Forwarding this from the ASND news-only thread; posted by Maverick. Covers NN, ASND, CSCO, Siemans, LU, NT
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NN article validates ASND's strategy
Excerpts of The Meltdown at Newbridge
BY IAN AUSTEN February 27, 1998, Canadian Business
Just as shipping containers have made old-fashioned ports obsolete, ATM gains much of its efficiency through standardization. Instead of carrying packets of varying lengths, ATM breaks data down into so-called cells of equal size. Not only does that standardization improve the speed, a simplified header allows the cells to be switched rather than routed. The technical differences between routing and switching are complex, but the critical point is this: switching relies mostly on hardware rather than on complicated software machinations to move data. Unlike routers, switches are far less likely to be overwhelmed by great bursts of data and also offer significant increases in peak speed--at least twice as fast as the swiftest system yet found to move IP packets.
Speed isn't the only advantage ATM offers. Right now, most major telecommunications companies have layers of different networks. Some carry everyday phone calls, others video, and several others still are devoted to different ways of moving data. ATM, by contrast, can handle all types of traffic in a single network that is less likely to be disrupted by sudden surges in volume. That and other factors have all compelled telephone companies, including Bell Canada, and other network providers to pick ATM as the future of their systems.
It helps to look at the ATM network equipment market as something akin to the ink-jet printer business. The printers themselves aren't particularly profitable, but absurdly high margins on replacement ink cartridges more than make up for that. In Newbridge's case, producing networking equipment is the burden it carries to get into the really lucrative network management software segment. (One industry analyst estimates that the gross margins on Newbridge's software are at least 90%. While its equipment margins are lower, the same analyst still pegs them at about 60%, which is well above industry standards--Northern Telecom's overall gross margin, for example, is about 40%.)
Network management software is a boon for Newbridge's big customers as well, in that it promises to make ATM not just a cost saver but an attractive new revenue source. Here's how: once networks are pooled into a single ATM blob, the management software easily allows its operator to chop up the result into a nearly limitless number of virtual private lines for resale, with the level of service tailored to customers' needs and budgets. At the same time, Newbridge's network management system generally makes it more cost effective for private network customers--such as banks--to let their service provider run their virtual private network rather than continuing to do it in-house. "The network provider is now managing the services, right, the valuable thing," says Matthews. "They're moving up the value chain from basic transmission."[MAV: ASND has said that it would make a strong push for the family of Navis end-to-end service and network management products which have been used to manage ASND's H/W products and partnered w/ Security Dynamics for Firewall & Security sw]
Recognizing that most telephone companies would be reluctant to entrust their core network operations to a company the size of Newbridge, Matthews formed an alliance with the telephone equipment branch of the German industrial giant Siemens AG in 1996. "We gained about 18 months to two years on the competition by joining together," says Jeff Matros, vice-president of marketing for Siemens Telecom Networks. Matthews, Matros adds, was also part of the attraction. "We competed against him when he was at Mitel and it's a lot better
working with him than against him."
Now, the companies share R&D and work jointly on designs. Newbridge builds the small to medium-sized ATM switches (by far the biggest sellers), while Siemens produces a huge version that can wrestle one trillion bits of data--a product that not even Lucent Technologies, the world's biggest communications equipment maker, can match. All of the products are marketed under Newbridge's name.
Although it's sometimes hard to put a meaningful dollar value on these deals at the outset, they are huge. The BT agreement, for example, is worth an estimated $560 million over three years. About 90% of the contract's value will go to Newbridge and a couple of affiliates. It's all part of BT's plan to become the first major telephone company in the world with a fully ATM-based network. If past history with previous technology is any indication, the initial contract is only the beginning. Software upgrades will keep the money rolling in for years to come.
In the big scheme of things, however, Newbridge will live or die by its success in the bigger ATM market. And right now, nearly everyone agrees that Newbridge offers the most advanced ATM technology for telephone companies and big Internet service providers. But others are moving in. Cisco Systems, which dominates the corporate networking market, bought its way into the ATM market through the takeover of StrataCom Inc. in 1996. Since then, Cisco's ATM success has been limited mainly to Cisco's traditional private network market. While some telephone companies have installed Cisco machines, the hardware hasn't proven itself well-suited to the segment's needs. However, Cisco's flawless financial growth helps make it a formidable competitor.
Another potential threat from Cisco's end of the market may come from computer networking equipment maker Ascend Communications Inc. of Alameda, Calif., which bought ATM maker Cascade Communications Corp. last spring. Again, the private network world seems to be its
main market, but it has sparked some interest with US telcos.
The competition from companies that traditionally make telephone equipment is similarly fragmented. Northern Telecom has a strong product line for private network, but nothing that matches Newbridge's equipment for the critical core network. Lucent Technologies, the equipment company spun off by AT&T Corp., is a relative newcomer to ATM--its product line only d‚buted last year. However, with sales of US$25.6 billion in 1997, it has enormous resources. About 3,000 engineers were thrown into developing the AT&T switches. And few companies can match Lucent's satisfied customer base, particularly in the US. There are also persistent--and, for Newbridge, scary--rumors that Lucent might speed up its program[thru acq.] and Cisco might solve its telco shortcomings by forming an ATM alliance.[w/ LU or NT, the one who is left out would have no choice but partner w/ ASND]
That may not be such a bad thing, of course. Another analyst, who requested anonymity, says Newbridge's strategy of selling ATM switches to phone companies is a sound one. "I think there is a big business and Newbridge's approach is the right approach."
Matthews' [NN's CEO] own ATM sales pitch: emphasizing ATM's ability to
handle all types of communications in a single, centrally managed network that's quickly and easily reworked.
"There's a big revolution going on in ATM, a monster overhaul,
and I want it!" he says.
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