DEALMAKERS TARGET TRIANGULATION

Tekelec's acquisition of VocalData last week may not have been the company's biggest buy, but when combined with its acquisitions of Santera Systems and Taqua Systems earlier this year and Steleus last month, the vision of CEO Fred Lax appears to have taken shape.

In light of acquisitions by other key suppliers of next-generation platforms, such as Alcatel, Cisco Systems and Lucent Technologies, during the past year and particularly in the last month, the same can be said of the market in general (see figure).

Lax said the $27.5 million VocalData acquisition gives the company the final pillar in what he calls the triangulation of the three major categories for next-generation switching: softwitching, media gateways and application servers.

While vendors may feel the time is right to begin consolidating and jockeying for position for what they see as the next growth market in converged and voice-over-IP services, there is caution about calling recent market progress a turnaround.

“We are seeing consolidation in the market at this point, which is a good sign because we are starting to see greater traction in telecom overall,” said Lax. “They're positive signals, but I don't think we are through the tough times yet.”

When and if the tough times end, it appears Tekelec has used the downtime well to position itself as a competitive provider of next-generation infrastructure. However, despite the company's strong position with incumbent carriers through its signaling platform, Tekelec was struggling to market its new switching portfolio as the solution for circuit to packet migrations. Competitors already had their foots in those doors as incumbent providers of Class 4 and Class 5 switches.

That's changed now, said Steven Levy, analyst with Lehman Brothers. “If you put VocalData's applications with Tekelec's signaling products, it can supplement and perhaps extend the life of these circuit switches,” he said.

The VocalData acquisition will not change Tekelec's relative position from a revenue perspective over the next four quarters, Levy said, “But it gives them a chance to break into the top tier over the next two years.”

Defining that top tier is still an inexact science. Research firm Dittberner Associates counts the number of ports shipped quarter by quarter and provides a worldwide ranking of softswitch and media gateway providers.

Dittberner showed Chinese vendor Huawei Technologies as the market leader with a 28.7% market share in softswitch ports shipped in the second quarter of this year. Nortel Networks was second with 16.8%, then Sonus, Italtel and Siemens. Huawei also led the media gateway market with a 24.2% share, followed by Sonus, Cisco Systems, Nortel, Ericsson and Siemens.

A North America-only list would eliminate Huawei and Italtel and might include Tekelec, however the company hasn't determined how it wants to measure ports shipped and hasn't provided data to Dittberner.

“Tekelec is a major player. And like Lucent, they don't have a big presence, and yet they may be a little shy about sharing their numbers,” said Lilian Tau, executive vice president of market research for Dittberner Associates.

Lehman's Levy said that Tekelec has more media gateways shipped than both Sonus and Nortel, but that the latter vendors' shipments are larger.

In another sign that market conditions may be improving, Tau said the softswitch market is performing better than expected. Softswitch ports versus gateway ports in the quarter accounted for 60% of ports shipped. Nortel, for example, shipped 660,000 softswitch ports but only 357,000 gateway ports.

Dittberner will soon begin tracking ports for the application server market as well. According to Mark Levine, managing director at Core Capital Partners, which had an investment stake in VocalData and made out quite well on the deal, Tekelec just acquired the market leader in the application server market. Most experts agreed, however, that it is tough to tell who the leader is in that segment.

Early market share numbers don't always forecast the leaders of a mature market, and the recent spate of acquisitions indicates that vendors are still maneuvering for position.

Acquisitions, on the other hand, don't always indicate that a market is poised for growth. The optical market is an example of where vendors guessed wrong and were almost done in by their acquisition sprees.

The difference this time is in the math, according to Levy. “Vendors are paying tens of millions of dollars to hundreds of millions to get into this market. The last time they were chasing a boom they didn't have the products for, they spent hundreds of millions to billions,” he said.

Analysts and the companies themselves expect consolidation to continue. VocalData's competitors — BroadSoft, Sylantro and others for example — could get gobbled up in the rush to provide the application leg of the next-generation architecture.

Other companies, such as Alcatel, are trying to break into new markets altogether. “Alcatel realized that in order to get into the core market in wireless, what they had wasn't enough,” Levy said. “Theirs was a time-to-market decision, especially in the U.S. where they have no presence in either the core or the access portion.”

While acquisitions are piling up, some vendors see partnerships as a better alternative, at least for the time being. Charlie Vogt, who took over as president and CEO of media gateway provider General Bandwidth last week (see page 18), has seen it from both sides. He was formerly CEO of Taqua and vice president of sales at Santera, both of which sold to Tekelec. But in the future, he says partnerships will rule the day.

“I don't think we need to broaden our product portfolio to help our ability to sell our media gateway as a stand-alone product,” Vogt said. “We're entering an era where service providers are going to be able to choose best-of-breed technologies.”

Kurt Dobbins, founder and chief technology officer at Ellacoya Networks, has the same go-it-alone mentality for now, especially after raising another $7 million in funding last week. However, despite Cisco's announcement two weeks ago that it would acquire his primary competitor P-Cube, he still sees consolidation as a good thing.

“We are pretty excited by that acquisition because it educates the market at large that IP service control is a key technology in broadband networks,” Dobbins said.

Sonus, which completed interoperability testing with Ciena last week, also said partnering was more effective in this market primarily because it has too many parts, and a vendor can't acquire everything (see story at www.telephonyonline.com).

Still, one other factor could feed continued consolidation, said Core Capital's Levine. “The incumbent vendors can leverage the technology platforms of the start-ups better than the start-ups on their own,” he said.

For now, Tekelec has acquired everything it needs, but the company and its competitors will all have to partner. “That's one of the realities of the new world,” Levy said.

Beyond this summer's deal, there are many big players still looking to fill holes in their portfolios and lots of small players eager to fill them.

“We don't think we have any huge gaps at this time, but we are always looking for the right opportunity to fill, complement and grow our business,” Tekelec's Lax said.

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With additional reporting by Vince Vittore.

HIP TO BUY IP

Vendor	Acquisitions	Technology
Lucent	Telica	Media gateway
Alcatel	eDial Spatial Wireless	SIP software Wireless softswitch
Cisco	P-Cube dynamicsoft NetSolv	IP service control SIP applications IP monitoring/security
Tekelec	VocalData Steleus Taqua Santera	IP applications IP monitoring Wireless softswitch Wireless softswitch