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To: zbyslaw owczarczyk who wrote (9955)	3/3/1999 3:42:00 AM
From: pat mudge	Respond to of 18016

From the Financial Times: Europe March 3 1999 TELECOMS: Catching up with the net The conservative sector is being transformed by the success of internet protocol-based traffic, writes Paul Tay As John Chambers, chairman and chief executive of Cisco, the US-based networking equipment leader, is fond of saying: "The internet changes everything." That growing realisation has sent shudders through the boardrooms of the traditional telecommunications network operators and their equipment suppliers and it has led to a series of multi-billion dollar strategic acquisitions that are reshaping the networking equipment industry. Nortel paid $7bn for Bay Networks in August last year, Lucent last month bought Ascend for $19.3bn, GEC spent $2.1bn on Reltec earlier this week and yesterday Alcatel of France made a $2bn all-cash offer for Xylan. This scramble by the traditional telecoms equipment manufacturers to purchase often "upstart" data networking companies reflects the seismic impact that the growth of the internet and telecoms traffic based on internet protocol has had on a historically conservative and slow moving sector. The seeds of this revolution were sown years ago when the technologies of the computer industry began to diverge from those adopted by the much older telecoms industry. However, it is only since the commercialisation of the internet in the mid-1990s and the adoption of IP as the de facto data networking standard for both internal and external data communications, that the issue has come to the fore. Traditional circuit-switched voice networks are built around computer-style devices that establish an-end-to-end link between caller and recipient. These are very reliable, but inefficient in their use of bandwidth, or capacity. In contrast, IP-based networks use packet-switching technology - which divides data up into small parcels or packets for transmission - a much more efficient way to transmit information. Traditional telephone network operators and their suppliers have invested huge sums in building the vast circuit-switched networks that span the globe. But in recent years they have watched as IP-based traffic has caught up with, and in the case of the US and now Britain, overtaken conventional voice traffic. While traditional voice traffic grows by 3-5 per cent a year, IP-based traffic has been growing at 500 per cent a year. In the process, a new generation of fast-growing telecoms companies such as Worldcom and Qwest have emerged, backed by data networking equipment suppliers such as Cisco, 3Com and Ascend. Meanwhile, the privatisation and liberalisation of the telecoms market has added further competitive pressure. For the traditional telecoms equipment suppliers such as Nortel, Ericsson, Lucent, Alcatel and Siemens this has posed a challenge for several reasons. Telecoms equipment suppliers lacked the technical expertise to build IP-based equipment, and this has mainly driven their recent spending spree. But historically they have also lacked the marketing drive and competitive sales instincts of their smaller data networking rivals. In particular, they have been used to operating in the relatively staid environment of the telecoms industry, where engineering standards are set by bureaucratic international bodies, sales cycles are measured in years rather than months, and their main customers until recently were mostly state-owned monopolies. These deficiencies have clearly been recognised by the new generation of senior executives running many of the traditional telecoms equipment suppliers. They believe that the acquisition of new companies such as Bay Networks, Ascend and Xylan will not only provide them with the technology they need to compete in the new internet world, but also an infusion of competitive corporate culture. Thus, although Alcatel's bid for Xylan was seen as relatively highly-priced, it was also welcomed by analysts yesterday because it extends considerably Alcatel's product range and gives it improved access to the important US market. In the wake of the Alcatel deal, analysts expect more announcements - both Sweden's Ericsson and Siemens of Germany are being watched closely. "This deal shows that convergence is finally happening, at least from the supplier side," said Colin Corrill, an analyst with Romtec. "The thing that focuses all the traditional voice companies is the internet." Given the pace of change, other industry marriages are likely. Rather like a game of musical chairs, no-one wants to be left without a seat when the music stops.