Lucent Buys Answer Nortel/Bay, Cisco Challenges

Posted: 03/1999

Lucent Buys Answer Nortel/Bay, Cisco Challenges
By Ken Branson

When Lucent Technologies Inc., Murray Hill, N.J., announced it would buy Ascend
Communications Inc., Alameda, Calif., and Kenan Systems Corp., Cambridge, Mass., it seemed
to be sliding toward a packet-switched future in which operations support systems (OSSs)
and billing and customer care systems would be fully integrated. The Ascend deal is worth
about $20 billion, and the Kenan acquisition about $1.48 billion.

Lucent’s moves followed last year’s acquisition of Bay Networks Inc., Santa Clara,
Calif., by Nortel Networks, Richardson, Texas. "When Nortel got together with Bay
Networks, it made perfect sense, and we were waiting for Lucent to make their move,"
says Jeffrey Kagan, an independent telecom consultant based in Atlanta. "They could
either build up their own data capabilities or buy their way into the market. Building
would take valuable time. Buying gets them up and running quickly. Buying established
brands helps them hit the ground running."

What about Bay Network’s old rival Cisco Systems Inc., San Jose, Calif.? At least to
hear Cisco tell it, it’s up to Lucent and Nortel to worry about them, not up to them to
worry about Lucent and Nortel.

"Clearly, Lucent is reacting to us," says Larry Lang, Cisco’s vice
president-service provider marketing. "If they want to move to packet switching,
they’re welcome to try, but it’s worth pointing out that we’re No. 1 in that market. [The
purchase of Ascend] is clearly a defensive move in response to Cisco’s position."

Lang says that service providers–incumbent local exchange carriers (ILECs),
competitive LECs (CLECs), Internet service providers (ISPs) and interexchange carriers
(IXCs)–now make up about 30 percent of his company’s business, with enterprise customers
of one kind or another making up the rest. Service providers are the fastest growing part
of Cisco’s business, and Lang thinks he knows why.

"We compete with Lucent in marketing, but they’ve never had any real products, so
we haven’t seen them in any deals," he says.

Not surprisingly, Lucent CEO Rich McGinn sees it otherwise. The Ascend and Kenan
acquisitions, he says, are completely consistent with the data networking strategy Lucent
announced nearly two years ago, and about which Lucent has been "boringly
consistent" ever since. "We’re going to invest heavily in the highest growth
segments available to us in our business space," McGinn says. "And that means
software, data networking, microelectronics and wireless."

And Kagan, for his part, believes the marriage of Ascend and Lucent is evidence that
Lucent’s eye is on the donut, not on the hole. "Lucent is thriving in today’s
circuit-switched marketplace, but needs to expand their offers to meet the demands of a
changing marketplace, which is increasingly data and packet-switched," Kagan wrote in
an e-mail to reporters. "Ascend will allow them to do just that. With Ascend, they
can cover their bases and serve their customers, whether they need circuit-switched or
data networks. This will give Cisco a run for their money."

In the Kenan and Ascend deals, Lucent officials say, they were driven in part by
customer demands for convergence and integration. One customer, who asked not to be
identified, put it more bluntly. "Of course that’s what we wanted to
see," the customer says. "That’s what everybody wanted to see. We’ve been
telling them this for years."

Lang believes his company heard those customers long before Lucent heard them, and that
his company is in a better position to meet their needs. Although Cisco makes boxes
(routers, asychronous transfer mode [ATM] switches), it recently has announced its
intention of stepping out of what might be called the "Box Box." In late
January, Cisco announced its Total Implement-ation Solutions (TIS)–an initiative that
provides "total turnkey services" for Cisco’s service provider customers. The
first phase deals with network implementation, and is supposed to help service providers
with everything from network design to service deployment and the actual making of money.

"In light of Lucent’s acquisition of Ascend and Nortel’s acquisition of Bay, Cisco
need[s] to outline a support strategy to compete with the traditional telco suppliers
rather than the data vendors," says analyst Ron Westfall of the TIS initiative.
Westfall, who follows network services for Current Analysis Inc., Sterling, Va., says that
Cisco’s TIS service could "compel chief rivals Lucent and Nortel to rearticulate
their service provider efforts."

Lang says the TIS approach already has led Cisco down some interesting roads.
"Oftentimes, we might be bidding on a large network that involves packet
switching," Lang says. "We might provide the packet switches, and then other
vendors will provide the operations support systems." Lang says that when this is the
case, Cisco works carefully with the OSS vendor to make sure that the software and
hardware solutions mesh. In the antidiluvian epoch–say, about five years ago–the
customer in such a project would have done that meshing. Now, there simply isn’t time.

In fact, Lang questions the central assumption of the Lucent/Kenan deal. He believes
that carriers want integrated software solutions, but not necessarily from the same
vendor. "There is no industry leader in billing and customer care software," he
says. "The No. 1 choice is ‘home-grown’ software. So it isn’t as if Lucent has done
anything to make it easier (for Lucent). In fact, it could get in their way. If they’ve
got a customer who has a billing system they’ve developed themselves, and Lucent is
pushing Kenan, they could irritate the customer."

Lucent officials, however, say they are not tied to any one technology or market in
their drive to increase their customer base, stay ahead of the technology curve and make
money for their shareholders.

AGIS Gains Telephony Foothold
Nortel/Bay Platforms Lay Foundation for VoIP Wholesale
By Peter Lambert

While traditional long distance telephony carriers struggle to make their networks
capable of carrying data services, some major Internet back-bone providers are moving to
accommodate telephony in their networks, too.

By the end of July 1999, for example, the fourth-largest North American Internet
backbone pro-vider, Apex Global Internet Services (AGIS), will activate new Nortel
Networks Internet protocol (IP) routing, cell switching and other technologies on its
networks that will enable the Boston-based company to wholesale voice services.

Last year, AGIS agreed to purchase 2.5-gigabit-per-second (gbps), fiber optic network
capacity from Qwest Communications International Inc., Denver, to interconnect AGIS’s 250
points of presence (POPs) in the United States.

Now, through a three-year purchase agreement, it will install Nortel Networks’ backbone
and edge routing switches, asynchronous transfer mode (ATM) edge switches and
Internet-to-public switched telephone network (PSTN) gateways, all designed to support
network products and services spanning data and telephony services.

The agreement, the value of which the companies declined to divulge, marks a shift for
the large Internet service provider (ISP) away from traditional data network equipment
providers to a supplier with both data-networking gear and a large share of the
time-division multiplexing (TDM) telephony-equipment market. It also constitutes Nortel’s
first major supply contract since its acquisition of data-networking manufacturer Bay
Networks Inc. last year.

"With their long history and experience in delivering telephony equipment combined
with the strength of Bay Networks’ data offerings, we felt that Nortel Networks was one of
a kind in the industry for really being able to understand our needs as a carrier,"
says AGIS chief operating officer Rob Orr.

"We’re establishing the backbone reliability, flexibility and scale to enable AGIS
to enter wholesale of telephony over IP," says Gary Disher, director of customer
network engineering for Nortel’s Carrier Packet Networks division, Billerica, Mass., and
lead architect of the AGIS network. "This is a multi-protocol network ready for all
frame relay, IP ATM or TDM services. Through the [Nortel-Bay] merger, we’ve been able to
blend IP and voice and network management know-how."

Leveraging Nortel’s "Unified Networks" strategy, the AGIS network will
incorporate emerging Internet protocols, including multiprotocol label switching (MPLS),
that are expected to assure varied quality of service (QoS) performance levels and
alternate-route traffic engineering over IP networks, thereby laying the groundwork for
real-time, delay-sensitive services including voice.

"AGIS sees IP QoS as a requirement" for its next-generation backbone, Disher
says. With QoS capability, AGIS will be able to wholesale managed wide-area port services.
Managed ports, in turn, will enable local Internet service providers (ISPs) and local
exchange carriers (LECs) to pool resources to buy shared ports and/or to gain access to
excess long-haul capacity when it’s available. Although AGIS is expected initially to
apply its next-generation capabilities to the dial-up Internet access wholesale market, it
has initiated a voice over IP (VoIP) trial with Nortel.

Fiber Construction Continues on Sacramento/Portland Route

ST Telecommunications Inc., Vancouver, Wash., and Pacific Fiber Link Inc., Westminster,
Colo., have joined forces with Williams Communications Inc., a unit of Williams, Tulsa,
Okla., in the construction of a fiber optic backbone network between Sacramento, Calif.,
and Portland, Ore.

Williams has agreed to pay $47.2 million worth of the construction costs for this
715-mile, multiconduit network that GST and Pacific announced they were building in August
1998.

GST and Pacific already formed a similar agreement for $30 million last October with
FTV Communications, a joint partnership between Williams, Enron Communications and Touch
America.

While the October agreement between FTV, GST and Pacific secured fiber on the
Sacramento/Portland route for Williams, this latest agreement with GST and Pacific allows
the wholesale carrier to go back and place conduits–plastic tubes through which fiber is
laid–along this route, says Todd Steele, manager of business development and planning for
Williams Network. This is a preventative measure by Williams in case there is a need to
upgrade the route with new technology or simply to lay more fiber due to an increase in
bandwidth demand, Steele adds.

The carriers expect to complete construction of the Sacramento/Portland route, which is
an extension of GST’s multiple-conduit fiber backbone already running between Los Angeles
and Sacramento, by the end of 1999.

–By Jennifer Knapp

Netcom, ICG’s Bathwater, Becomes Mindspring’s Baby

In yet another example of the increasing segmentation of facilities-based Internet
service providers (ISPs) and portal ISPs, the consumer Internet business of San Jose,
Calif.-based Netcom On-Line Communications Inc., the ISP acquired a year ago by ICG
Communications Inc., Englewood, Colo., for $285 million, is being sold for $245 million in
cash and stock to Atlanta-based Mindspring Enterprises Inc.

ICG keeps Netcom’s backbone Internet protocol (IP) network with its 236 points of
presence (POPs) serving 700 markets, big and small, in the United States. Under a separate
agreement, Mindspring will use that backbone network and its POPs. Several hundred of the
700 Netcom employees in the United States will go to Mindspring when the deal closes
sometime this quarter, company officials say, though they were unable to provide a precise
figure.

"If ICG keeps the POPs, then that means they keep the voice over IP (VoIP)
equipment, and that means Mindspring gets access to all that equipment without having to
deploy any," says Hilary Mine, executive vice president for Probe Research Inc.,
Cedar Knolls, N.J.

That’s fine with J. Shelby Bryan, ICG’s president and CEO. "We’re keeping the
(Netcom) network," he says. "And we’ve already created the ability for that
network to carry voice. So we’re going to sell that ability wholesale to Internet service
providers."

ICG announced Jan. 20 that its IP-based long distance services now are available in 214
U.S. cities.

But Charles Brewer, CEO of Mindspring, says voice is not the central point of the deal
for Mindspring. To him, voice is just audible data.

"My view, which I think is common, is that the core telephony of the future is
access to the Internet," Brewer says. "We don’t provide Internet telephony now,
but I don’t see why we shouldn’t have a Mindspring-branded long distance service, for
instance. When I say Internet access is the core telephony of the future, I really mean
telecom coming to us, rather than the other way around. I think of voice as … a subset
of packet-based services on what is fundamentally a data network."

ICG’s press release says the company is selling the consumer Internet business because
it wants to concentrate on its core telecom business.

"We needed [Netcom’s] data network to go with our voice strategy," Bryan
says. "Everybody knew there would be an explosive growth in the Internet sector. We
just wanted the damn network."

What ICG did not want, Bryan says, were the half-million or so dial-up customers
hanging from that network, most of whom are "nonbusiness." It was always part of
the plan, he says, for ICG to shed the dial-up bathwater and cling to the backbone baby.
"I want us to be one of the major Internet backbone providers in the country,"
he says.

Mine is dubious about Bryan’s assertion that it was always part of the ICG strategy to
keep Netcom’s backbone and jettison its retail business. "Netcom has been going
nowhere for a long time," she says. "Their revenues have been around $150
million (Editor’s note: Netcom’s revenue for calendar 1998 was $160 million.) for
about three years. They lowered their subscriber count to try and be more profitable. The
strategy was to go after small office/home office (SOHO) users–people who would pay a
little more for a little more reliability. But they didn’t reach these people."

Mine says she sees the ICG/Mindspring deal as part of the continuing consolidation of
the consumer and small-business ISP market. Probe Research, she says, now categorizes ISPs
into facilities-based ISPs and portal ISPs. Mindspring and America Online Inc., Dulles,
Va., are examples of the latter.

–By Ken Branson

Lucent Takes Voice over IP to Next Level
By Charlotte Wolter

Lucent Tech-nologies Inc., Murray Hill, N.J., introduced a new Internet telephony
solution that for the first time is scaled to the networks of the large carriers that
process millions of Internet protocol (IP) phone calls daily. The new PacketStar IP 1000
solution, developed by Bell Labs, is a modular, network-class voice over IP (VoIP)
gateway, gatekeeper, network management and billing solution that elevates VoIP processing
to nearly the scale and performance of traditional voice switching.

With the ability to handle 2 million calls daily, the capacity of the new PacketStar is
more than twice the 800,000 IP telephone calls and faxes sent on average per day in 1998.

"This is for the big guys," says Jeff Wilson, director of access programs,
Infonetics Research Inc., San Jose, Calif. "This is for Qwest [Communications
International Inc.], ITXC [Corp.] or Level 3 [Communications Inc.] or anyone else who
wants to deliver a service and make some money right away."

The PacketStar 1000 is priced at $350 to $600 per port list price, with the gatekeeper
a $150,000 turnkey solution and the PacketStar IP management package a $45,000 turnkey
solution. The standalone 7-foot rack can have up to 3,000 ports. The system was expected
to be available as of February.

Acquisition to Speed Local Reseller’s Move to Facilities

Accelerating its migration to its own network, McLeodUSA Inc. has added Ovation
Communications Inc. to its list of acquisitions. The Cedar Rapids, Iowa-based competitive
local exchange carrier (CLEC) will trade 5.1 million shares of stock and $141 million in
cash for all the Ovation stock. McLeodUSA also will assume $83 million in debt.

Ovation, based in Minneapolis, is privately held. Like its acquirer, it is in the
business of providing competitive telecommunications services to business and residential
customers in the northern Midwest.

For Ovation’s owners, the closure of the merger will mean payday. For McLeodUSA, the
size of the market will expand by 50 percent.

Analysts suggest the merger might not have much impact in the industry as a whole, but
point out that Ovation is a facilities-based carrier, and McLeodUSA is a heavy reseller
interested in increasing its facilities-based network and in acquiring people with
facilities-based experience.

"Ovation is focused on building out a facilities-based strategy, which over the
long-haul will help McLeodUSA move its resold lines to its own network for a more
profitable business plan," says Jilani Zeribi, a network services analyst with
Current Analysis Inc., Sterling, Va.

The merger is expected to close within a few months.

Global Fax Messaging Provider Enters U.S. Telephony Market

Marking its entry into the U.S. telephony market, Teaneck, N.J.-based Graphnet Inc., a
27-year-old international data, messaging and Internet service provider (ISP), has formed
Graphtel Inc. as its telecommunications subsidiary.

Graphnet’s telephony arm initially will deploy services in New York and New Jersey,
including switched and dedicated access, integrated services digital network (ISDN) and
calling cards. Graphtel also has begun selling wholesale data and voice services to major
domestic and international telecom providers. This step follows Graphnet’s initial
telephony launch during 1998 in France and Belgium, where the company is building its own
European network, says Idan Elkon, vice president of global operations for Graphtel.

The departure from its longstanding fax messaging services was a natural extension of
the company’s assets, Elkon explains. These assets include an established global network
that already supports the company’s fax business, value-added service licenses throughout
the world and an established customer base, plus interconnects with more than 40 carriers
in the United States.

–By Jennifer Knapp

Immix MagicWire to Improve Economics, Customer Retention for
Alternate Network Access Businesses

Immix Telecom Inc., Margate, Fla., unveiled last month at the CompTel Annual Convention
in Atlanta a new line controller called MagicWire, which its developers say will change
the economics of alternate network access businesses, such as 10-10-XXX dial-around and
international callback services.

Unlike other single-line automatic dialers that cost more than $70 apiece, MagicWire is
priced at $10 or less depending on ordered volume. The unit’s low cost makes it
economically feasible for alternate network access providers to keep their customers that
are not presubscribed to their networks "virtually connected" to their networks
by automating the dialing of network access numbers.

It’s no sleight of hand, says company spokesperson Elizabeth McCullough. MagicWire
incorporates advanced semiconductor technology into a plug-and-play device that snaps onto
any telephone line between the telephone handset and the wall jack. It also works on an
extension phone connected to a private branch exchange (PBX). MagicWire integrates a
preprogrammed intelligent monitor to register dialed digits and direct calls to the
selected network.

MagicWire is suited for alternate access services, such as dial-around international
and domestic long distance calling, international callback, call blocking, Internet access
and "hot line" dialing. In particular, the company is targeting dial-around
service providers that offer customers low-cost long distance calling by dialing
10-10-XXX. Dial-around service providers typically rely on direct mail and television
advertising to attract customers.

McCullough explains that instead of recurring direct mail campaigns to keep customers
using "dial-around" products, a carrier could mail one of these devices to each
customer. Assured retention and usage by those that install the MagicWire will speed
return on investment over ongoing advertising expenses, she says.

The logic and circuitry of MagicWire are transparent to the telephone network. It does
not interfere with inbound calls, emergency calls, operator-assisted calls and forward
payment calls. The unit draws its power from the telephone line during
"off-hook" times.

DEALS

Maine, Rhode Island PUCs Favor CTC

The Maine and Rhode Island Public Utility Commissions (PUCs) in separate proceedings
have ordered Bell Atlantic Corp. to stop charging business customers a penalty for
switching service providers. The orders answered petitions from Waltham, Mass.-based CTC
Communications Corp. regarding Bell Atlantic’s January 1998 decision to charge contracted
customers a termination-of-service charge should they choose to continue service with a
reseller.

CTC has won favorable decisions for similar petitions in Maine, Massachusetts, New
Hampshire, New York and Rhode Island. Bell Atlantic, however, has received a stay on the
motions granted in Massachusetts and New York.

CTC also is awaiting decisions for emergency relief petitions against Bell Atlantic in
Vermont.

SmarTalk Sells Assets to AT&T

In association with the commencement of its Chapter 11 application with the U.S.
Bankruptcy Court in the District of Delaware, SmarTalk TeleServices Inc., Dublin, Ohio,
has agreed to sell substantially all its assets to AT&T Corp. for about $192 million.
The boards of directors at both companies have approved the transaction, and they expect
to close the deal in the first quarter of 1999 pending bankruptcy court and regulatory
approvals.

Intellicall Breaks into Canadian Payphone Market

Paytel Canada Inc., Surrey, British Columbia, has purchased 25,000 ASTRATEL 2 smart
payphones from Intellicall Inc., Dallas, for installation in the Canadian market. By the
end of 2000, Paytel anticipates installing 40,000 payphones, which feature a 20-character
fluorescent display and voice prompts in English, French and Spanish.

Williams Doubles Nortel Investment

Tulsa, Okla.-based Williams Communications Inc., in response to a growth in business,
doubled the volume and dollar value of its investment in Nortel Networks’ optical network,
network management and long distance switching solutions. The contract originally was
valued at $300 million for the period between 1997 and 2002.

Williams will implement in its national network Nortel Networks’ optical networking
equipment, integrated network management capabilities, DMS-250 switches and the
ServiceBuilding advanced intelligent network (AIN) service-creation portfolio.

Telecom Industry Says Fairwell to Geoff Carroll

Former KMC Telecom executive Geoff Carroll passed away Jan. 16 at his home in
Chesapeake Bay, Md., at the age of 50. Carroll is survived by his daughters Katie and
Amanda and son Rob.

Carroll was new to his position as director of agent programs at KMC Telecom Inc.,
Bedminster, N.J. Previously, he spent a year with e.spire Communi-cations Inc., Annapolis
Junction, Md., as director of e.spire’s agent program. He also held positions with
Cleartel Communications Inc., a CGX Communi-cations Co., Washington, and US WATS Inc.,
Bensalem, Pa.

"To those who worked with Geoff, he was one of those people that always kept in
touch," says close friend Mark Scully, chief financial officer of Golden, Colo.-based
New Global Telecom Inc. "No matter what changes happened through the craziness of the
telecom industry, Geoff was there as a sanity check and a good friend. Geoff loved the
sea, and it was fitting he passed away at his home on the Chesapeake Bay. It would not be
unusual to stop by and visit Geoff for lunch there, and end up spending the night on his
boat in some distant cove."