Little-Known Avaya Tackles
Cisco in Internet Calling Gear
By KEN BROWN, Staff Reporter of THE
WALL STREET JOURNAL, October 26, 2004; Page B1
Avaya Inc. is hardly a household name.
But this unlikely survivor of the telecom bust has
emerged as a leader in the surging market for Internet
phone-calling equipment.
Today as Avaya plans to report the first
annual profit of its short life on revenue of about $4
billion, it finds itself in a rather surprising
position. The once-troubled company, which was
unceremoniously spun out by Lucent Technologies Inc.
four years ago, is slugging it out with some of the
biggest names in technology -- chiefly, with
computer-networking giant Cisco Systems Inc. -- for
major contracts to install this cutting-edge phone gear.
Each has signed up a who's who of
customers: Avaya landed Morgan Stanley; Cisco got Bank
of America Corp.; Avaya handled the Olympics for General
Electric Co.'s NBC; Cisco will install a new phone
system for Ford Motor Co.
But despite this string of high-profile
contracts, executives say little-known Avaya needs to
work on breaking out of telecom circles to establish
itself as a big name in technology in its own right --
particularly if it wants to better take on Cisco's
legendary marketing clout.
"They're neck and neck," says Manuel
Recarey, an analyst at the investment firm Kaufman
Bros., adding that the No. 1 slot in Internet telephone
equipment now shifts routinely between Cisco and Avaya
depending on one or two big orders in a quarter. The two
companies "are doing very well in this space, and their
competitors are not doing so well."
Even as consumers begin to embrace
Internet calling, corporate customers may present a
potentially bigger market since they spend billions of
dollars on communications annually. Because calls are
sent via the Internet as data packets, instead of the
dedicated connections used by traditional phones,
Internet calling can drastically cut phone costs as well
as provide many new features and better control over
sprawling communications systems.
Observers say Avaya is doing many things
right. In particular, it is taking advantage of its
legacy -- stretching back to the days of Lucent and,
before that, AT&T Corp. -- of selling equipment that
sits in the phone closets of nearly every major
corporation in the U.S. With its traditional emphasis on
maintaining the quality of voice calls -- the most
difficult of all applications on the Internet -- Avaya
is going to its established customers and offering to
link the new equipment with the old. This allows
companies to upgrade their phone systems slowly, keeping
costs and stress levels low.
Industry analysts say that Cisco, by
contrast, tells customers they must do what's dubbed the
"forklift upgrade," meaning all of a company's phone
equipment, including the phone that sits on every desk,
is removed and replaced with Cisco gear. Avaya's go-slow
approach sometimes gives it an edge, especially with
companies still leery about Internet calling, analysts
say.
Avaya was put in the spotlight last year
when Merrill Lynch & Co., which had hired Cisco to
build an Internet phone system, decided that it wanted
to keep a portion of its traditional phone network.
Cisco couldn't provide a hybrid system, so Merrill
brought in Avaya to do the job.
"What we've discovered over time, in all
manner of service, is rip and replace is not a very well
thought-out strategy," says Maribel Lopez, an analyst at
Forrester Research, a technology-analysis firm in
Cambridge, Mass.
Don Proctor, vice president and general
manager of Cisco's voice technology group, says the
company purposely doesn't sell a hybrid phone system
because it is an unnecessarily expensive step to get to
the ultimate goal of an all-Internet phone system. "What
we disagree on in the industry is how you get there," he
says.
Each company has about 26% of the market
for corporate Internet calling gear, according to
Synergy Research Group, and the market is growing 30% to
40% a year, according to analysts. Cisco remains a
ferocious competitor and still has the advantage of
being a big seller of equipment that carries all sorts
of other Internet traffic. The growing Internet phone
business is likely to provide both companies with
healthy growth and profits.
But being such an unknown compared with
Cisco is presenting perhaps Avaya's biggest challenge.
The Basking Ridge, N.J., company still has a long way to
go before its sales and marketing arms catch up with
Cisco's. Avaya recently hired a big name to boost its
image: Jocelyne Attal, who was the marketing chief for
International Business Machines Corp.'s WebSphere
software before joining Avaya as chief marketing
officer. She is frank about how far Avaya has to come:
"I say to my team, we are in the voice business and no
one can hear us."
Avaya also is raising its profile by
making deals in the U.S., India and Europe. Early this
month, Avaya announced its biggest acquisition yet,
German equipment maker Tenovis GmbH & Co. from
Kohlberg Kravis Roberts & Co. for $725 million in
cash and assumed debt and leases. The deal could vault
Avaya to the upper ranks of telecom equipment makers in
Europe.
Avaya's start wasn't so promising.
Lucent spun the unit off in October 2000 so the former
parent could concentrate on selling equipment to big
telecom companies, which it believed would be a much
faster growth industry than selling to general
businesses. Investors drove Lucent's stock up 15% on the
news of the move, believing that what would become Avaya
was dragging down Lucent's growth rate.
Some inside Avaya describe the spinoff
as a Viking funeral where the warrior's body is put on a
boat that is set ablaze and sent adrift. The telecom
meltdown was only one of its problems. Many of its
customers had already upgraded their phone systems in
preparation for the year 2000 computer-software bug,
while others delayed spending because Internet phone
calling wasn't yet ready for prime time.
Making matters worse, Lucent freighted
Avaya with $780 million in short-term debt, setting the
stage for a near-death experience. When business started
to slow in early 2001, Avaya executives began cutting
costs -- but couldn't keep up with the drop in revenue.
The company slashed its work force by more than half to
about 15,000 currently and raised cash by selling stock
and debt, often on onerous terms. "We weren't quite at
the brink, but it didn't feel good being there," recalls
Garry McGuire, its chief financial officer.
Avaya's business hit bottom near the end
of 2002, a few months after its stock reached its low of
$1.15. Today, the company is paying off that debt, its
balance sheet is healthy and its stock has rebounded; it
stood at $13.22, down 35 cents, at 4 p.m. yesterday on
the New York Stock Exchange.
Avaya turned itself around because
corporate customers started buying Internet calling gear
and many favored the company's go-slow approach.
Customers nervous about sending calls over data networks
also have been comforted by Avaya's century-old history
in the phone business, stretching back to its Ma Bell
roots.
Chief Executive Donald Peterson says the
company is slowly transforming itself from a phone
company to a tech company. When he joined AT&T from
Nortel Networks Corp. nine years ago, he says there were
dozens of executive assistants running around his
department, making "sure I wanted for nothing." He's
slashed that and other perks, while also cutting the
company's pension plan to better compete with tech
companies.
"Have we got a speedboat yet?" he asks.
"Probably not, but I think we've moved down to a sleeker
battleship."
Write to Ken Brown at ken.brown@wsj.com |