High-Technology Future Switches to a New Mode
The fastest-growing industry on earth is right now inventing the devices and systems that will transform communications as nothing has since the invention 106 years ago of the telephone switch, which made possible independent telephone calls free from shared or “party” lines.
That’s an arresting thought for the holiday period when we pause to assess what is going on in business and the world around us. And it’s a pertinent thought because legislation to deregulate the telecommunications industry--long debated in Congress--seems likely to become law early next year.
When it does, we’ll probably to see an avalanche of merger activity in telecommunications. Bell Atlantic and Nynex, two of the seven regional Bell companies are already discussing merger. Many of the other five, Ameritech, BellSouth, Pacific Telesis, Southwestern Bell and US West, plus GTE and others will combine or merge to compete with AT&T;, MCI, Sprint and all the eager beavers, from cable firms to financial brokers, that want to get into local phone service.
“Before 1996 is over we may get down to three Baby Bells,” says Peter Bernstein, head of Infonautics Inc., a Ramsey, N.J., consulting firm.
It will be less than an inspiring sight, with layoffs of long-time employees and confusing claims about converging media. What’s really going on is consolidation, the process of taking capital out of old industry for use in expanding new business.
But watching the mating dance of big companies doesn’t give you much insight about industries of the future and the real trends in communications.
Briefly put, the technology that matters is not one that will bring us movies-on-demand over 500 channels but one that will allow us to beam our own “movies” to each other as easily as we now make phone calls.
More seriously, it’s the technology emerging now that allows hospitals to beam magnetic resonance imaging to operating rooms or engineers to work simultaneously on a construction diagram even though they’re half a world apart.
The industry bringing that to fruition, at present little more than $5 billion in total sales, makes network switches for computers.
It’s an industry growing 400% a year, led by such companies as Cisco Systems, Bay Networks, 3Com, Cabletron, Fore Systems and hosts of tiny private firms with breakthrough technology such as MMC Networks and Xylan.
You should know about this industry because, in contrast to seemingly endless layoffs elsewhere, computer networking companies are expanding employment exponentially.
The industry will be at the heart of communications for years to come. And as it develops, the industry is demonstrating a new model of research and development for America in a time when defense budgets have shrunk and Bell Laboratories has lost its former prominence.
And you should know about these companies because institutional investors are bidding them up furiously. Cisco Systems, a San Jose-based company with roughly $2 billion in sales, has a total market value of more than $20 billion. That’s almost as much as Bell Atlantic and more than Pacific Telesis, companies many times Cisco’s size.
Valuations seem hectic. Bay Networks has a $7-billion market value; Fore Systems just paid over $700 million to acquire Alantec, a company with less than $50 million in sales.
That’s not crazed speculation, says Jeff Yang, a partner in Institutional Venture Partners of Menlo Park, Calif. “These companies’ growth rates often are higher than their price-earnings ratios.”
But for close-up understanding of this new industry, look at a start up company, Xylan Corp. of Calabasas.
Xylan, started in July 1993, occupies three buildings in one of the many industrial parks dotting the West San Fernando Valley. Steve Kim, 46, founder and president, immigrated from South Korea 20 years ago, earned an engineering degree at night from Cal State Los Angeles while working for Burroughs, Litton Industries and other companies experimenting with data transmission.
With backing from local investors, Kim founded Fibermux, a fiber optics maker, in 1982, built it up to $50 million in sales and sold it to a Minneapolis telecommunications firm in 1991.
Then with his own and investors’ money, and co-founder Yuri Pikover--an immigrant from Russia--Kim started Xylan. The company has now attracted $25 million in venture capital from Brentwood Associates and other firms, and has grown to 250 employees, some of whom brought in skills from shrinking aerospace-defense companies.
Xylan makes local area and asynchronous transfer mode networks--but don’t be put off by technical language. The simple fact is that most computers today communicate on party lines as telephones did from 1876 until 1889.
ATM switches, which are about the size of a home CD player, allow independent communication, akin to that of telephones. “ATM has the potential to supplant all other network technologies, from the desktop to the worldwide telephone network,” Stephen Johnson, a Silicon Valley computer engineer writes in a report on the technology.
Demand for network products is intense. Xylan, shipping product for less than a year, is up to $15 million sales a quarter. Customers include universities, hospitals, computer makers Digital Equipment and Hitachi, and telephone companies here and abroad--from Bell Atlantic to MCI to Alcatel of France.
The capabilities of switches doubles every year and the price for usage falls by 50%--a pace of change that beats even that of semiconductors. Long term, the outlook is for computer switching to develop as telephone switches did--over most of a century.
But right now the technology is in its infancy and Kim, whom venture capitalists cite for “extraordinary vision,” plans to take Xylan public in the spring to raise capital for further development. “I want Xylan to become a billion-dollar company,” he says. And so do its 250 employees, all of whom own stock.
Will Xylan make it? Who knows! The industry is characterized by constant movement. “I counted $3.2 billion worth of mergers among network companies in 1995,” says venture capitalist Yang.
It’s not chaos, it’s a beehive. “Venture capital is R&D; to these companies. They invent products and test them immediately in the marketplace. It’s extraordinary.”
Clearly, looking at computer networking we see that this period, like the late 19th century, is a time of headlong invention and development. Then as now, times seem threatening, but they’re really invigorating.
