CEO rebuilds Bay Networks

A sleeping giant has risen to compete for networking dollars.

Bay Networks (BAY), a provider of networking equipment to corporations and Internet service providers, has awakened from a deep sleep after a year under the guidance of chairman, president, and CEO David House. Profits and revenues, more than $2 billion last fiscal year, are up. In addition, the myriad issues that grew out of an ill-fated merger to create the firm seem to be in check, at least for the moment. Still to be determined is the fallout from a lawsuit filed yesterday against the company by Rockwell over Bay's license for the use of modem technology.

The company grew famous for its inertia in the aftermath of the 1994 merger of Wellfleet Communications, based in Billerica, Massachusetts, and Silicon Valley-based SynOptics Communications, according to Stephen Mullaney, vice president of enterprise marketing and nine-year veteran of the company. The result--Bay Networks--was a firm that was unsure of its direction and prone to delivering products late, he said.

"Mergers of equals are not an easy thing to get through," Mullaney added. "You still have to go through that psychological melding of the two companies."

The result of these problems? The company hit rock bottom last fall after several quarters of shrinking profits. Cofounder and CEO Andrew Ludwick resigned, and his East Coast counterpart, chairman Paul Severino, said he wanted no part of the CEO job.

Enter House, an Intel veteran who knows a thing or two about marketing and focus, given his work on the successful "Intel Inside" promotional campaign and the runaway financial success at the dominant chip manufacturer. He spent the first 60 days at Bay listening to customers and employees and the next 90 days defining the values he wanted to instill. Then he unveiled an "adaptive networking" strategy for the company in May of this year and began cultivating a can-do attitude.

CNET's NEWS.COM sat down recently with House, who is entering his second year at the helm, to see what's been going on since these initial moves and how he views competitors such as Cisco Systems and 3Com.

NEWS.COM: What are the cultural and business similarities and differences between Intel and Bay?
HOUSE: The culture of the companies are in some ways very different, in some ways there are similarities. We're both very technology-oriented companies. The difference, from a cultural perspective, is Intel had much better running set of systems and processes. This company was more of an overgrown start-up when I got here.

What do you mean by that?
I think that what works for start-ups doesn't work beyond a certain size. Start-ups typically have a very strong leader who delegates responsibilities and, therefore, there's not much of a structure for managing a set of priorities and goals--one person sets them and tells you what they are and expedites issues and knows what's important. You get beyond a certain size and you have to be able to fuse that into an organization.

What did you find when you arrived? There's been a lot made of the different cultures on the East and West coasts.
When I say the company was like an overgrown start-up, I mean it didn't have the kind of structure in place that holds everything together. People want to like team ball and want to succeed, but if you can't define the rules of the game, and you can't define the goal line, and you can't define the players and what positions they're going to play, then the team's not going to figure out how to win games. What I think the structure I've put in place has done is unify the company.

Coming from a chip background, were some of the intricacies of networking layouts hard to grasp?
I still have to ask what acronyms mean at times, where at Intel I'd grown familiar with computers and microprocessors had become second nature to me. The thing I realized is that I bring a much broader view of business than existed here, so I have a contribution to make from my information systems knowledge that has turned out to be very valuable.

What do you make of the biggest merger ever in the networking industry between 3Com and U.S. Robotics?
That's an interesting one. 3Com's always had sort of a partial solution for the enterprise where we play the strongest, but not a complete solution. They do a great job from a small business and channel perspective, and then they have this NIC (Network Interface Card) business, which is really a different business. Cisco, Cabletron Systems, and Bay really aren't in this business, but its an interesting business and its been fueling a lot of their profits. So then they went out and bought this company that's got modems, which is another business we aren't in, and servers for service providers, which is a market we compete in.

But interestingly, they don't have the backbone router that the thing connects to, which we do. So they want to have kind of a part of a solution in the enterprise and part of a solution in the service provider space. What they really did is bulk up so they can talk about how big they are, but I think their NIC business and their modem business are really irrelevant. We are in network business. They're masquerading that they're really bigger than us and they're really not.

So you don't see them in large corporate networking accounts?
No, where we see them is around the edge of the network, so they'll come in and try to pick off the edge devices.

How about Cisco and the opinion of some that it dominates the networking industry, much like Intel dominates microprocessors and Microsoft dominates software?
Cisco is a major marketing company. They are masters at positioning. Yet people are talking about Cisco joining with Intel and Microsoft--sorry, but they do not have that position in the marketplace. We're in a $30 billion business and they're a $7 billion company. They are a master of marketing and positioning and they've done a good job of positioning their competition with Bay over time. Fortunately, we tend to have better products technically. Where we tend to beat Cisco is with people who are building industrial-strength networks. We also have a very different model--they are a direct sell and we are an indirect sell.

Their approach is a proprietary approach--it's kind of like Sun Microsystems. Sun has their own microprocessors and their own operating system and, yes, it's Unix, and they'll tell you how open they are. Compaq Computer, on the other hand, uses commodity operating systems and commodity microprocessors and commodity applications. And like Sun, Cisco sells direct, and like Compaq, we sell indirect. That is most of our business--we have contact with our largest customers, but it still typically goes through the channel. So we have a different model. They're out there saying, "we're IOS," which is a proprietary operating system. We're out there saying we're for standards.

Most observers of Bay say that the hardest part of rebuilding the company is yet to come?
I'd be stupid if I didn't do the easy things first. The things we did were not quick fix and we're thinking long-term and that's my reputation. One of my mottos is: Good business comes from good products. If you're a good business, you develop good products, and that's really the engine that's driving us. This is just a case of managing and executing. We're in an incredible, incredible market. The fact that we're not as big as Cisco? I can remember when Intel was only in the top ten semiconductor companies, I can remember when we were in the top five, I can remember when we were in the top three. Now no one remembers when Intel wasn't on top.