Nortel-Bay deal a sea change
By Ben Heskett
Staff Writer, CNET NEWS.COM
June 15, 1998, 5:05 p.m. ET
The $9.1 billion merger between telecommunications firm Northern Telecom and data
communications provider Bay Networks is the most striking representation of the
changes taking place in the networking industry.
This natural evolution--or revolution, depending on whom one talks to--hinges on the
term "convergence," which in the networking sector essentially refers to new methods
for combining two formerly disparate types of traffic over a single pipe. Most pundits
predict that by the year 2000, data traffic will outstrip voice congestion across the
public telecom infrastructure.
The long-rumored deal between Canadian-based Nortel and Bay offers wide-ranging
opportunities for the duo to provide an integrated set of
products supporting voice and data for service providers and
corporations. It also applies pressure to a variety of
data-focused rivals, as a combined Bay-Nortel will be able to
hold increased sway in the market.
Voice and data previously have been carried across separate
networks, but the growth of the Net has made it self-evident
that a single pipe for the two is necessary to remain
competitive--a reality that has not been lost on other
competitors such as Cisco Systems and Lucent Technologies.
"What we saw was the opportunity to catapult ourselves--to
leap to the center of this new space," said David House,
chairman, president, and CEO of Bay, who will become
president of the combined entity.
Lucent has spent the past several months buying data-centric
companies and rolling out internally developed data-based
products, looking to capture a larger piece of the lucrative
data communications pie. The telecommunications firm is
betting heavily on its expertise in building huge voice-based
networking to drive its data efforts.
Cisco, the king of the data market, also has made a lot of
noise via acquisitions and partnerships in the area of
convergence, hoping the dominance of data traffic on networks will make it a natural
choice.
"The lines in the sand are being drawn," said Craig Johnson, principal for the Pita
Group, a market watcher.
Cisco was nonplused by Nortel's move, even though CEO John Chambers said
recently that he would like to have a closer relationship with the firm.
"As data, voice, and video begins to come together, it's clear to the market that the
Internet will drive this convergence. Certainly, industry consolidation will occur,
particularly as old world companies look for ways to compete in this Internet-driven
economy," the company said in a prepared statement. "Cisco anticipated this new
competition and believes that our leadership in data networking positions us well in this
new world."
But what do smaller data competitors such as Ascend Communications, 3Com, and
Cabletron Systems do in the face of ever-larger competitors, such as the new Nortel?
3Com has chosen to partner with European giant Siemens AG and wide area specialist
Newbridge Networks in order to fulfill demand for combined voice and data-based
networks.
"Our strategy is very different," said a 3Com spokesman. "Our strategy is to strike
partnerships with telecommunications providers rather than be acquired. We can best
execute our strategy by remaining independent."
Cabletron is trying to right itself after suffering through its first-ever fiscal crisis. In a
prepared statement, the company's CEO, Craig Benson, said: "Cabletron has been
aggressively pursuing a number of opportunities in the integrated voice, data, and video
marketplace, including a two-year relationship with Nortel. We look forward to future
joint technology developments that will allow us to provide customers with
leading-edge, integrated solutions that leverage the unique heritage of both companies."
Ascend recently digested its merger with Cascade Communications and is only now
reaping the benefits, with its stock on the rebound. Both Cabletron and Ascend could
be acquisition targets for other providers, such as Alcatel Alsthom.
Size, it seems, will matter, making the livelihood for some of these data-centric players
tenuous at best. "The data networking space is a hard space," noted Michael Duran,
analyst with Lazard Freres. "The fortune for data networking players essentially is ebb
and flow."
Added Fred McClimans, CEO and director of analytical operations for industry
watcher Current Analysis: "While this has been rumored for several months to have
been in process, its consummation will force others in the industry, like Cisco and
Ascend, to rethink their own competitive positions in the market."
The competitive maneuvering, it seems, may just be getting warmed up. |
