucrative switch business, says Michael Arellano, a consultant who works
closely with Lucent. But Lucent says any technology company gets used to cannibalizing
itself in the process of moving to a new technology. If Lucent doesn't do it, "someone
else will," says Mr. Arellano.
Ascend and Lucent, meanwhile, harbor vastly different corporate values. While Lucent
puts a premium on product reliability above all else, 10-year-old Ascend's goal has
always been to get there first.
A 'Yes' Culture
"Our culture has always been just to say yes," says Jeanette Symons, Ascend's
35-year-old co-founder and chief technology officer. "Lucent's has been more
conservative, like 'Let's plan what we will deliver to you five years from now.' "
Ms. Symons says Ascend has succeeded by sending its salespeople out to tell
companies they didn't need circuit switches like Lucent's. "I'm sure the traditional Lucent
guys would say ours are a little flippant," she says.
To show that he understood Ascend's young and iconoclastic culture, Mr. McGinn, the
Lucent chairman, made a point of wearing casual clothes when he held a nationwide
videoconference for AT&T and Ascend employees in late January to discuss his
company's pending purchase of Ascend. But his sartorial gesture created some
embarrassment when Ascend's executives showed up wearing suits for the occasion.
Lessons to Learn
Ms. Symons concedes that the fledgling data world has plenty to learn from Lucent. She
recently surprised her colleagues by picking up a telephone in the middle of a recent
presentation at a California conference. She told them she knew the dial tone was there
before it got to her ear. That kind of certainty isn't something the data world "can
guarantee," she added.
Indeed, AT&T estimates that for every million calls it handles, only 84 don't go through
the first time and need to be redialed. It puts the error rate for calls sent via data
networks at 10 to 20 times as high.
Mr. McGinn says he is confident Lucent will survive the transition to packet technology
-- which he compares to the evolution from mainframe to personal computers -- just as
it did the rise of wireless communications. Purchasing Ascend, he says, shows that the
company is humble enough to acknowledge its shortcomings. Besides, he says: "We'll
sell more switches this year than we ever have in our history."
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