Nexabit CEO on marriage to Lucent
cbs.marketwatch.com
Hot tech firm developing crucial phone network device
By Jeffry Bartash
Last Update: 7:48 AM ET Jul 27, 1999
Also: NewsWatch
WASHINGTON (CBS.MW) -- Maybe its founder could've gotten
richer through a splashy stock offering, but earlier this month the
hot new technology developer Nexabit Networks agreed to be
acquired by Lucent Technologies for more than $950 million in
stock.
Nexabit is among a slew of firms aiming to speed up and ease
the transition of phone carriers like AT&T and BellSouth from
century-old circuit-based networks to new "packet-switched"
ones.
Circuit-based networks are relatively slow, handle fewer calls
and are more expensive to operate. Packet-switched networks
are geared for faster transmission of data (faxes, video and
e-mail), offer the promise of lower costs and are better suited for
communications in the Internet Age.
We recently spoke to Mukesh Chatter, founder of Marlborough,
Mass.-based Nexabit, about why his company made the big
move to ally itself with Lucent.
Your company makes a unique switching/routing
device that basically acts as a traffic cop, moving
information around on telecommunications networks and
directing it to where it's supposed to go. In laymen's terms,
can you tell us why your product is so special and why
Lucent wanted it?
Chatter: To understand our product is to
understand what it means to be at the core of
a network, to be the backbone of a network.
The backbone is analogous to the operating
system of a personal computer. If you
compare the two, you realize that the core of
the network -- the leadership position at the
core of network -- allows a vendor to go out
and sell a lot more of their equipment, giving
them a much larger share of the market. But
if you don't own the core of the network, it's
much more difficult.
Imagine Microsoft without owning the
operating system. It would be a very different
company with a very different market cap
because it did not own the core. The same
thing holds true in networking and wireless.
Those who understand that also see the
value of the core may only be $2 billion or $3
billion or $4 billion, whatever the numbers
may be, but that core controls and gives you
the leverage to sell five or 10 times more
outside the core. Similar to how
operating-system ownership allows Microsoft to sell lots of
Microsoft Word and Excel spreadsheets and Internet Explorer on
the software side.
That's why Lucent and other big players all are driving toward
owning that core. Lucent actually has the leadership position.
There are three elements of the core: optical, ATM switching and
Internet protocol (or IP) routing. Lucent has leadership position in
market size and technology of the optical element and ATM (or
anynchronous transfer mode). Cisco clearly is the leader in IP
routing -- in terms of market share, not technology. What Nexabit
brings to the table is the leadership position, in terms of
technology, of IP routing. Our intent, and our merger with Lucent,
is to translate that leadership position in technology into a
leadership position in market space.
If your product is as good as claimed, I would have
assumed that other companies aside from Lucent would
have made strong offers. Was there a bidding war? Can
you shed any light on this matter?
Chatter: We certainly have been one of the most desired
companies. I'll just leave it at that.
Why sell to Lucent? You personally probably could
have made more money taking the company public,
considering the craze for stocks of companies such as
yours -- Juniper Networks (JNPR: news, msgs), for instance.
Chatter: That's quite possible. Money is one component. Having
your vision come true -- to have our technology and product
throughout the country-- is also pretty important to us.
The results have to be looked at in the context of the long term,
such as the next 18 months to two years. Our view was that we've
got the leadership position in technology. However, you need the
credibility with the carriers. You need the seven hours days a
week and 24-hour-a-day support. You need the large financial
muscle. And so forth. The backing you need to be able to sell to
the carriers means a different set of requirements beyond the
leadership position in technology. We felt that by joining with
Lucent and taking advantage of all that infrastructure, we will be
able to very quickly gain a market share in the IP router space.
Compare that to going with an initial public offering. Lots of hype.
But if you did that, and you're a small independent company with
low credibility, what you see in the next 18 to 24 months is that
the market share of the independent company would be much
smaller. And in the end it boils down to you've got to make a
quick run for the market share.
That vs. being independent, do an IPO, have a much higher
valuation in the early stages but, because of the lower market
share, end up at much lower ranges. The choices were very
clear. We decided to go with Lucent. Obviously, time will tell if we
are right.
Cisco has argued before that customers did not
need the speed your device is said to provide. Did they
ever change their mind and discuss a potential buyout
with you?
Chatter: All I can tell you is customers need the product. Just
because somebody wishes customers wouldn't need it doesn't
make customers not need it. Those who have the technology and
can deliver it … the larger customers are very willing takers for it.
We have 14 customers who have signed and agreed to do trials
with us. Large customers. So that tells you the kind of level of
interest there is.
There are other companies out there -- Avici, Argon
Networks, NetCore Systems, Pluris -- developing high-end
routers. Who do you consider, potentially, your biggest
rival?
Chatter: Our only concern is Cisco (CSCO: news, msgs).
Others we really don't consider rivals at all. All the names you
mention, none of them have a product in trials in the space we're
in. It's really Cisco that's our primary competitor. In a nutshell, we
are 6.4 terabits per second of switching capacity, compared to
60 gigabits for Cisco. Roughly translated, (Nexabit's product) is
120 times (faster).
How would a customer see the benefits of the kind
of device your company makes?
Chatter: Customers get the lowest cost per bit (of data) per
mile. They get rid of multiple boxes. And, on top of it, they get
lower maintenance costs. It's a huge difference. And that's
attributed to our innovation and technology. It's seriously
patented technology. We have 15 patents -- three have been
allowed and 12 are pending. It's a very cool technology.
What gave you the idea for Nexabit anyway? The
company didn't even exist a few years ago -- and now this.
Chatter: If you look at the growth of bandwidth, anybody can
sign on to AOL today. Anyone can sign on to any ISPs. All the
bandwidth, the total bandwidth, is a function of the number of
users multiplied by the access of speed. This tremendous growth
in access of speed in the last five to 10 years, the growth in
terms of numbers of users, has gone up substantially. Now cable
and DSL modems are putting up so much more pressure. So
even two years ago, the writing was on the wall. The number of
users was growing very, very rapidly, and you knew that the
speed was going up because the modem speed was going up,
and all this bandwidth had to go to the core (of the network) and
get switched. That's what basically prompted us to start this
process. All the early-on patents were filed in 1995.
Where do you see the telecom-equipment market
headed, and the Internet in general?
Chatter: The market is huge. The number of users is increasing.
And the paradigm shift from circuit-switched to packet-switched
is clearly happening. The question is, How do you make that
migration from a huge installed circuit-switched base that
functions very reliably to the newer paradigm, where both
circuit-switched and packet-switched will coexist for a long time.
How do you make the packet-switched network equally reliable?
That's really the key. The old data communications makers never
made equipment that comes close to the reliability of what
telecommunications companies provide.
For example, today when you pick up the phone and dial 911,
the call makes it. But how many people in the world today who
talk about the new world of data communications, or the
new-world-vs.-old-world debate, how many of the same old data
communications guys would be willing to have their 911 calls go
through their Internet service providers. Would you? The answer
is none.
The reason is people still don't trust the old-style routers to be
reliable enough to support mission-critical operations. I think
that's where you see the major shift. Everybody wants
packet-switched. Everybody loves packet-switched. I think it's
clearly the case that packet-switched is far more efficient than
circuit-switched will be. The challenge at the same time is how
do you make the packet-switched environment as reliable as
traditional telecom wiring was?. I think that's where we bring
unique expertise. By sharing our knowledge base with Bell Labs
and Lucent, and together create the same level of reliability. The
user should never know the difference. |
