Cabletron Systems, Inc.

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Cabletron Systems, Inc.

35 Industrial Way
Rochester, New Hampshire 03867
U.S.A.
(603) 332-9400
Fax: (603) 332-7386

Public Company
Incorporated: 1988
Sales: $418.2 million
Employees: 3,065
Stock Exchanges: New York
SICs: 7372 Prepackaged Software; 3661 Telephone and Telegraph Apparatus

Cabletron Systems, Inc. is one of the leading manufacturers of cables and other equipment for the Local Area Networking (LAN) industry, which enables all the computers in an office to exchange and share phone lines, power, and data. With a rapidly growing customer base of over 45,000 and 1993 record sales revenues of over $418 million, Cabletron has developed from a small two-man firm that initially manufactured Ethernet cable assemblies to a leader in the field of network management and connective solutions.

The Cabletron story starts in March of 1983 with then 25-year-old Robert Levine. For four years Levine had worked as an independent sales representative for such firms as Hercules Corporation and Insilco Corporation, selling cable, power supplies, and electronic equipment to various companies throughout the northeastern United States and Canada. One day he was called on by a customer who needed 1000 feet of highly specialized cable for one of his computer networks. Unfortunately, Levine’s supplier refused to sell him cable in amounts less than 10,000 feet. When Levine told this to his friend, 28-year-old Craig Benson, there was little doubt in Benson’s mind as to the next step. Benson had been a materials management specialist for three years at Interlan, an early manufacturer of local area network equipment, and a financial inventory analyst at Tera-dyne, Inc. before that. It took some time, but he finally persuaded Levine that it would not be much of a problem selling the other 9,000 feet of cable and doubling their money in the bargain.

The two friends purchased the 10,000 feet of cable for $30,000 on credit, and shipped it to Levine’s garage in Ashland, Massachusetts. During lunch breaks and evenings, Levine and Benson spliced a 1,000 foot section to meet their first order, and then sold the remaining 9,000 feet of cable to new customers. Not long afterward, Levine was selling wire and cable for his own company on a full-time basis, and Benson was taking care of the firm’s finances during evenings and weekends. Levine’s business was the only company supplying cable in less than 10,000 feet increments. To speed order processing, Levine hired ten part-time employees to splice and package cables. With the new employees, Levine and Benson could emphasize customer service, reducing the delivery time from 90 days to within 48 hours. By the end of one year’s business, revenues amounted to nearly $120,000.

Disappointed over the amount of first year revenues, Levine and Benson were determined to make the company a much bigger success. In 1985, Cabletron was moved from Levine’s garage to New Hampshire in order to take advantage of a lower tax rate and less expensive labor force. Another benefit included renting manufacturing space at half the amount for the same square footage near Boston. A stroke of good fortune also helped: lower housing mortgages attracted well-trained, highly creative software and hardware engineers from the failing computer businesses situated along Route 128.

After Cabletron’s relocation, the two entrepreneurs quickly began to install networks in addition to selling cable and wire. Within a short time, they hired engineers to design and manufacture equipment for the networks. The most important and lucrative parts of the equipment were those that connected personal computers to telephones and to the computer network that manages the flow of data within a company’s office. One of these connective parts was a small box which contained a circuit board that controlled all the information entering and leaving each of the personal computers within the network. To supply a network of 80 computers, a Cabletron contract might call for 80 of these small boxes, priced at $250 each. When Cabletron’s engineers developed a box that not only controlled information input and output but allowed computer analysts to diagnose problems with connections into the network, both the product and the company were poised for success.

Levine and Benson decided to sell its box at nearly 15 percent below the market price. On the basis of this new product alone, Cabletron’s sales skyrocketed from $4 million in 1986 to $25 million two years later. In 1988, Cabletron introduced another innovative piece of equipment named a “smart hub,” a highly sophisticated and extremely reliable management system for networks. One of Cabletron’s “smart hubs” might ordinarily monitor 90 personal computers on a network and, instead of searching from computer to computer to locate problems, it allows a technician to identify and locate faulty wires and computers immediately. With an initial sales price of $37,000 for the hub and an annual service fee of $4,400, Cabletron’s revenues once again soared. Before long, smart hubs accounted for over half of the company’s revenues.

Cabletron concentrated on developing more technological innovations for the networking industry to further the company’s success. Company engineers introduced the Multi-Media Access Center (MMAC), the industry’s first modular, intelligent wiring hub device for the central location of transmission media and data in 1988. The first entirely modular approach to comprehensive network integration, it soon became one of Cabletron’s cornerstone network management technologies. Already having introduced LANVIEW in 1986, a diagnostic indicator for network systems, by 1988 it was redesigned and reintroduced as LANVIEW/Windows, the first Ethernet network management and control software package with diagnostic capabilities.

Cabletron decided to enter the PC card market in 1989, and although it entered the marketplace disadvantaged by its small product line, the company soon emerged as the fastest growing manufacturer of PC cards. Cabletron’s plug-in network adapter cards for different kinds of computers allowed users to connect into Ethernet networks and thereby communicate and share information and data with other users on the network. In addition, Cabletron provided the LAN industry with a comprehensive approach to network management control with its SPECTRUM product, the first protocol independent multi-vendor network management system based on concepts derived from artificial intelligence.

Having focused almost exclusively on the Ethernet standard (which comprises 65 percent of the networking market) for the LAN industry, in 1990 Cabletron broadened its market by introducing its first products for IBM’s “Token Ring” standard (which comprises the remaining 35 percent of the market). A “Token Ring” is a type of network where computer workstations are provided access to the network by means of a token that passes from station to station in a ring. Cabletron immediately began to make inroads on the $800 million “Token Ring” standard market that had been dominated by IBM.

With the success of its product line, Cabletron’s revenues continued to grow rapidly. By 1989, sales had jumped to $55 million, and by 1990 sales had passed the $100 million mark. As sales increased dramatically, profit margins also soared from $189,000 in 1986 to almost $12 million by 1989. In light of these figures and the promising future for Cabletron that they indicated, Levine and Benson decided to take the company public. An initial public offering of $84 million was made in May of 1989. By 1990, the company’s stock price had shot up from $ 16 to $23, giving it a market value of approximately $600 million. Not surprisingly, Levine and Benson profited handsomely; with a 36 percent ownership of Cabletron’s stock, Levine’s worth was estimated at $220 million while Benson, with a 29 percent interest, was estimated to have a stake worth over $170 million.

Throughout its short existence, Cabletron lagged behind its arch-rival SynOptics, a Mountain Valley, California, firm which was the leader in certain segments of the LAN equipment market. Initially, Cabletron trailed SynOptics because of its slowness in developing a smart hub. Yet Cabletron’s continuing improvement and development of networking management software allowed it to finally surpass its competitor. By the end of 1991, Cabletron became the leader in the worldwide intelligent hub market, capturing a market share of nearly 17 percent, while SynOptics’ market share fell to 15.9 percent. In the same year, Cabletron also became the world’s leader in international Ethernet hub shipments, with a 24.9 percent share of the market as opposed to a 23.3 percent share for SynOptic shipments.

Even though Cabletron’s products outsold SynOptic’s, many industry analysts speculated that Cabletron’s success in surpassing SynOptics was not due merely to its product line, but also to its highly aggressive sales methods and its emphasis on technical support. Levine and Benson’s unorthodox management style gives employees impetus to work hard. Levine and Benson describe themselves as corporate misfits, and encourage their employees to engage in rough games of market competition. Cabletron has no vice-presidents and almost no middle management; Levine and Benson discourage lengthy conference meetings by furnishing meeting rooms without chairs. The two men encourage an all-out, no-holds-barred aggressive sales technique to please the customer, a technique that proved so successful that by 1990 Cabletron had increased its work force by 90 percent, totaling approximately 2,300 employees, to keep up with company growth.

Cabletron expanded its services worldwide through a well-conceived strategy. During the 1990s, it opened offices in Canada, Mexico, Venezuela, Brazil, England, Ireland, Germany, France, Spain, Sweden, The Netherlands, Australia, Japan, and Singapore in order to capture high-profile multinational customers. Soon there were 25 sales and support offices located in Europe, South America, and the Pacific Rim. With the company’s European headquarters located in Birkshire, England, and a 50,000 square foot facility in Limerick, Ireland, serving as the manufacturing and distribution base for all products sold on the continent, Cabletron’s overseas revenues increased significantly. By 1993, over 60 percent of its revenues were generated from multinational corporations such as Philip-Morris, Motorola, Bank of America, and Mexico’s largest bank, Bancomer, S.A.

In one decade, Cabletron has distinguished itself as one of the fastest growing companies in the world. In 1993, the company employed over 3,065 people worldwide, with 52 international direct sales/support offices. Marketing its products and services to end users and Original Equipment Manufacturers (OEMs), Cabletron lists 84 of the Fortune 100 as customers. Besides the Fortune 100 companies, Cabletron also provides products and services to a wide variety of financial institutions, federal and state agencies, industrial and manufacturing firms, and academic institutions.

Cabletron’s international sales for the second quarter of 1994 amounted to $141.9 million, an increase of nearly 50 percent when compared to the second quarter of 1993. With an eight to one service to sales ratio, almost 70 percent of its revenue coming from existing customers, and the continued guidance of Levine and Benson, the company can look to the future with a good deal of confidence.