Lucent and Ascend

It was only years ago when Sterling Research was asked to evaluate a small West Coast company that was making significant noise in the budding ISDN market. We interviewed the company -- Ascend Communications -- and were impressed by their technology. But as for the company’s claim that it planned to double in revenue each year -- well, we thought that was just chest thumping.

In retrospect, how wrong we were! Ascend closed its books that year at about $40 million -- up from $25 million the year before -- and subsequently went on an acquisitions binge. It gobbled up Cascade Communications and Stratus Computers, as well as a bevy of lesser known companies.

Ironically, a similar fate has befallen Ascend. If the deal goes through, Ascend Communications will be merged into Lucent Technologies through a deal worth $20 billion. Not a bad financial ending for a company that started out with only one competency -- in-depth knowledge of ISDN technology.

We're left with a couple of outstanding questions. First, what does this merger mean to those who buy and use networking equipment? And second, what does this merger tell us about the state of today's communications market?

With regard to the first issue, most answers I’ve heard seem to be colored by the current Microsoft vs. Justice Department imbroglio. Not that people see a Justice Department intervention in this deal, but many now have a heightened sense of the importance of a competitive market and its impact on pricing and the availability of alternative equipment suppliers. Many people want to know if Lucent has taken out one of its major competitors, thereby reducing competition by giving buyers fewer options to chose from.

At first blush, this would seem to be the case. After all, both companies manufacture equipment for the same market. A closer look, however, shows that the merger could produce the opposite effect: providing buyers with a competitive equipment manufacturer that may counter already dominant players in the market.

The main point of this argument is that there is little product overlap between the two companies, so no options are lost but a well-balanced vendor emerges. It is unlikely that there will be a "kill list" developed that will determine the fate of rival products. The companies may be merging, but there is little merging to be done down on the product level. The result will be a stronger company with the dual legacies of Bell Labs' voice experience and Ascend Communications' data experience.

So what giant might this new company go up against? Well, it doesn't take too long to come up with the name Cisco Systems. After all, with the enterprise market firmly in hand, Cisco has set its sights on the carrier and ISP markets. It is in these markets that a merged Lucent/Ascend will give buyers an option other than Cisco. Unfortunately, for the enterprise folk the merger holds little benefit. Ascend was never a big enterprise player and Lucent -- after having acquired both Agile Networks and Prominet -- has yet to show a strategy that indicates a strong push into the data equipment part of the enterprise market. Many, including myself, think this is wise given that it would run up against an incumbent and snarling Cisco should it try to do so.

So what does this deal say about the state of the market? In a word -- although it is becoming a tired word -- convergence. In a world converging on an IP-centric solution for data, voice, and whatever else may come along, Lucent now has Ascend’s product line to offer carriers and ISPs that are thinking in terms of IP-everything service offerings. --Sam Alunni is vice president of networking at Sterling Research (Sterling, Mass.). Contact him at alunni@sterlingresearch.com.