Networking firms feast on Net growth

As consumers and corporations increasingly tap the Internet for e-commerce and other business, networks constantly require cutting-edge technologies to keep pace. Companies responsible for the flesh and blood of these sprawling networks have enjoyed stellar revenue growth as demand for hardware increases.

Industry stalwarts like Cisco Systems, Nortel Networks and Lucent Technologies have led the push for advanced networks capable of carrying voice and data at high speeds. Yet this year may be remembered as the year of the upstart: new players such as Juniper Networks and Sycamore Networks splashed on to the scene with successful public offerings and offered serious competition to some of the entrenched networking leaders.

The demand for fiber-optic networks has been the catalyst for an industry that seemingly knows no financial bounds when it comes to market capitalization or acquisitions. These firms justify this year's slew of multibillion-dollar deals with the belief that optical networks are the right mechanism to handle the unpredictable growth curves associated with voice, data and Internet traffic.

New fiber-optic technology allows a single strand of fiber to be "split" into the equivalent of several strands, or "wavelengths," to expand the capacity of a network without physically having to add more cable. This new development and its potential applications helped fuel demand for networking firms on Wall Street, analysts said.

"Investors realized there had to be the hardware and software for all the dot-com companies to build the Internet infrastructure," Infonetics Research analyst Mike McConnell said.

This past year may also be considered the year of lost opportunity for some networking firms. Companies like Cabletron, 3Com, and Newbridge Networks--once leaders in the networking world--suffered through takeover rumors, sinking stock prices and product slowdowns.

Forrester Research analyst Charles Rutstein said the new year will determine whether these firms can mount a comeback or continue to play second fiddle to leaders Cisco, Nortel and Lucent.

"It may well be that they become permanent second-tier players," he said. "You take a company like Cisco [that is] able to maintain 60-percent margins. These guys can't command that kind of premium…It's unclear how profitable they can be."

In many ways, nothing exemplified the evolution in the industry better than investors' thirst for networking equipment-related public offerings. The likes of Juniper, Sycamore, Copper Mountain Networks, Redback Networks, Extreme Networks and Foundry Networks all experienced huge jumps on their first day of trading. Many continued to benefit from a healthy stock market, resulting in market caps that surpass established players such as 3Com and Cabletron, in some cases.

Juniper's shares have soared to $370, giving the start-up a market value of $19.1 billion. Sycamore, whose stock has reached $320, is worth $25.3 billion. Redback at its current stock levels is worth $7.8 billion. In comparison, 3Com's claims a company valuation of $14.9 billion, while Cabletron is worth $4.5 billion.

Even more striking, perhaps, were the valuations associated with companies in their infancy--many which lacked products, customers or even revenue. These facts didn't scare established firms from paying huge sums for little more than a handful of engineers with a networking vision.

Little known firms such as Cerent, Siara Systems and Qtera, became the beneficiaries of the deep pockets of some of the larger networking players this year.

Cisco bought much-needed networking technology from start-up Cerent for $7 billion. Cerent, at the time, had $10 million in annual revenue. In November, Redback grabbed Siara--with no products and no revenue--for $4.3 billion, while Nortel acquired Qtera--which has no sales--for $3.25 billion.

The industry was greeted in January with further evidence that Lucent was taking the Net seriously, when the former telecommunications arm of AT&T plucked the former Ascend Communications in a more than $20 billion deal. Ascend had annual revenues of approximately $2 billion at the time.

The next generation of networking start-ups could make their mark in 2000, among them Avici Systems, Pluris, Optical Networks, Chromatis Networks and Sonus Networks, among others.

Many sprawling network construction projects were in full swing this year, and the growing demand for new networks has sparked increased demand for the hardware that builds them. Communications companies like Qwest Communications International, Global Crossing and Level 3 Communications have all purchased a wide array of networking equipment and software to keep up with the demands placed on their sprawling networks.

"There's a terrific boom in optical networking equipment. We've seen lots of companies like Qwest and Level 3 spend the last several years dumping fiber into the ground. Now you need the equipment on both ends of that fiber for it to do anything," Forrester's Rutstein said.

Yet international players made strides to join the Net equipment craze this year. French networker Alcatel, German giant Siemens and Swedish wireless player Ericsson bought firms based in the United States to establish a presence in the domestic market.

But none have used their considerable weight to capture the interest of customers and investors quite like the so-called Big Three: Cisco, Lucent and Nortel.

Cisco, expanding from its roots as a provider of technology to corporations and traditional Internet service providers (ISP), now wants a piece of the larger telecommunications equipment pie.

But Nortel and Lucent have established vast bases of customers and knowledge concerning telecommunications networks and their associated reliability requirements. Much of the competitive arguments between these firms center around the question of whether new Internet technologies, specifically Internet protocol (IP), are ready to handle the demanding requirements of a customer like AT&T.

Cisco says the technology is ready, while competitors Nortel and Lucent disagree. The answer may be somewhere in between, industry experts say, but it will be the market that will determine which firm takes the lead.

"Vendors and service providers are all realizing that supporting voice, data, fax, video--all kinds of traffic--on a network in a cost-effective manner is the crux of the whole thing," said analyst Laurie Gooding of Cahners In-Stat Group, in an interview earlier this year. "The vendors are hard at work addressing the technical hurdles."

News.com's Wylie Wong and Aimee Male contributed to this report.