Lucent Technologies (LU) and Northern Telecom (NT) have both noted the bushels of profits being reaped by data-centric networking firms and want a piece of the action. From their roots as the back-end of voice networks, both firms can offer stiff competition for corporate and service provider networking dollars due to the ongoing convergence of voice and data networks.
What is driving this interest? Increasingly, service providers are moving from simple Net-based services to offer a plethora of options for corporations who simply do not have the time, employees, or money to handle their networking needs. Furthermore, several studies have projected that by the year 2000 data traffic will eclipse voice traffic across public networks, offering unique opportunities for veteran voice firms who also offer data communications gear.
Lucent has built up its data networking portfolio through a series of acquisitions culminating in the purchase last December of gigabit-speed Ethernet start-up Prominet for $200 million. Executives at the sprawling $26 billion telecommunications firm noted that their penchant for purchases is not over.
Nortel, eyeing a higher profile in data networking, formally announced a new unit focused on enterprise data networks today. Executives said $785 million in revenue at the $15.5 billion firm came from data and multimedia networking products over the past year. F. William Conner will head the new arm of the company, which will be based in Dallas, Texas and will employ 3,000 worldwide.
"They have to expand their horizons," noted Craig Johnson, analyst with market researcher Dataquest.
Both Lucent and Nortel seem advantageously positioned to take advantage of increased investment in networks by service providers who offer high-speed leased lines, outsourcing, Web hosting, and a myriad of other services. The two companies also share a current focus on wide area networks (WAN) with their products.
A WAN is a network that connects users across a wide geographical area. Both public networks, such as MCI's Internet backbone, and private layouts, such as a multinational corporate network, can be considered WANs.
"Networks of the future are going to service providers," observed Karyn Mashima, vice president of the enterprise systems group at Lucent. "I could see where we could be a tremendous threat to [data networking firms]."
Nortel executives are of a similar mind-set: "A lot of the service providers are looking for people who can transition into the data networking marketplace," Conner said.
Both Lucent and Nortel are on the minds of competitors such as Cisco. That company's CEO, John Chambers, said he would continue efforts to try and partner with one or both of the firms in an effort to expand the company's alliance portfolio to North America. "They understand voice networking and they have deep pockets financially," he added.
The CEO did note that he believed Cisco had advantages due to its experience in building product in the fast-paced Internet age and could reap rewards due to the lower costs associated with data networking layouts, as compared with voice infrastructure.
However, Chambers said that the window for cooperation between the firms was closing due to Lucent and Nortel's increasing data networking focus.
Lucent has gained new freedom since it split from former parent company AT&T. As a result, the company has spent hundreds of millions of dollars to acquire new technology in recent months, adding capabilities such as remote access to core in-house products like its line of ATM (asynchronous transfer mode)-based switches.
"Whereas AT&T/Lucent missed the bandwagon on [the initial wave of] data networking, we aren't going to miss next-generation networking," Mashima said.
Nortel has chosen to develop and acquire in a similar fashion, though not at such a frequent pace as Lucent. Whenever a networking firm appears to be in play on Wall Street, however, Nortel is among a small circle of companies always mentioned as potential suitors. The company has also promoted a "Power Networks" concept that purports to offer an end-to-end layout for corporations and service providers.
Nortel officials said the new data-focused organization will provide a "stake in the ground" for customers who previously did not realize the Canadian behemoth had a data networking story to tell.
Analysts said the strengths of companies like Lucent and Nortel include experience at selling high-end systems to high-level executives at big corporations. Some also believe an understanding of voice technology is harder to grasp than data expertise. Potential pitfalls for voice-centric entrants are a lack of visibility in the data networking arena and a lack of sales channels to sell their products.
Down the road, some expect the current slate of networking firms to diminish as sheer size dominates over point product players and voice, video, and data networks converge to the advantage of players like Lucent and Nortel. "There's probably only going to be one or two of these networkers that can really play in five years," Johnson said. "Everyone is going to the exact same space. You can't all survive."