StrataCom, Inc.

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StrataCom, Inc.

1400 Parkmoor Avenue
San Jose, California 95126
U.S.A.
(408) 294-7600
Fax: (408) 999-0464

Public Company
Incorporated: 1986
Employees: 997
Sales: $331.74 million (1995)
Stock Exchanges: NASDAQ
SICs: 3661 Telephone and Telegraph Apparatus

StrataCom, Inc. is a worldwide leader in networking technology, producing frame relay and asynchronous transfer mode (ATM) communications switches, access devices, and support services for the fast-growing wide-area network (WAN) market. Its revenues doubling in both 1994 and 1995, StrataCom dominates the worldwide frame relay market, with a commanding 41.1 percent share, and holds a strong second position in the WAN ATM market, with more than 16 percent behind the leader Newbridge’s nearly 32 percent. StrataCom’s product portfolio includes its IPX cell switch, the Integrated Gigaswitch (IGX), the BPX ATM switch, and its family of FastPacket networking systems. Together these products boosted Strata-Com’s 1995 revenues to $331 million, in markets estimated to near $3 billion by the turn of the century. Top StrataCom clients include its exclusive vendor agreement with AT&T, which provided approximately 40 percent of StrataCom’s revenues, as well as LDDS WorldCom, Inc., CompuServe, some 40 public phone companies, and more than 450 private companies, such as Air France, Daimler Benz, Lufkin and Jenrette, Motorola, and the Securities and Exchange Commission.

The Frame-Relay Innovation

A group of venture capitalists led by Anthony Sun formed StrataCom in 1986 to develop new networking technologies being pioneered by Charles Corbalis (later StrataCom’s vicepresident of engineering) and others. Richard M. Moley, formerly of ROLM, a maker of telecommunications switches, was hired to head the new company as chairman and chief executive officer. Moley’s task was to convince the international market of the need for StrataCom’s ATM technology.

ATM represented a break from the traditional circuit switching that had for years been a mainstay of the telecommunications industry. Circuit switching, or time-division multiplexing (TDM), set up a circuit for a certain amount of time through which data, such as a voice in the typical telephone call, flowed from one end of the circuit to the other. The advent of networking, and especially WANs, however, placed an extreme burden on the circuit. With only a limited bandwidth through which data could move, network communications could easily bog down, particularly when a large amount of data was being sent. WANs, which were set up over existing phone carrier lines, were also expensive to maintain: companies would typically rent a dedicated amount of bandwidth from a phone carrier. Even with the advent of Tl connections, with band-widths capable of sending 1.5 million bits of information per second, networks were still hampered by the existing circuit switches. A data-intensive transmission, such as video or a large database, could easily slow down the entire network.

StrataCom’s ATM technology provided the innovation to transform communications and launch the 1990s boom in private networking. Rather than opening a continuous circuit, ATM broke up the transmission into identically sized cells or “packets” of information. Each cell held the address for the transmission’s destination. But instead of flowing in a continuous stream, each cell traveled individually through the telecommunication channels, essentially finding openings in the traffic, and thus preventing the traffic from becoming clogged. Once the cells reached their destination, they could be reassembled in their original configuration.

This process could be likened to a department store’s escalator. A department store outfitted following traditional TDM switching would have a separate escalator leading to each department. Cell switching, or frame relay, adopted an approach similar to the typical department store’s escalator, that is, instead of many escalators, a department store normally featured a single escalator system. Each cell of the several or many transmissions being sent over a frame relay-based network took its own step on the elevator; the cells of the various transmissions then sorted themselves out at the appropriate department, or destination.

ATM permitted more efficient use of a network’s dedicated bandwidth or rented T1 connection. In addition, companies were no longer dependent on month-by-month rentals of guaranteed band widths or Tl connections. Adoption of the technology could achieve significant cost savings, up to 50 percent of a company’s network transmission costs, especially as it allowed companies to pay for transmissions only during the actual transmission. In 1988, StrataCom incorporated and introduced its first product, the IPX switch, a narrowband ATM system that supported voice, video, and data transmission at speeds up to 2 million bits per second (bps). Sales were slow at first as StrataCom faced a market that had already invested heavily in the existing technology. Corporations were reluctant to scrap their investments for StrataCom’s ATM devices. First year sales reached $17.8 million, with a net loss of nearly half a million dollars. The following year, StrataCom shipped its 500th IPX, for sales of nearly $24 million but a loss of more than $3.3 million.

StrataCom’s losses continued into 1990, doubling over the previous year to $6.8 million, on revenues that had barely climbed to $25.8 million. Until 1990, the company’s sales had gone entirely to corporations setting up their own networks. But 1990 marked StrataCom’s turning point.

The Frame-Relay Standard

In October 1990, StrataCom became the first to offer frame relay capabilities, by mapping frame relay onto an ATM infrastructure. One month earlier, StrataCom had joined with Northern Telecom, Digital, and Cisco Systems to form the Frame Relay Forum, constructing international standards for the new technology and for its application to local-area networks (LANs) and WANs.

Frame relay permitted companies not only to use T1 connections for their networks more effectively, but also to abandon the Tl connection altogether. Networks could be returned to public, long-distance networks. Over the next several years, frame relay posed a growing threat to the T1 market, which would grow to an $8 billion business by 1995. In response, phone companies and public carriers moved to offer frame relay services to take up the slack from shrinking T1 revenues.

One of the first public carriers to offer frame relay was Wiltel Network Services, later renamed LDDS Worldcom, Inc. The March 1991 launch of Wiltel’s frame relay services, using StrataCom products, provided StrataCom with its first major entry into the public carrier market. As Richard Moley said to the Wall Street Journal, “Wiltel was absolutely seminal” for StrataCom. Frame relay quickly became a standard for networking transmissions, and StrataCom’s role as innovator of the technology placed it in the prime position to gain a dominant place in the market.

StrataCom made further inroads in 1991. CompuServe announced its own public frame relay service, to be based on the IPX, in January 1991. In March, Europe’s largest company, Daimler Benz, chose StrataCom as the vendor for its own company network. Later in 1991, StrataCom entered a worldwide reseller agreement with British Telecom, which would base its own international high-speed frame relay service on the IPX early the following year. One of StrataCom’s most important sales occurred in November 1991, when AT&T announced its own IPX-based public frame relay service. This endorsement of the IPX by AT&T, known for its preference for providing its own internally developed equipment, placed StrataCom at the forefront of frame relay technology.

In 1991 StrataCom showed its first earnings, $53,000 on nearly $40 million in revenues. By 1992, with revenues climbing past $55 million, StrataCom posted a net income of $4.5 million. In July of that year, StrataCom went public, offering 2.5 million shares at $7 per share; by the end of 1992, Strata-Corn’s stock had already topped $19 per share.

ATM and frame relay quickly became worldwide standards in data transmission. More and more corporations began to adopt the new technologies for their private LANs and WANs. StrataCom soon faced competition from other vendors, chiefly Cascade Communications Corp. of Massachusetts, which had been founded in 1990 and rapidly seized a strong 15 percent share of the market. StrataCom’s portfolio grew to include the IPX 8, IPX 16, and IPX 32, offering coverage from small network sites to larger, traffic-heavy sites. The company next turned to development of broadband systems, spending from 18 percent to 20 percent of revenues on research and development efforts.

The 1990s: Becoming a Multiband Vendor

By January 1993, StrataCom was ready to announce its high-speed, broadband switch, the BPX. Aimed at the public carrier market, the BPX provided a high-performance, multiservice 9.6 gigabyte per second (Gbps) crosspoint switch capable of data transmission up to 20 million bps. Next, StrataCom formed a partnership with AT&T and Cisco Systems, Inc. to produce AT&T’s Network Systems GCNS-2000 and In-terSpan Data Communications Services, a network providing support for multimedia and distributed data applications. Strata-Corn’s 1993 revenues grew to $74.4 million, with a net income of $7.5 million.

Company Perspectives

Stratacom’s mission is to develop, deliver and support the best fastpacket networking systems in the world by sustaining profitable growth; delivering innovative, high quality products and services; being a valued business partner; and being a great place to work.

Shipments of the BPX system helped to double StrataCom’s revenues in 1994. Sales reached $154 million, and income grew by 163 percent to near $20 million. Revenues were split almost evenly between the public carrier channel, which grew by 159 percent from 1993 to 1994, and the private WAN channel, which brought in about $72 million of 1994 revenues. International sales also strengthened, rising from $22 million in 1993 to $64 million in 1994. Importantly, StrataCom stepped up its research and development efforts, doubling expenditures in 1994 to more than $29 million.

Until 1994, StrataCom had remained a one-product company. But in the first quarter of 1994, StrataCom introduced a line of multimedia access products, the FastPAD multiplexers, which integrated slower-speed voice and data transfers into an IPX network. Frame relay was emerging quickly; by 1994 the market for frame relay products had grown to $293 million and public carriers revenues from frame relay had reached $234 million. In October 1994, with stock reaching a 52-week high of $49.25 per share, StrataCom filed a second public offering of $1.5 million, for $62 million earmarked for research and development. In November 1994, StrataCom announced a two-for-one stock split.

StrataCom introduced a number of new products in 1995, including support for its BPX switch with AXIS, a product that created 53-byte cells from low-speed traffic that could be integrated into a BPX network, providing significant cost advantages over an IPX network. In June 1995, StrataCom launched a mid-range ATM system, the IGX, filling out its line of switches. Positioned between the IPX and the BPX, the IGX was targeted at mid-sized corporate network users and smaller service providers. By the end of 1995, StrataCom had shipped 200 IGXs. Its IPX presence grew to 4,000 IPXs worldwide. Revenues more than doubled again, to $331.7 million, including $100 million from a newly signed multiyear, exclusive-vendor contract with AT&T.

StrataCom’s future was seen as being strongly linked to its research and development efforts, which received 18 percent of revenues in 1995. As ATM and frame relay became the worldwide standard, competition intensified; AT&T also announced plans to enter the ATM equipment market. StrataCom faced a problem common in the computer industry: the rapid advances in technology quickly made products obsolete. The IGX, for example, was expected to cannibalize IPX sales. StrataCom’s product line also faced pressure from the latest advances in networking technology, particularly the announcement of StrataCom’s Fulcrum Intelligent Network Server (INS) system, which would reduce the vulnerability of single-server systems. With reliance on ATM systems expected to continue through the end of the 1990s, however, and StrataCom’s strong commitment to research and development as well as its renowned customer support efforts, the company appeared to be well-positioned to maintain its industry dominance into the next century.

Principal Subsidiaries

StrataCom Ltd. (U.K.); StrataCom GmbH (Germany); StrataCom China Limited (Hong Kong); StrataCom Korea, Inc.; Nihon StrataCom K.K. (Tokyo); StrataCom SARL (Paris); StrataCom Sri (Italy); StrataCom de Mexico S.A. de C.V.); StrataCom Australia Pty. Ltd.; StrataCom Pte Ltd. (Singapore); StrataCom BV (The Netherlands); StrataCom do Brasil Ltda.