INTERNET WEEK
October 12, 1998, Issue: 736
Section: Trends
Following The Leaders1
John T. Mulqueen
Following the leaders is never an easy game, but it's even harder when the
leaders themselves are moving targets.
Convergence is fueling a merger and acquisition frenzy among the major
internetworking vendors.
Cisco, the hungriest of the megavendors, has acquired 28 companies since
September 1993. Even Cabletron, the least acquisitive of the big
internetworking crowd, bought four companies-and Digital Equipment's
networking business-in the past 12 months. But even in this climate, Northern
Telecom's $9 billion acquisition this summer of Bay Networks, the No. 3
internetworking vendor, created a new blueprint for the convergence of data
and telephony in the industry.
Northern Telecom, a traditional telephony voice equipment vendor, became a
major player in the enterprise networking business overnight. The combined
entity now has the technology to support LAN and WAN networks as well as
public and private networks. It is positioned to supply end-to-end networks to
carry data, voice and video over IP-based infrastructures.
The acquisition will help Bay compete against an increasingly dominant Cisco,
and will give Nortel a major presence in the data networking market in its
battle with Cisco and Lucent Technologies.
"More voice traffic will be handled over the data infrastructure, and there will
be better integration of products and services to customers," says Ilan Carmi,
vice president and general manager of routing products at Bay.
Branch office PBXs will be connected to routers for voice-over-IP telephony
through gateways that will be delivered in 1999, he says.
Other telecom equipment vendors are poised to follow suit. Lucent has
assembled pieces of the IP puzzle with its acquisitions of Agile, Prominet
Corp., Yurie Systems Inc. and, most recently, Lannet Corp. More
acquisitions are expected this month.
Target: Cisco
All this activity is evidence of the huge opportunities vendors expect in the IP
enterprise and carrier markets. It also underscores the fact that telephony
vendors need to buy enterprise data networking customers. Additionally, they
are trying hard to build up muscle to compete against Cisco-which threatens
to extend its dominance of the enterprise and Internet service provider
networking worlds to telecommunications carriers.
"There's a new avenue for the telephony vendors who have made the decision
to stem off competition by acquisitions," says George Kelly, an analyst at
Morgan Stanley Dean Witter. "A tremendous consolidation is coming in the
data networking industry. We will be left with only a handful of significant
competitors."
And the big are getting bigger. Cisco has nearly 80 percent of the high-end
router business, 70 percent of the midrange market, 64 percent of low-end
router sales and 68 percent of the overall market, according to estimates by
researchers at The Dell'Oro Group. Its nearest competitor, Bay, has only 11
percent of all router sales.
In the Ethernet switch business, Cisco has nearly 45 percent of the market; 49
percent of Level Two switch sales; 63 percent of the modular Ethernet switch
business and 24 percent of the stackable market, where 3Com is the leader
with 31 percent, according to Dell'Oro.
In another example of Cisco's clout, 59 percent of the company's customers
listed it as their main router vendor, and 27 percent say it is their main switch
vendor, according to a survey conducted by Cahners In-Stat Group. Bay was
named by 14 percent and 17 percent, respectively, of those responding to the
same questions, says analyst Emily Johnson.
But Cisco has its vulnerabilities as well. "Even more dominant players than
Cisco have lost favor," says George Prodan, vice president of marketing at
Extreme Networks Inc., one of the upstart companies trying to survive in
Cisco's wake. "If you look at Cisco and its end-to-end networking story, it's
really a systems integration business."
Prodan sees Cisco piecing together several different products from its
acquisitions. In contrast, Extreme hopes to carve its niche around a family of
enterprise Gigabit Ethernet switches that company backers claim will blow by
the slower, expensive routers that have made Cisco rich.
Scott Kriems, CEO of Juniper Networks Inc., another competitor, uses the
same analogy for the service provider market. Terabit switch routers will
make the Internet reliable, fast and a generation ahead of Cisco's best switch
routers, Kriems contends. Juniper's products are shipping, but are still being
tested by service providers.
Although it's tough going, the upstarts are finding a few takers for their wares.
Phil Kwan, manager of network planning at Incyte Pharmaceuticals Inc., a
DNA research company, has about 100 Foundry Networks switches in 10
buildings. Fully loaded routers from Bay or Cisco would have cost $130,000
each, compared with the $3,000 to $20,000 for the Foundry switches. The
gigabit switches perform at three to four times the capacity of the routers,
Kwan says.
"We are running 40 percent to 50 percent more data on the network today,
and it is only at 56 percent capacity," Kwan says. Even at the lower capacity,
the routers and the 5000 series switches from Bay were running at 80 percent
to 90 percent capacity, and at times broke down under the burden. At the
time Incyte bought the switches, Bay did not yet have its Accelar switch.
And at Avon Products Inc., Michael Bowles, a senior staff consultant, is
evaluating Extreme Networks' gigabit switches, Cisco's new 8500 and
3Com's Corebuilder switches. Avon is "pretty much a Cisco shop," Bowles
says, but he likes the Extreme product because its network management is
free. As networks converge and run only IP traffic, it makes no sense to have
"large, expensive routers," Bowles says.
The Gigabit Switch
Experimentation with new products and vendors is happening partly because
Cisco only began shipping Gigabit Ethernet switches this summer and,
therefore, does not show up in market studies for the second quarter. That
market is still in its infancy, with only $49 million worth of any gigabit devices
sold.
Even with a sharp run-up for the rest of the year, the total in the fourth quarter
will be only about $106 million, predicts Greg Collins, a Dell'Oro analyst.
Whatever the exact number, it's a tiny part of the $16 billion LAN switch and
router market.
When asked how Cisco will hold off threats from the new gigabit and terabit
switch vendors, Eddie Hold, an analyst at research company Current Analysis
Inc., says: "I don't hold my breath waiting for Cisco to get in trouble."
Lucent Wild Card
The most formidable threat may come from Lucent, a company with $28
billion in revenue, very deep pockets and the willingness to use its financial
muscle to win market share. In the past 18 months, Lucent has acquired Agile
Networks, Prominet and, most recently, Lannet. Menachem Abraham,
president of Lucent's Enterprise Infrastructure products group, says Lannet
gives Lucent a workgroup switch to make complete campus networks.
"Until we had Lannet, we had primarily backbone products, i.e., the Cajun P
550 from Prominet and the ATM switch from Agile," Abraham says. "We did
not have a homegrown workgroup LAN chassis switch, an Ethernet-to-ATM
backbone feeder switch or connectivity to legacy [protocols]. Now we have
all of those."
Lannet has stackable Gigabit Ethernet switches for the wiring closet, Abraham
notes, and a multilayer switch will be out in few months. The company also
will add technology from Agile to the Lannet products that will support voice
over the same wires, he says. Lucent is not interested in network interface
cards, hubs or other commodity customer premises equipment, he says.
Some skeptics still think of Lucent as a voice company, but Lucent is getting a
hearing from CIOs because of its reputation for quality, Abraham says.
Nevertheless, Cisco will hold its own in its competition with Lucent, says
Judith Estrin, Cisco's chief technology officer. She says that Cisco has already
won several contracts with carriers such as Deutsche Telekom, GTE, Sprint,
U S West and Verio to run their data networks.
The other new factor is Nortel. Bay is beefing up plans to offer end-to-end
solutions within Nortel's Unified Network Architecture that have a very high
degree of network reliability, Carmi says.
Bay also will leverage Nortel's telephony experience to deliver
quality-of-service capabilities and prioritize traffic. Micom Systems, another
Nortel unit, will provide technology to do voice over frame relay networks, he
says.
Bay is developing a new router that will ship in the second half of 1999 with a
capacity of up to OC-192 (9.6 Gbps). The Versalar 15000 Virtual Private
Network switch will let carriers bill users for different levels of service. It will
ship in volume in the first quarter.
For the carrier and service provider market, Nortel is actively pushing Avici
Systems Inc.'s terabit router, says Todd Dagres, an investment banker at
Battery Ventures. "They take it everywhere they go," he says. Nortel owns 20
percent of Avici, but also has a stake in Juniper. Dagres says if the Avici
switch is not a hit, Nortel could turn to Juniper.
Gigabit switching will push routers to the edge of the enterprise network as
customers move from collapsed backbone networks based on routers to
switched configurations, says Basil Allwan, vice president and general
manager of Bay's enterprise product division.
Bay sold $77 million worth of its Accelar switches in the second quarter, but
that includes Fast Ethernet as well as Gigabit Ethernet versions, says
Dell'Oro's Collins. Bay's sales of gigabit switches were depressed by the lack
of a stackable device, according to Dell'Oro's research. Bay introduced the
BayStack 450 switches in July to fill the void.
Soni Jiandani, director of LAN switching products at Cisco, says the 40,000
ports of Gigabit Ethernet shipped in the second quarter is only a fraction of the
9 million ports of 10/100-Mbps switches shipped. She says that the advent of
Gigabit Ethernet products will not erode the market for Cisco's high-end
routers, the core of the company's business. Routers aggregate WAN traffic,
perform edge functions in metropolitan area networks, provide LAN
emulation, firewall security and other services.
Faster switches in the network also will lead to more powerful interfaces on
routers to handle that traffic, Jiandani says. Cisco will introduce its 8500 and
8540 Layer 3 switches this fall, on schedule, she says. And, Cisco introduced
Gigabit Ethernet modules for its Catalyst 5500 earlier this year. "We are
seeing tremendous interest among customers for this technology," Jiandani
says.
3Com agrees. There is a very rapid adoption of Gigabit Ethernet switching in
both stackable and chassis models, says Clint Ramsey, 3Com's vice president
of marketing. Layer 3 switches in both Gigabit and Fast Ethernet versions will
ship in November.
Fast Ethernet switching is quickly replacing 10-Mbps switching at the network
edge; gigabit switching with multimedia extensions, high availability and policy
management is becoming the switch for network backbones. ATM also is
used in campuswide networks, Ramsey says.
Some see Cabletron struggling to keep up. Its partnership with Nortel on
voice switching equipment is expected to end as a result of the Bay merger.
Cabletron also had turnover in top management, and its revenue growth has
slowed to a crawl. For its second quarter ended March 31, it reported
essentially flat revenue of $370.6 million compared with a year ago and up
only 1.3 percent from the first quarter of this year. Profits fell 75 percent to
$14.6 million.
Cabletron's Focus
Cabletron is increasing its marketing and has focused its sales force on six
vertical markets, says Mike Skubisz, chief technology officer. It also is
building a separate sales force to address the carrier market, and is purchasing
DSL technology and network management products to sell in that sector.
Cabletron also intends to partner with carriers such as MCI and Sprint, and
major equipment suppliers such as Lucent, Ericsson and Fujitsu.
The company has become very aggressive in its pricing. One example is the
introduction in September of the SmartSwitch Router 2000 for workgroups.
Cabletron says the SSR 2000 is 77 percent less expensive than Cisco's 8510;
70 percent less than 3Com's Corebuilder 3500; and 40 percent less
expensive than Bay's Accelar 1100. Current Analysis' Hold says the SSR
2000 and the new backbone SSR 8600 "significantly enhance Cabletron's
Layer 3 product line at the high and low ends. It will let Cabletron defend its
market share against the start-ups and the other Big Three," he says.
William Becklean, a securities analyst at investment firm Tucker Anthony
Research, says Cabletron has two of the hottest products in the switching
market with its SSR gigabit line and NetVantage Fast Ethernet desktop
devices. Cabletron just completed the acquisition of NetVantage.
The SSR switches "have 10 times the performance of Cisco products at
one-tenth the cost," Becklean says, adding that SAP AG installed 30 SSR
devices and ran its recent user conference on Cabletron's backbone.
He says Cabletron may not be able to survive long term as an independent
company, but that with its SSR product it will be able "to have an impact on
the [Layer 3] switching market for the next year."
And when following the internetworking leaders, a lot can happen in one
year's time.
John Mulqueen is a free-lance journalist based in New Rochelle, N.Y. He can
be reached at jtmulque@atgnet.com. |
