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Gigabit Ethernet shakedown

With each passing month, the remaining start-up players in the emerging market for Gigabit Ethernet gear are getting closer to market success or financial ruin.

With each passing month, the remaining start-up players in the emerging market for a new high-speed version of Ethernet networking technology are getting closer to market success or financial ruin.

The Gigabit Ethernet bonanza has seen huge injections of cash being dumped on small firms by venture capitalists, even though--in typical fashion--actual products were far from proven at the time of the investments. The market has grown from that technology development stage of 1996 to the hype stage of 1997. Now, in 1998, most participants have working equipment in beta testing or ready for sale.

When the 20 or so gigabit-related start-ups formed in 1996, most figured some would soon be acquired by the large networking firms, others might be able to go it alone, and a few would have problems staying afloat. Now the industry is waiting to see how it shakes out for the likes of Packet Engines, Foundry Networks, and Extreme Networks.

"It's like musical chairs--when the music stops there's always a few left standing," said Domenic Orr, president and CEO of Alteon Networks, another remaining independent player targeting a specific niche in the market.

The Gigabit Ethernet opportunity is huge. Revenue from equipment is expected to jump from $473 million this year to $1.5 billion by 2001, according to market projections from International Data Corporation.

Gigabit Ethernet is the next version of classic Ethernet technology, the dominant means for connecting PCs and server machines to a network. A standard for the technology is currently in the final stages of approval, with delayed ratification now on track for June.

The technology is so attractive because it extends the investment most organizations have already made in 10 mbps and 100 mbps Ethernet technology to their local area networks (LAN) and offers a high-speed alternative that most information technology professionals are familiar with.

"It represents a major shift in how people use and how people build networks," noted Gordon Stitt, president and CEO of Extreme. "The local area network is becoming fairly homogeneous and that's why Gigabit Ethernet is important."

Market observers expect volume shipments of Ethernet-based gear with gigabit-speed support to starting booming toward the end of this year, with large scale roll outs taking place in 1999 at the earliest.

"I still think it's going to be a while before you see the major deployment," Esmerelda Silva, an IDC analyst, said.

The timing for large scale purchases of gigabit-speed gear is significant. Several start-ups are counting on a high-growth curve to boost sales, to quiet investor viability concerns, and to validate their position in the market. Dreams of initial public offerings also swirl through the halls of some nascent firms.

The remaining prominent start-ups can be broken out in this way: Foundry and Extreme are focused on providing high-speed switching devices; Alteon is selling server-based network gear for fast data access; Packet Engines is developing low-end network cards, network components, and high-speed back-end switches. Others, such as XLNT, are focused on FDDI (fiber distributed data interface)-to-Gigabit Ethernet network migration.

Other start-ups have opted to be acquired. Cisco Systems dropped the first bombshell when it doled out a whopping $220 million in stock for start-up Granite Systems in the early fall of 1996. Rumors are rampant among networking insiders that things have not gone well since the purchase, with one result being a delay in the introduction of Gigabit Ethernet equipment from the networking giant.

In a widely anticipated move, Bay Networks acquired Rapid City Communications for $155 million in stock this past June. Executives from some of the remaining start-ups say Rapid City was hell-bent on going the acquisition route, noting the manner in which the firm set up shop.

Telecommunications giant Lucent Technologies dipped into the market with the December acquisition of Prominet for $200 million, highlighting the firm's growing interest in the data communications opportunity.

Rounding out the shopping spree by networking veterans, Cabletron Systems plucked Yago Systems in January for about $210 million.

Looming on the horizon is the formidable competition that remaining start-ups will face from established players, like Cisco, Bay, Cabletron, and 3Com, which has decided to develop most of its gigabit-speed gear internally. Analysts believe that gear from these established firms will eat into the potential for sales by start-ups. For some, the power of these firms has already been felt.

Cisco's insistence that they would not deliver equipment until the final Gigabit Ethernet standard is delivered has had a chilling effect on the market, according to some. "I thought the mainstream acceptance of gigabit would be faster. Cisco has effectively slowed the market for gigabit. They didn't have product," said Drusie Demopoulos, vice president of marketing at Foundry.

"They did it through FUD--fear, uncertainty, and doubt. I was a little caught off guard by their ability to do that," she said.

But the one thing that remains consistent in this emerging market is that everyone's view of how it is developing is different. "I think the market is growing faster than we thought," insists Bernard Daines, president and CEO of Packet Engines. That company just rolled out its largest product yet, a high-speed switching device that hopes to tackle the work normally associated with expensive routing devices.

All the start-ups continue to promote their success stories. Some whisper of successful licensing relationships they have developed with big firms. But the pot of gold at the end of the Gigabit Ethernet rainbow is only filled with so much loot, and the time may soon come when proponents of this new technology will have to make some hard choices. Networking giants and large systems firms are waiting in the wings for a bargain and unsuccessful start-ups will wonder where their piece of the $1.5 billion pie went.