Bay Networks' failed expectations

Bay Networks could have been a serious contender in the internetworking business, but analysts say the company hasn't fulfilled its potential because of infighting, late deliveries, and mostly a lack of leadership.

CNET News staff
6 min read
Bay Networks (BAY) is the Marlon Brando of networking companies. Its motto may as well be, "I coulda been a contenda."

A pioneer in high-speed networking technology and once one of the highest flyers of the high-tech stock market, Bay Networks has all the qualities needed to dominate the markets for both LAN (local area network) and ATM (asynchronous transfer mode) switching--two bulwarks of the internetworking business. But in both arenas, analysts say it's been edged out of the spotlight by other players. Somehow, things just haven't come together for this troubled company.

"They should be number one in a number of markets, but they're not. It's not that they haven't grown; it's just that, given their opportunity, they should have done more," said Don Miller, principal analyst for networking service at market research firm Dataquest.

That assessment was brought into clear focus last week when the company announced that its first-quarter earnings had plummeted 91 percent and its chief executive had resigned, replaced by an acting CEO who says he doesn't want the job permanently. News of the poor quarter pushed the networking equipment maker's stock to its 52-week low of 20-1/4 a share, far below the 40 points that followed its 3-2 split a year ago. This week, the company is down even further, closing under 20.

Founded in 1994, Bay Networks gained wide attention early on as one of the first companies to specialize in the production of ATM switches, a technology that provides high-speed network connections for local networks. The company now has a wide-ranging portfolio of networking and internetworking technologies, from LAN switches to high-end routers.

But despite its reputation as one the chief promoters of ATM technology, the company now ranks only fifth in the $219 million market, according to the most recent figures from Dataquest. (See chart below.) Fore Systems, a competitor that entered the market about the same time Bay Networks did, is now the market leader. Cisco Systems stepped into the arena even later but now has 17 percent of the market.

In the $1.76 billion market for LAN switches, Bay ranks number three, with 11.2 percent. But some believe that the company is losing its hold on that market as well, according to Bill Becklean, an analyst with Hancock Securities in Boston.

So why hasn't Bay Networks captured the top spot in these areas?

Market analysts say there are several reasons, including almost all the classic problems that plague young high-technology companies: coming out early in a market that developed later than expected; shipping products late; falling victim to management confusion and infighting after a merger; and suffering from a lack of strong leadership.

Paul Severino
Paul Severino, now Bay Networks' chairman and acting chief executive, did not respond to repeated requests for an interview for this report.

Bay Networks was formed two years ago by the merger of Santa Clara, California-based SynOptics Communications and Boston-based Wellfleet Communications. SynOptics was looking to expand its lineup with multiprotocol routers, a market where Wellfleet held the number-two position. Wellfleet, meanwhile, was looking for a financial partner in its fight with Cisco. By merging, the companies planned to create a comprehensive range of products by combining Wellfleet's high-speed multiprotocol routing with SynOptics' hubs, switches, network management, and distribution network that would reach all sizes of business.

But like many companies before them, what seemed like a good idea on paper was much more difficult when it came to mixing corporate cultures and practices in the branch offices. From the beginning, Wall Street looked askance at the deal, with analysts pointing out that the companies had vastly different cultures and that the geographic divide between the two headquarters was not going to help overcome that, according to Becklean.

The deal was billed as a merger of equals, as both companies posted revenues of more than $400 million each. However, although Wellfleet and Synoptics perceived this as an advantage, analysts predicted that this meant that no one would be at the helm.

"I think the merger is were some of the trouble began," said Don Miller, principal analyst for networking services for Dataquest. "They tried to bill it as a merger of two equals and had no one controlling leader, so there was an internal range war."

The cultural conflicts boiled down to a difference in styles and motivations between SynOptics' strong indirect sales force, which sells to resellers and distributors, and Wellfleet's direct sales team, which sells to corporations.

"They had a hard time managing direct and indirect channels," said Esmeralda Silva, a senior analyst with market research firm International Data Corporation. "The direct sales force was competing with the resellers and didn't care if they stepped on their toes."

Dataquest's Don Miller on Bay Networks' troubles
Bay's greatest strength as a prescient and experienced developer of ATM technology also turned out to be a handicap when the market failed to grow at the expected rate, stymied by corporate reluctance to give up investments in the Ethernet technology that fueled the growth of LANs. Analysts also note that Bay had put most of its effort into developing ATM, despite the market's slow acceptance, and then was often late in bringing their products to market.

When the ATM market did start to mature, Bay Networks failed to present their message effectively and explain to customers how ATM could take them into the next generation of networking, analysts said.

VP Rob Newman on Bay Networks' competition
Rob Newman, vice president of LAN backbone products, conceded that Bay has been slower to roll out new products than its competitors but said that this is because it tends to build its technology base in-house, rather than adding to its products through acquisitions like some of its competitors do, namely Cisco. (See related story, Networking vendors order out.)

One of the areas that Cisco bought its way into lately is the Gigabit Ethernet market, through the purchase of Granite Systems. While Bay claims that building instead of buying leads to a more profound understanding of the technology, its high-road approach means it has no products for what looks like the next big thing in internetworking, Gigabit Ethernet. (See related story, Watch what happens to Gigabit Ethernet.)

"A lot of customers are not ready to fully embrace ATM. To switch would mean not only adopting a whole new architecture but also training their MIS staff," Silva said. "Customers are looking for the solution that will cause the least disruption to their network."

That leads them to Gigabit Ethernet, a technology that's evolved from the Ethernet technology that now dominates LANs but provides data access rates of 1,000 mbps, and can be potentially used for both backbones and connections between existing LANs.

"Bay needs to provide a Gigabit Ethernet story," said Silva. "This is a future area they need to focus on."

IDC's Esmeralda Silva on Bay Networks' woes
Silva and other analysts say that focusing on the future is really the problem at Bay, however. Basically, no one so far seems to have really wanted the job of leading the company.

Andrew Ludwick
Andrew Ludwick, cofounder of SynOptics, became CEO after the merger. But Ludwick indicated he wanted to leave after the company began posting shrinking profits during the past three quarters. Even so, his actual departure last week surprised Wall Street because there was no clear successor waiting in the wings.

Severino, cofounder of Wellfleet and Bay Networks chairman, has now stepped in as acting CEO, but has already indicted that he too does not want the job for very long.

"Having a lame-duck leader isn't good for anyone," Miller said. "They have to find someone with charisma and dynamics who will bring this company to its full potential."

Company officials defend Severino as a key player in the company's development who will be a good acting chief.

"Paul's been active in all facets of the company since the merger," said Beth Pampaloni, a spokeswoman. "He's been a silent partner who's been involved with it all. And even though he does not want the CEO job, he'll analyze problems and fix them as we go along."

Fundamentally, though, Bay seems to have failed to perform as expected because the company lacked the leadership to exploit its technological advantages.

"They have a lot of natural resources, but no leadership," said Dataquest's Miller. "They're like top-ranked football players with no coach."