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Nortel-Bay deal a sea change

The $9.1 billion merger is the most striking representation of the state of the networking industry.

The $9.1 billion merger between telecommunications firm Northern Telecom and data communications provider Bay Networks is the most striking representation of the changes taking place in the networking industry.

This natural evolution--or revolution, depending on whom one talks to--hinges on the term "convergence," which in the networking sector essentially refers to new methods for combining two formerly disparate types of traffic over a single pipe. Most pundits predict that by the year 2000, data traffic will outstrip voice congestion across the public telecom infrastructure.

The long-rumored deal between Canadian-based Nortel and Bay offers wide-ranging opportunities for the duo to provide an integrated set of products supporting voice and data for service providers and corporations. It also applies pressure to a variety of data-focused rivals, as a combined Bay-Nortel will be able to hold increased sway in the market.

Voice and data previously have been carried across separate networks, but the growth of the Net has made it self-evident that a single pipe for the two is necessary to remain competitive--a reality that has not been lost on other competitors such as Cisco Systems and Lucent Technologies.

"What we saw was the opportunity to catapult ourselves--to leap to the center of this new space," said David House, chairman, president, and CEO of Bay, who will become president of the combined entity.

Lucent has spent the past several months buying data-centric companies and rolling out internally developed data-based products, looking to capture a larger piece of the lucrative data communications pie. The telecommunications firm is betting heavily on its expertise in building huge voice-based networking to drive its data efforts.

Cisco, the king of the data market, also has made a lot of noise via acquisitions and partnerships in the area of convergence, hoping the dominance of data traffic on networks will make it a natural choice.

"The lines in the sand are being drawn," said Craig Johnson, principal for the Pita Group, a market watcher.

Cisco was nonplused by Nortel's move, even though CEO John Chambers said recently that he would like to have a closer relationship with the firm.

"As data, voice, and video begins to come together, it's clear to the market that the Internet will drive this convergence. Certainly, industry consolidation will occur, particularly as old world companies look for ways to compete in this Internet-driven economy," the company said in a prepared statement. "Cisco anticipated this new competition and believes that our leadership in data networking positions us well in this new world."

But what do smaller data competitors such as Ascend Communications, 3Com, and Cabletron Systems do in the face of ever-larger competitors, such as the new Nortel?

3Com has chosen to partner with European giant Siemens AG and wide area specialist Newbridge Networks in order to fulfill demand for combined voice and data-based networks.

"Our strategy is very different," said a 3Com spokesman. "Our strategy is to strike partnerships with telecommunications providers rather than be acquired. We can best execute our strategy by remaining independent."

Cabletron is trying to right itself after suffering through its first-ever fiscal crisis. In a prepared statement, the company's CEO, Craig Benson, said: "Cabletron has been aggressively pursuing a number of opportunities in the integrated voice, data, and video marketplace, including a two-year relationship with Nortel. We look forward to future joint technology developments that will allow us to provide customers with leading-edge, integrated solutions that leverage the unique heritage of both companies."

Ascend recently digested its merger with Cascade Communications and is only now reaping the benefits, with its stock on the rebound. Both Cabletron and Ascend could be acquisition targets for other providers, such as Alcatel Alsthom.

Size, it seems, will matter, making the livelihood for some of these data-centric players tenuous at best. "The data networking space is a hard space," noted Michael Duran, analyst with Lazard Freres. "The fortune for data networking players essentially is ebb and flow."

Added Fred McClimans, CEO and director of analytical operations for industry watcher Current Analysis: "While this has been rumored for several months to have been in process, its consummation will force others in the industry, like Cisco and Ascend, to rethink their own competitive positions in the market."

The competitive maneuvering, it seems, may just be getting warmed up.