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Networkers move toward software to expand

Recent software acquisitions are only the latest sign that network equipment providers fear that selling snazzy hardware technology won't be enough to survive in a rapidly changing marketplace.

What do Microsoft's Bill Gates, Cisco Systems' John Chambers, Lucent Technologies' Rich McGinn, and Nortel Networks' John Roth have in common?

They all love software.

Yet it may be a passion borne of necessity. Nortel's purchase of business software maker Clarify yesterday is just the latest sign that network equipment providers fear selling snazzy hardware technology won't be enough to survive in a rapidly changing marketplace.

A trail of stock and cash deals tells the tale. Cisco, Nortel, and Lucent have all spent billions of dollars in the past year to augment their networking core with software technology that manages telecommunications networks and organizes customer information, such as billing. Even European equipment provider Alcatel has dipped into its coffers recently to buy software firm Genesys Telecommunications Laboratories for $1.5 billion.

The upshot of such deals is a more diverse, complex role for networking equipment providers. Firms are now focusing more on what software applications and features run across their networks, rather than on the nuts and bolts of the network itself. Increasingly, companies such as Lucent and Nortel are growing from their telecommunications software roots to tackle new businesses opportunities like e-commerce.

"Nortel builds these networks and we are a killer app to run on that network," said Ben Kiker, vice president of marketing for Clarify, following yesterday's deal announcement.

Others, such as Cisco, are expanding beyond their Internet-based core to cater to telecommunications carriers that need sophisticated software to run their networks and manage their customer base. Some already view Cisco's "IOS" software as its crown jewel, since it contains many of the protocols and services companies and service providers use to run their business.

Shifting priorities
Analysts say network equipment companies are interested in specific portions of the software industry, such as billing applications, so they can address not only their customer's networking needs but offer technologies that can best take advantage of the network investments that have already been made.

The integration of voice and data network traffic across a single scheme also plays into software's increased role in business strategy for Cisco, Lucent, and Nortel.

"As these companies look at trying to address convergence, they're looking at, What are the [network] voice applications? What are the data applications?" said Chris Nicoll, director of infrastructure analysis for market watcher Current Analysis.

"It's interesting to see the traditional hardware vendors focusing on how organizations are using networks," Nicoll said.

Competitive pressures in the market are also spurring business deals between some of the major players in both arenas. Lucent bought Kenan Systems and Mosaix, while Cisco grabbed GeoTel Communications and WebLine Communications this year.

Though parts of the network hardware business are extremely lucrative, there are only so many equipment dollars that can be squeezed out of a market through upgrades once an installed base of high-end hardware is built.

"What we're coming down to is the hardware is becoming commoditized," said Maribel Lopez, an analyst with industry consultants Forrester Research. "The basic hardware [for networks] has pretty much been decided."

Will there be a day when Cisco, long known as the data networking king, is referred to as a software company? "Without a doubt," according to Lopez.

"The only question is if they'll keep making acquisitions or finally build it themselves," she said.

It should noted also that Unix operating system software, now the basis for a multibillion-dollar industry, was created at the Bell Labs arm of AT&T, a research and development asset that is now part of Lucent.

Price for "personalization"
Amid this rush for software buys, networking companies may be paying a steep premium for access to the technologies and the associated armies of code-crunching programmers, according to some.

Though customer relationship management (CRM) software has become "increasingly important" for equipment providers, Nortel's $2.1 billion Clarify deal was an "expensive" way to enter the market, according to a report by PaineWebber analyst Walter Piecyk.

Business software maker PeopleSoft merged with Vantive, a Clarity competitor, earlier this month in a $433 million deal. Forrester's Lopez said a company such as Siebel Systems may have been a better--though more expensive--fit for Nortel.

Bill Conner, Nortel executive vice president and president of the company's enterprise solutions, said Nortel is focused on uniting Web-based transactions and call center-based interaction so a customer gets a general view of their business.

Conner said the company plans to use Clarify's software to "personalize" business transactions for their customers.

"The issue isn't about joint selling, it's about unified networks and solutions," he said, noting that today, reseller agreements between software and networking companies aren't enough. "We want to build our network with Clarify software."

Tony Zingale, Clarify's chief executive, said the lines between networking and software are blurring. "If we move into the second wave, these companies need it all--they need applications, the network, et cetera, over the Web."

News.com's Kim Girard contributed to this report.