France's Alcatel eyes North
American networking market
By Wylie Wong
Staff Writer, CNET News.com
July 26, 2000, 12:10 p.m. PT
European telecommunications-equipment
companies are battling for a piece of the hot North
American networking market, but so far, France's
Alcatel has mounted the fiercest offensive and
made the biggest inroads, analysts say.
In the past three years, Alcatel has invested about $16
billion in seven North American networking companies,
culminating in this year's $7.1 billion purchase of Canadian
Newbridge Networks. The company also created a $150
million investment fund to enable it to take stakes in
U.S.-based start-ups and recently launched a $25 million
advertising campaign.
Foreign companies are hoping to penetrate the North American market because it accounts for
60 percent of all networking revenue, analysts say. They're buying North American networking
companies to gain access to their customer bases and sales staff.
"(Alcatel) is pretty strong, given their Newbridge acquisition. It showed the industry that they
were truly making a solid commitment to North America," said analyst Jeremy Duke of Synergy
Research Group. "Of the bunch, they're making the biggest commitment and the most progress."
Alcatel and other European telephone-equipment makers,
including England's Marconi, Sweden's Ericsson and
Germany's Siemens, are snapping up North
American-based data-networking companies to compete
against local leaders Cisco Systems, Lucent Technologies
and Nortel Networks in the market for equipment that
speeds Net traffic for businesses, telecommunications
carriers and Internet service providers.
More specifically, these companies are racing to build new
"converged" equipment that combines voice and data on a
single Internet-based network.
Alcatel, a leader in selling digital subscriber line (DSL)
equipment to service providers such as SBC
Communications, bought Newbridge in February to spruce
up its ISP networking offerings.
Newbridge
is
developing a set of high-end, Net-based
equipment that combines voice and data
traffic, technology that Alcatel didn't have
but needs if it wants to compete against
Cisco, Nortel and Lucent. Newbridge is
also a leader in asynchronous transfer
mode (ATM) technology, which sends
voice and data signals over networks at high speeds.
Previously, Alcatel bought six other businesses, including U.S. networking companies Xylan,
Packet Engines and Internet Devices.
"Alcatel, at this point, is the most successful of the European invaders," said analyst Chris Nicoll
of market research firm Current Analysis. "They focused on the U.S. market a lot earlier and
have a head start."
Other European rivals, however, have not stood still. Since late last year, Britain's Marconi has
combined two U.S. acquisitions--networking company Fore Systems for $4.5 billion and
fiber-optic company Reltec--with its own telecommunications-equipment unit to form a division
called Marconi Communications. The company also has launched a $100 million venture capital
fund to invest in U.S. start-ups.
Siemens has purchased several start-up networking companies, including RedStone
Communications, Castle Networks and Argon Networks, and Ericsson acquired equipment
maker Torrent Networking Technologies for $450 million.
Analysts say the European companies face a big challenge in tackling the U.S. market, but that
the companies have a chance at success, especially in emerging,
fast-growth markets such as optical equipment and metropolitan
networks. Optical equipment allows service providers to send larger
amounts of Net traffic across their networks at faster speeds.
Every player is entering the burgeoning optical market on equal footing,
said Current Analysis' Nicoll.
"We will see a new balance of power between incumbents like Cisco, Lucent and Nortel and
those new entrants from Europe," he said. "No one is behind. A Siemens or an Alcatel can bring
to the party the corporate resources, the services and support that large service providers are
looking for. And they can take some market share."
Of the $150 billion in worldwide communications-equipment revenue in 1999, Cisco leads the
pack with 44 percent of the market that includes data networking and Internet-based gear,
according to Synergy Research Group. 3Com placed second with 17 percent, followed by
Nortel with 11 percent and Lucent with 6 percent. Alcatel and Newbridge combined for 2.4
percent of the market, while Ericsson captured 1.8 percent and Fore Systems, now owned by
Marconi, got 1.6 percent.
In the overall communications market, which also includes traditional phone systems called
"PBXs," Lucent placed first with 19 percent, followed by Nortel with 14 percent, Ericsson with
12 percent and Cisco with 9 percent. Alcatel and Newbridge combined for fifth place at 7.8
percent, while Siemens collected 7.5 percent of the market.
Alcatel poised for North American inroads
Analysts say Alcatel, which also sells optical gear and components, is in a good position to
capitalize on the North American market. While its European counterparts still have holes in their
product families, Alcatel's is nearly complete.
The company later this year will release a high-end router for service providers to compete with
Cisco and young networking company Juniper Networks. Analyst Raj Mehta of market research
firm RHK said the new router, which manages heavy Net traffic, will fill the largest gap in
Alcatel's product portfolio.
Alcatel executives are optimistic that the company can compete against domestic leaders Cisco,
Lucent and Nortel. Cisco, for example, has historically been a data-networking player and is still
new at selling and installing telecommunications equipment for service providers, executives
said.
"Each of them have their own weaknesses," said Krish Prabhu, Alcatel's chief operating officer
and chief executive of the company's North America unit. "Lucent can be attacked, and we
have done that successfully with some wins with AT&T. Nortel does not have the close
relations with the Bell companies. (It's) not part of the Bell system as Lucent was, and Cisco's
challenge is servicing a Bell Atlantic or SBC that has millions of customers."
North American sales account for 23 percent of Alcatel's $25 billion in annual revenue.
Company executives hope North American sales will continue to grow at 40 to 50 percent per
year, Prabhu said.
He estimates that the North American market represents 40 percent of all telecommunications
sales. Decisions made by U.S. service providers influence
sales internationally, which makes Alcatel's success in
North America crucial to the company's bottom line, he said.
"In Europe, we're very well known, but in the U.S., we're
invisible and we need to get our name out," he said.
"Establishing credibility may take some time against the
well-entrenched competition. The beauty of American
customers is they don't care where you're from. You just
have to prove yourself.
Investors wake up
Investors are taking notice as Alcatel's shares are reaching
an all-time high. In the past year, the stock has more than
tripled, from the low $20s to about $75. And Wall Street
analysts expect that the company tomorrow will report
second-quarter earnings of 32 cents per share, according
to a survey by First Call/Thomson Financial.
Analysts have mixed views on Alcatel's stock. Several
firms, including Morgan Stanley Dean Witter and UBS
Warburg, rate Alcatel a "strong buy," while Goldman Sachs
gives it a "market outperform."
Analyst Syed Haider of Frost Securities said Alcatel's stock
has been undervalued and is catching up with rivals that
have fared better on Wall Street.
"They've been pretty erratic in the past few years and have come out with profit and sales
warnings," Haider said. "But now they've been having steady growth." |
