Cable companies may soon be offering dial-tone service and telephone companies soon could be serving up videos-on-demand. While such convergence may sound far-fetched, particularly given the meltdown of networking stocks, public hopefuls Unisphere Networks (Nasdaq: UNSP) and Convergent Networks (Nasdaq: CVNI) are hoping to convince the markets that telecommunications hasn't dried up -- it just changed.
"In this environment, companies are looking for less expensive ways to deliver value-added services to both the residential and business markets," says Amy Helland, a voice and data communications analyst at Cahners In-Stat Group, a Scottsdale, Arizona-based consultancy.
Unisphere, which is majority owned by German electronics giant Siemens (Nasdaq: SMAWY), had been scheduled to go public during the week of March 12. It now appears that the offering will take place in late March. Convergent, which filed the latest amendment to its own offering in December, is likely to debut after Unisphere. For both deals, Credit Suisse First Boston is the lead underwriter and J.P. Morgan is the comanager.
VOICE AND DATA ON THE SAME NETWORK The switches and network management software manufactured by Unisphere and Convergent enable carriers to operate packet-based networks that divide voice and data into more efficient bursts of information. Unlike traditional, circuit-based networks, which were designed for voice traffic and are either on or off for the duration of a call or transmission, packet-based networks are far more efficient.
"I literally ripped out all my circuit-based switches and replaced them with Convergent's equipment," says Frank Gangi, CEO of Global NAPs, a privately held competitive local exchange carrier (CLEC) based in Quincy, Massachusetts. According to Mr. Gangi, Convergent's ICS2000 Broadband Switch delivers four times the capacity, in one-tenth the space, at one-tenth the cost of his previous circuit-based network.
Global's use of Convergent's switches proves that it makes economic sense for carriers to allow data and voice to be transmitted over the same network, as opposed to operating duplicate networks. Down the road, the union of data and voice over a single network could allow carriers to unveil services such as voice-activated Internet browsing.
"The advantage to the service provider is significantly lower cost of operation, reduced cost of transport, and the ability to provision new services giving opportunities for new revenue generation," says David Schantz, a general partner at Waltham, Massachusetts-based Matrix Partners, a financial backer of Convergent.
WILL INVESTORS TOLERATE HUGE LOSSES? The ability of these media gateways to offer additional services has economic ramifications for all types of service providers, whether they're CLECs, digital subscriber line providers, cable companies, or wireless network operators. This is good news for gateway vendors such as Convergent, Unisphere, Sonus Networks (Nasdaq: SONS), Tellabs (Nasdaq: TLAB), and Cisco Systems (Nasdaq: CSCO).
Motorola (Nasdaq: MOT), for example, announced plans on Monday to use Convergent's softswitch technology to provide packet-voice services over a cable operator's hybrid fiber-coaxial infrastructure. (Through software, softswitches manage the switching of voice calls between networks as well as value-added services.)
You only need to look as far as traditional circuit-based switch manufacturers such as Nortel Networks (Nasdaq: NT) and Lucent Technologies (Nasdaq: LU) to realize that spending on legacy equipment has dried up.
Whether investors will be able to brush aside large losses at Unisphere and Convergent in the face of Nortel and Lucent's earnings meltdown is doubtful. But for Unisphere, which lost $433.7 million in fiscal 2000, ended September 30, and Convergent, which lost $55 million through the nine months ended September 30, the transition is in the works.