Detaching from the mother ship: Cabletron spinout targets metro market

Imparting agility, nimbleness and the culture of a start-up to a line of business overshadowed within a large organization is the desire of many vendors these days. Cabletron Systems carved itself up because its businesses were going nowhere under one huge entity.

The first fruit of Cabletron's divide-to-conquer strategy is Riverstone Networks, a developer of routers and switches for metropolitan area service providers. The company announced this week that it would go public in November. Judging from the Wall Street debuts of some of the vendors it competes against - Foundry Networks, Juniper Networks and Redback Networks, to name three - its IPO could be a blockbuster. But is Riverstone ready to make it on its own?

Incubating inside Cabletron, Riverstone hasn't had to develop the scrappiness that comes from having to raise venture capital; instead, it could dip into a Cabletron cash hoard estimated at $1.5 billion to $2 billion. On the flip side, its customer base, products and management are more mature than those of a typical equipment start-up.

Romulus Pereira, president and CEO of Riverstone, is the former chief operating officer of Cabletron. The company's customers include BT, EarthLink, Telefonica and Genuity. Riverstone reported revenue of $15.8 million in its first quarter of fiscal 2001, a 24% increase compared with its previous quarter.

Riverstone's engineering and management team began developing switch routers in 1996 as YAGO Systems, which was acquired by Cabletron for $280 million in 1998. Forty-three of the original 45 YAGO Systems' engineers are still with the company, and the company has 92% of the market in WAN Layer 3 ports shipped.

"They already have an established customer base, and they've been developing winning switch router products for years," said John McConnell, principal analyst at McConnell Associates.

Riverstone's focus on application and service delivery, as well as quality of service, is what attracts most service providers to its gear, according to analysts.

"They've really targeted a specific market rather than built core equipment. Most of their play with providers is going to be on the edges," McConnell said.

Pereira said the company's strategy is logical. "It's incumbent on box vendors to [not only] provide the speeds and feeds and capacity, but also to provide the service enabler," Pereira said. "We are building a service creation model."

Vitts Networks, a regional service provider in Bell Atlantic territory, uses Riverstone's RS 8000 and RS 8600 Internet routers in its IP-based network. The products enable Vitts to deliver virtual private network services with high-speed data rates for 40% to 70% less than similar services using ATM-based equipment, said Chris Oliver, CEO of Vitts. Vitts chose Riverstone's router because it offers the most advanced technology in a box that doesn't consume a lot of power or take up a lot of space, he said.

"To provide lots of high-speed services at the edge of broadband networks, they're really in a class by themselves," Oliver said.

Another strength of Riverstone's products is their compatibility with the way carriers provision and collect billing information, said William Flanagan, program director at The Burton Group. The flexibility to bill by time, number of packets or sessions is built in, Flanagan said.

"Whatever way the carrier wants to bill, they can," he added. "If you can't bill for it, why bother?"

Indeed, Riverstone's management sees customer support as another key differentiator.

"Buying [our equipment] is only the first chapter in the book for service providers," Pereira said. "We're small, they're small, and every time their network and equipment falls over, we have to be there to help them."

Customer service and superior technology were the hallmarks of the old Cabletron before it lost huge market share points to Cisco Systems. But analysts don't think Riverstone will have image problems from the old association.

"There's a strong residue of respect and loyalty for Cabletron," McConnell said. "They made some bad business decisions, but I think the overall legacy from Cabletron is positive."

Pereira said that Riverstone plans to create its own identity. "We have established our own presence in the market," he said. "Wall Street may have had [a negative] perception, but our customers have never, ever questioned our ability to deliver product based on the Cabletron name."