Shifts in the Power Structure [in networking]
bcr.com
Volume 28, Number 8
August 1998, p. 2
By Fred Knight (fknight@bcr.com), editor/publisher of Business Communications Review.
The following is the full text of the printed article:
Well, it's been quite a summer. AT&T bought TCI, Nortel acquired Bay,
Cisco's market capitalization reached $100 billion and the Chicago Cubs have
finally figured out how to do a first-rate impression of a professional baseball
team. The Cubs will probably soon be unmasked, but the changes in our
industry promise to be long-lasting.
In the AT&T-TCI deal, the respective chairmen--AT&T's Armstrong and
TCI's Malone--have each been trying to make the best of a bad situation. Mr.
Malone, who came out of semiretirement about a year ago to rejuvenate TCI's
stagnant share price, was running a company with horrific customer relations
and an infrastructure badly in need of expensive renovation. Now those
problems become Mr. Armstrong's.
The good news for AT&T boosters is that in addition to being the market
leader in long distance and in cellular (via the acquisition of McCaw), it just
became number one in cable TV. On paper at least, Armstrong can pull the
strings in three businesses--long distance, wireless and cable--that will be
critical to communications in the 21st century. But whether AT&T can
harness them into coherent, integrated business offerings remains to be seen,
and time is running out: Margins in the long distance business that fuel the
AT&T engine continue to shrink, with nothing on the horizon to turn that
around.
There's a lot more reason for optimism about the Nortel-Bay deal. Here each
had something the other needed: Nortel offered Bay shelter from the
Cisco-induced storm. Ever since Wellfleet and Synoptics combined to create
Bay Networks, the gap between it and Cisco has grown wider and wider. Now
with Nortel as Bay's protector, Dave House can stop worrying about having
to please Wall Street analysts and shareholders, and concentrate on pleasing
existing customers and finding new ones. Bay had recognized the PSTN as a
key market, and now, backed by Nortel's ample resources and reputation, it
has the means to attack it big time.
And what does Nortel get in return? Access into data networking, a market it
has been almost shut out of during the past decade. Even though it sold
plenty of X.25 switches, Nortel has been a TDM- and, more recently, an
ATM-centric company, while the market has moved to IP. Bay gives Nortel
credibility and connections within the IP community at a critical time: Demand
for truly industrial-strength data networking has never been higher, and
Nortel knows how to build networks that don't break. If Bay's and Nortel's
people can get along, this could be a blockbuster deal.
Meanwhile, the Cisco locomotive keeps on chuggin'. It has bought or
quashed all the opposition it's faced in the past 10 years, but now with the
Internet and PSTN about to be rebuilt, it faces a new type of foe: In going up
against the likes of Lucent, Nortel, Siemens and Ericsson, it isn't competing
against companies so much as institutions. However, the demographics seem
to be in Cisco's favor: Increasingly, the decision-makers it needs to convince
speak IP and, in many cases, have built their professional careers on Cisco
routers and switches rather than 5ESSs or DMSs.
In short, if you have to bet whether Cisco will hit a market cap of $150 billion
before the Cubs make it to the World Series, let history be your guide. Don't
bet on the Cubs.
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