OT..Cabletron...
How Cabletron failed
The missteps of a onetime market
leader.
redherring.com
By Luc Hatlestad
Red Herring magazine
From the October 1999 issue
In 1995 Cabletron Systems (NYSE: CS) riding high.
At that year's NetWorld+Interop trade show in
Atlanta, the network-switching company hosted one of
the event's hottest parties: an invitation-only bash
featuring Joe Piscopo at the Hard Rock Cafe. The
comedian directed most of his schtick at Cabletron
cofounder and then-CEO Bob Levine, who was sitting
in the front row. Afterward the two men, both avid
power lifters, staged a friendly arm-wrestling match.
Mr. Levine won handily.
Four years ago, Cabletron was
poised to defeat many of its
opponents. But since then the
company, like the comedian, has
plunged into near obscurity. With
its mix of strong technology and a
formidable sales force, Cabletron
actually scared mighty Cisco Systems (Nasdaq:
CSCO), whose insiders once pegged Cabletron -- not
3Com (Nasdaq: COMS), Bay Networks, or Ascend
Communications, the other major players of the day --
as its most threatening competitor. Yet today the New
Hampshire-based company is regarded as an also-ran,
barely even sellable for parts.
How could this happen? With the benefit of hindsight,
we can see that Cabletron's promise was more
imagined than real, a dream that was perpetuated by
the company, the media, and the analysts who
followed it. What they all failed to recognize was that
Cabletron's sales and acquisition strategies were
simply wrong -- and even after this became apparent,
company executives didn't react quickly enough. Many
of the reasons for Cabletron's downward spiral follow
Geoffrey Moore's list of failure modes for high-tech
startups (see "The Anatomy of Failure"). The company
was slow to adjust to changes in its markets as it clung
to a sales philosophy that wasn't working anymore, it
ignored customers' requests for single-vendor
networks, and it was arrogant enough to believe that it
didn't need help.
Although Cabletron still has an
aggressive sales team and solid
products in a rapidly growing
sector, its luster has faded.
"They're in ruins," says Tom
Nolle, president of CIMI, a
networking sector consultancy.
"They never had as much promise
as a lot of people thought they
had, and because of that illusion,
they fell over some things so fundamental that it was
devastating." This opinion is echoed by the longtime
Cabletron observer Frank Dzubeck, president of
Communications Network Architects, another
consultancy. "You can't call $1.5 billion in sales a total
disaster, but they were once Cisco's most aggressive
competitor," he says. "You have to ask, 'What the hell
went wrong?'"
WIN THE GUTTER, LOSE THE WAR
Most companies take one of two approaches to sales,
according to Mr. Nolle. The first -- championed by
Cisco, among others -- relies on press visibility,
advertising, and marketing campaigns to create a buzz
around the company.
The second approach uses the "gutter tactics of sales,
arm wrestling the network-administration guy into
submission," in Mr. Nolle's words. The sales
organization maintains direct, constant contact with the
person who makes the purchasing decisions.
Cabletron initially employed this method to great
effect, until the fast-changing networking industry
rewrote the rules. As development cycles accelerated
and customers began to demand that their entire
networks be supplied by a single company whenever
possible, Cabletron's competitors, most notably Cisco,
filled the holes in their product line by acquiring smaller
companies.
Cabletron not only eschewed this approach, it publicly
disdained it. In product presentations, company
spokespeople routinely belittled Cisco and others,
predicting product-integration problems for them while
boasting of the "purity" of Cabletron technology. (The
company eventually acquired ten networking vendors,
but it didn't start buying until early 1996, and its overall
acquisition count falls far short of Cisco's -- more than
30 companies -- and other rivals'.)
In a slower-moving space, Cabletron's technology
might have been enough. But once it became apparent
that networking sector success required consolidation,
it was too late. As Mr. Nolle explains, Cabletron was
less focused on promoting a broad strategic marketing
message, so it became disconnected from the
industry's trends. When CEOs, chief information
officers, and chief financial officers -- rather than
network administrators -- began making
technology-buying decisions, Cabletron got into
trouble. Some mergers and acquisitions might have
slowed the bleeding, but the company made only a
token effort. "Cabletron didn't fill in the blanks in its
product line quickly enough," says Mr. Dzubeck.
"When it did go after someone, it was a
bottom-feeder, always offering the lowest bid. That's a
disastrous strategy in this industry."
CABLE GUISE
Instead, the company tried enhancing its existing
technology with new functionality. But trade press
surveys at the time showed that buyers deemed
two-thirds of all new switching features unnecessary.
When companies realized that extra features didn't sell,
the switches themselves became a commodity, and the
game was suddenly all about selling simple switches as
quickly as possible. Cabletron's revenues per
salesperson declined, and the company was in a pinch.
"When salespeople's incomes decline enough, they
can't afford to focus closely on individual accounts
because they have to spread themselves thinner to earn
the same amount of money," Mr. Nolle explains.
"Once this happened at Cabletron, then like the flip of
a switch its business model crashed, and there was no
way to recover."
Cabletron's development strategy was equally resistant
to change. Though the company routinely bragged
about the army of developers for its flagship Spectrum
network management platform, the division quickly
became a liability. "The cost of development was
obscene. Spectrum was generating only 5 percent of
the company's revenue but required almost 30 percent
of its staffing," says Mr. Dzubeck. "Cabletron had
more developers than anyone else, so its revenue per
employee was the lowest. Eventually the stock fell off
a cliff because the company couldn't make its
numbers."
It's difficult now to understand how Cabletron could
have been so inflexible. After all, it was surrounded by
companies that were surpassing it by using a mix of
M&A and distributed sales operations while keeping
development costs down. Clearly, something deeper
accounted for the tunnel vision. The answer?
"Cabletron's management," Mr. Dzubeck says.
The company was founded in 1984 as a
garage-cultivated cable equipment business. The
cofounders, Mr. Levine and Craig Benson, used their
brash, New England-bred independence to build
Cabletron with no venture funding. (Mr. Benson
recently stepped down as interim CEO but remains on
the board.)
Mr. Levine's style was at first well complemented by
Mr. Benson's comparatively businesslike demeanor.
But the former's sometimes outlandish approach
foreshadows much of what went wrong with
Cabletron. He purchased an abandoned supermarket
near the company offices so that he would have a
convenient place to pump iron at lunch. He bought a
working armored personnel carrier (essentially, a small
tank) and placed it in his yard -- once, legend has it,
using it to scare the wits out of someone delivering a
pizza. And on his watch, Cabletron installed reserved
parking spaces for some managers, monitored
employees' movements, and removed chairs from all
the meeting rooms. (All these practices have been
discontinued under the new regime.)
Mr. Levine's confrontational nature influenced the
marketing teams that so eagerly bashed Cisco and
other competitors. And -- fatally, it turned out -- he
institutionalized the attitude that Cabletron could go it
alone, without help from other companies' products or
personnel. "Levine was the guy who ruined Cabletron,"
Mr. Nolle says. "He brought the sales pressure to the
fore, and his staff adopted his used-car-salesman
persona. If I wanted to start a Ponzi scheme, I'd have
the type of sales meetings that Cabletron held. The
company's failure doesn't stem from the tank in
Levine's yard, but it does stem from the personality
and mind-set behind the purchase of the tank."
SHAKEUPS AND LADDERS
But Mr. Levine didn't engineer the corporate culture
alone. According to an outside consultant who once
worked with the company (he asked not to be
named), Mr. Benson was equally convinced that
Cabletron didn't need outside help. "Benson always
insisted on a direct-sales force and wouldn't use
resellers," he says. "That hurt because the channel
didn't trust the company."
The situation worsened as Cabletron grew, according
to Mr. Nolle. "A salesperson should rarely run a
company, because the processes of selling and
strategizing are not the same," he says. "But many
companies reward salespeople's performance by
promoting them into increasingly nonsales positions,
where they climb the ladder of success to their own
level of incompetence."
Mr. Levine voluntarily resigned from Cabletron's helm
in 1997. (Attempts to reach him through the company
were unsuccessful.) The consensus is that he finally
recognized his limitations and decided to relinquish
control. "He realized that he couldn't help the company
anymore, but he's a smart guy, and I've never seen
anyone better in front of a customer," says John
Burnham, a former Cabletron sales staffer who is now
a vice president at CPort, a networking platform
developer.
But although Mr. Burnham agrees that Cabletron
should have started acquiring sooner and laments the
company's missed opportunities, his remaining loyalty
exemplifies the strength of the culture created by Mr.
Levine and Mr. Benson. "If they had listened a little
more to the people outside their inner circle, things
might have been different," Mr. Burnham says. "But
they gave me an opportunity that no one else would
have, and the culture I remember was about free
thinking, getting the job done, and dying for the
customers."
After Mr. Levine left, the company tapped Don Reed,
a former Nynex executive, as the new CEO. He was
brought in to help Cabletron push into the market for
Internet service provider equipment, but his tenure was
disastrous and he quit after only eight months.
According to the former Cabletron consultant, even in
that short time Mr. Reed was hampered by the
company's reluctance to change. "Benson resisted the
push into the ISP market for about a year before finally
deciding to do it," the consultant claims. In June the
company installed its senior vice president, Piyush
Patel, as its newest CEO to continue the ISP push and
to target the Web hosting and digital subscriber line
spaces.
Although Mr. Patel doesn't directly criticize the old
Cabletron, he obviously recognizes that changes are
required. "I want to bring a kinder, gentler culture to
Cabletron by making sure that people are treated
equally and that they trust the company more," he says.
The first task will be to decide what to do about
Spectrum, which apparently will be spun off into an
independent company, with a possible IPO on the
horizon. "Spectrum is one of Cabletron's crown
jewels," Mr. Patel says. "We need to make sure we
expand it and foster it as a separate entity, and if we
do take it public, we're open to one or two companies'
owning a big stake in it."
Some financial analysts have cautious hope for this
endeavor. In June, Erik Suppiger, an analyst with
Hambrecht & Quist, issued a Buy rating for Cabletron,
saying the "the company is a compelling turnaround
story with an attractive valuation." And Cabletron
scored high grades for the percentage growth of its
stock during the first half of 1999. (In real numbers,
though, it went from just under $10 to about $15 per
share. That's down from its high of $42 in mid-1997.)
NARROW SPECTRUM
Other analysts remain skeptical. "Spectrum's legacy
has been that it's good with Cabletron equipment, but
there still are too many ties between Spectrum and the
overall Cabletron sales force," says Elisabeth Rainge, a
research manager at the IT consultancy IDC.
"Spectrum needs to make a clean break and prove
that there's a physical separation between the two to
be an effective, independent network management
company." Mr. Dzubeck's take is downright gloomy.
"Spectrum can't survive as a stand-alone company
because it requires too many resources to produce too
little revenue," he says. Mr. Nolle, moreover, is
dubious about Cabletron's plan to target ISPs. "How is
it a good business plan to rehabilitate your financials by
selling to a market that contains no profitable
companies?" he asks. "It's mindless simplicity to say, 'If
we get into the Internet, all our problems will be
solved.'"
One might think that Cabletron's free fall from the cusp
of greatness would humble its directors. But whether
it's the sway of the culture created by its founders, the
uniquely independent confidence of its employees, or
just plain hubris, Cabletron remains defiant to the end.
"We started as a cable company in a garage with no
funding, and we grew into a $1.5 billion company,"
Mr. Benson reflects. "We should never have gotten
that far in the first place."
Write to luc@redherring.com.
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