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Forbes.com
Redback Using A Cisco-like Strategy
By John Shinal
Redback Networks, a maker of networking equipment that lets phone companies easily add and manage data services, has poached dozens of engineers and salespeople from industry kingpin Cisco Systems. Now, it's borrowing one of Cisco's key strategies as well.
Cisco (Nasdaq: CSCO - news) became the dominant supplier of equipment that routes Internet traffic by acquiring smaller companies that had beaten it to market with key technologies. Cisco has made more than 50 such acquisitions. Redback (Nasdaq: RBAK - news), whose products compete with a specific class of Cisco routers, has made just one acquisition since going public last May, but it was a big one--a $4.3 billion purchase of Siara Systems.
That deal shocked most networking analysts when it was announced last November, because Redback was paying in stock worth about half of its market capitalization for a startup that had yet to finish its first product. On May 30, though, Redback will unveil the Siara product, already being tested at Genuity (formerly GTE Internetworking) and several other service providers.
Redback Chief Executive Dennis Barsema says the company is on track to get its first revenue from the product in the third quarter. And some analysts are saying that Redback's decision to nab Siara may be the first step on a Cisco-like path.
``The combination of these two companies has the potential to be the next powerhouse'' among Internet equipment companies, says Ron Westfall, an analyst with market researcher Current Analysis.
Westfall was among the skeptics who initially questioned the acquisition. ``The only thing Siara had was an ASIC (application specific integrated circuit),'' says Westfall. ASICs are the brains of all newer Internet equipment. Now the company is delivering its product on schedule and ``it's clear that Redback did their homework'' before the purchase, he says.
Siara's product, called the SmartEdge 800, allows service providers to automatically add new data services for their business customers. Depending on the network, those services can include everything from unified billing to security authentication to video conferencing.
What's more, the product will plug into any type of regional telecommunications network, whether it uses older circuit-based technology or newer Internet-based protocols. The first units will ship with modules designed to connect to older voice networks built with optical rings.
The Siara gear will also let Internet service providers (ISPs) mix and match services running on different kinds of networks with a single piece of gear. That way, if a corporation wants to change its data service from the leased private lines common today to a less-expensive digital subscriber line (DSL) hookup, its ISP can make the change with a few clicks in a software program.
Since most of the cost of provisioning new services today comes from sending technicians out to make changes, the SmartEdge will give ISPs the chance for significant cost savings. ``It's what we call a graceful migration,'' says Vivek Ragavan, Redback's president and chief operating officer and the founder of Siara.
Redback plans to sell the Siara product first to its existing customer base of about 200 local phone companies. The gear is small enough to be used in so-called central offices, the banks of switching equipment that sit in buildings or neighborhood sidewalks and direct local phone traffic.
Redback has seen strong demand for its flagship line of products, called subscriber management systems (SMS), among phone companies rushing to add data services. For the quarter ended March 31, Redback's sales rose 426% to $34.2 million from $6.5 million for the same period in 1999. The company's quarterly profit before charges was $5.6 million, or 5 cents a share, compared to a substantial loss a year ago.
One of the main reasons for Redback's success is that it beat other equipment suppliers to market with SMS gear by at least six months. Even today, only Nortel Networks (NYSE: NT - news) has similar gear, which it acquired when it bought Shasta Networks.
Now the company hopes to duplicate that success with the SmartEdge gear. Although Redback's using Cisco-like tactics, its new equipment won't face a competing Cisco product. A group of startups that includes CoSine Communications, Springtide Networks and Quantum Bridge Communications is developing similar types of gear, although each has a different set of functions built in.
``We've always come with the view of solving a problem that's not being solved and solving it six to 12 months before anyone else,'' Redback's Barsema says.
Even with its new product, though, Redback still has significant hurdles to overcome before it can lay claim to a rich future. It will face increasingly stiff competition from Cisco and Nortel, whose product lines are much broader. More and more service providers look to consolidate their equipment purchases by buying from just one or two vendors, a trend that favors larger vendors.
``They have their work cut out for them challenging Cisco and Nortel,'' Westfall says. Redback's profit will also be less than previously expected this year because of costs associated with the Siara merger.
Another challenge will be holding on to the considerable engineering talent that Redback acquired with Siara. Ragavan has an entrepreneurial bent, and if he were to leave to found another startup it's likely that some of his team would follow. Ragavan is quick to contend that the transaction that brought the two companies together wasn't an acquisition. ``It was a merger,'' he says.
Either way, it will turn out to be the bellwether event in Redback's corporate history.
Go to www.forbes.com to see all of our latest stories.
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