6/98 Netwatcher Management Briefing [Discussion of ASND suitors and CSI vs. MPLS]
(from the ASND thread. Also contains NN references]
datacomm-us.com
Excerpt: ""But the only "niche play" that has any chance of developing into a really big market is the MPLS-dependent IP VPN market opportunity, with over $300 billion in total worldwide sales potential over the next 8 years. Only Ascend, of the WAN-oriented second tier, has any recognized and credible MPLS position, and even Ascend hasn't been able to really make that position appealing to the media."
June 1998 Volume 16.6
Netwatcher (ISSN 0890-5800) is a monthly publication of CIMI Corporation.
Subscription information is available here . Copyright c 1998, CIMI Corporation. All rights reserved. No
publication or reproduction of
this document is permitted without the express written consent of CIMI Corporation.
Management Briefing
The problem with logical analysis is that the world isn't necessarily logical. We mentioned Bay's possible
acquisition by either Lucent or Nortel in our last issue. We thought (though that issue didn't say so) that
Lucent would be the better deal. Naturally, Nortel did the deed.
The acquisition, and particularly its timing, portend great events in the data networking space. There will
probably be other acquisitions, some logical and some less so, and possibly some sinkings of key players. As
buyers of, or vendors in, the data networking market, you (our reader) have a vested interest in the future, and
so we're going to try to lay it out for you.
Let's start with the merger itself. Bay is a strong enterprise player, primarily in the LAN space. It has recently
been working to create a unified direction for all its data products, which would (if successful) pull through
higher-margin WAN products into the enterprise space, and also promote its products to carriers.
Nortel is primarily a carrier WAN player, with some enterprise successes to throw in. They have an enterprise
data group, recently formed, to which Bay will be added and which Bay CEO House
will lead. There has not
been any strong indication that the Nortel carrier and data people are on the same
wavelength.
Our big concern about the merger is that Bay's strengths are in a part of the data market
where Nortel has no
particular record of success. The LAN market is becoming a channel marketing play,
and Lucent was in fact
one of Bay's channels. Can Nortel replace Lucent's contribution to Bay's sales? Can
Nortel even run an
enterprise organization? If House departs, the whole thing could fall apart.
We believe that Bay's willingness to sell out in the summer of 1998, before Lucent's
restrictions on asset
pooling would have likely made it a suitor, suggest that the firm did not believe it could
sustain a strong profit
record in the next couple of quarters. Bay management clearly also believed that the
company could not remain
strong in the future.
The Second World's Viability
The most compelling thing the Bay acquisition suggests is that the entire second tier of
the vendor space in
the data marketplace isn't viable in an independent sense. Cisco, Nortel, and Lucent are
the first tier. The
second tier was led by Bay, and also includes 3Com, Ascend, Newbridge, and
Cabletron. These firms are too
big to be niche players, and the Bay acquisition suggests that even the best of those
players wasn't good
enough. At the low end of that tier, and thus possibly survivable as a niche player, are
Xylan, GDC, and Fore.
For all the remaining second-tier players, the choices are:
Shrink down to a niche player, small enough to be viable in market areas the big guys
won't pursue too
aggressively. Nobody seems to get little willingly, so we're of the view that this strategy
happens by
accident to some who try for other options (for others who try, the result is death).
Pull off a near-miraculous repositioning into some new market area, one with enough
revenue potential
to permit continued growth. Frankly, we don't know of any.
Get bought out. The Nortel acquisition will probably stimulate Lucent, Ericsson, Alcatel,
Fujitsu,
Samsung, and others to consider buying a second-tier firm.
Merge with one or more of the second-tier remainder to try to put something massive
together.
Die off.
In our view, the greatest pressure will fall on the firms who have no strong WAN
position, because WAN
products are commanding better profit margins. Thus, Cabletron and 3Com are two
firms to watch closely.
3Com has good distribution channels, but would have to endure at least three to
five quarters of slow progress
before lower LAN prices kick in true volume growth. Cabletron has no clear
future options we can see.
Some kind of partnership or merger among these players (our fourth option of this
section) would seem a
logical step. 3Com and Newbridge had a marketing alliance for the Newbridge Carrier
Scale Internetworking
(CSI) activity, but that never seemed to get started, and CSI now seems positioned
suicidally against MPLS.
Making this relationship more than paper, or creating other merger combinations from
among the second tier,
will probably get considered by the players only when it's too late.
The players with more options are Ascend (the best candidate of the lot),
Newbridge, Xylan, and Fore.
Because all these vendors are potentially strong WAN plays (even Xylan, whose
switches are forming the
basis for some carrier transparent LAN services), all of them could sustain themselves
long enough to either
cut a good deal with a partner, or even build a better market niche that would sustain
future growth.
But the only "niche play" that has any chance of developing into a really big
market is the MPLS-dependent IP
VPN market opportunity, with over $300 billion in total worldwide sales
potential over the next 8 years. Only
Ascend, of the WAN-oriented second tier, has any recognized and credible
MPLS position, and even Ascend
hasn't been able to really make that position appealing to the media.
The next year will tell the tale. It's likely that we'll see some major changes in this group
of vendors (and their
ownership) by then.
Who Might Buy Them?
The big question now is who would buy a second-tier player, and for what reason.
There are a number of
scenarios that can be played out, but Lucent and the offshore telephone competitors
figure in them all.
One obvious thing that could happen is for Lucent to counter the Nortel move by buying
an enterprise player
out of the second tier. Cabletron, whose products are distributed by Nortel, is
mentioned as a
possibility-there'd be a kind of irony to each of the big US telecom players buying each
other's data partners.
Ironic, but dumb in our view. If Lucent wanted a LAN player, it would seem they'd
have encouraged Bay to
hold out till the fall, when they could bid. Then again, we're trying to be logical here.
A better buy option for Lucent would be Ascend. Lucent could then suddenly be an incumbent in nearly every RBOC frame/cell network, a player in the ATM/IP market, and a real threat to Cisco's growth. Can Lucent cast off its "Not Invented Here" shackles and make this move? Frankly, we don't know.
There are already other people looking hard at Ascend, including (so it is rumored) Ericsson and Alcatel. The former is in particular need given the fact that its alliance with Bay and GDC on MPLS is likely to founder on the acquisition of Bay by Nortel.
Siemens is also said to be gunning for a partner, and there are rumors it would like to both buy Newbridge and
buy Cabletron or 3Com. This would make more sense than some of the other acquisitions, but Siemens has
never been strong in the US data market, and there is serious doubt whether the Teutonic mindset would adapt
to the somewhat disorderly US marketplace.
In our view, an acquisition of second-tier players by either Ericsson or Alcatel could create a viable data
player. It's possible that the complex Siemens multi-question might do the same. Lucent/Ascend would be a
killer deal. The rest of the combinations would be unlikely to create any real market change.
The real risk here is for the major players. Cisco has yet to make a real transition to carrier-dominated data
services, and so is vulnerable to successful exploitation of the carrier base (particularly the RBOCs) Nortel and Lucent. Real success by either one would make Cisco a perpetual also-ran.
Lucent has to see the Nortel move as pivotal. If they counter the move by trying to enter
the LAN/enterprise
market in greater strength, they'll be setting up a kind of phony war between themselves in an inconsequential
space-the WAN market is going to the carriers in the long run. Failure in this phony war would be treated as
failure, period, and would probably discredit the failed player overall. Thus, by fighting a
battle with Nortel here, Lucent could lose a lot and probably not gain much even by winning.
The big risk for Nortel has already been taken. It's ominous that they announced a proprietary IP-over-ATM
strategy recently, having just acquired Bay (whose MPLS announcement was the first from a big player). Not only does that take some heat off arch-competitor Newbridge, it seems to show that Nortel is determined to have its own view prevail in the IP market, which would be a disaster.
Stay tuned; more interesting things are coming. |
