Riverstone purchase fortifies plan

Riverstone Networks's recent acquisition of start-up Pipal Systems underscores the company's strategy to utilize MPLS as the technical underpinning of the metro Ethernet aggregation capability of its routers.

Last month Riverstone announced intentions to acquire Pipal, which employs 40 people and was founded in 2001 by engineers from Nortel Networks and Redback Networks. The company completed the acquisition on Jan. 3.

Still in the development phase when acquired by Riverstone, Pipal is working on Ethernet, MPLS and other technologies for broadband aggregation, including Layer 2 Tunneling Protocol (L2TP) and subscriber management.

Riverstone is remaining tight-lipped on its plans for Pipal's technology, including the shape of upcoming products. The company will unveil more details this spring, promises Steve Garrison, director of corporate marketing.

"They are developing next-generation technologies that help us offer service-creation capabilities," Garrison says. "It fits into our known focus of carriers and broader revenue bases," such as large enterprises with carrier-class networking requirements, he says.

Riverstone announced plans to target the enterprise market last year as a way to lift sagging financial fortunes from carriers and service providers that cut back dramatically on spending and network build-outs. For its fiscal 2003 third quarter ended Nov. 30, Riverstone posted a net loss of US$27.8 million on revenue of $13.8 million. This compares with a net loss of $58 million on revenue of $10.7 million for the prior quarter, and a profit of $2.2 million on revenue of $60.1 million for the third quarter of fiscal 2002.

Pipal will cost Riverstone 8 million shares of common stock, $3.5 million to Pipal stockholders, assumption of $6.5 million in debt, and $5.8 million in compensatory and bonus arrangements to Pipal employees. Analysts pegged the cumulative value of the deal between $35 million and $40 million.

Pipal's founders and top managers have authored several IETF Requests For Comment on L2TP and subscriber management techniques, Garrison says. These, as well as Pipal's other technical assets, were particularly appealing to Riverstone, he says.

"There are a lot of bright guys there, a lot of intelligence in that team," Garrison says.

Like MPLS's Draft Martini proposal, L2TP can be used to merge Layer 2 services - such as frame relay, ATM and Ethernet - into IP networks. L2TP is a "non-MPLS" way to integrate legacy Layer 2 with IP VPN services and infrastructures; Cisco already offers L2TP on its routers for this purpose.

Subscriber management provides a way to personalize IP services by identifying the subscriber and setting up customized service levels, qualities and content access. Subscriber management capabilities are particularly applicable to wireless networking, where vendors and operators are looking to offer mobile users personalized access to Internet and IP content through their handsets.

Garrison deflected questions on Riverstone's specific plans regarding L2TP, and subscriber management and wireless. He says Riverstone routers are already performing aggregation duties in a number of wireless networks.

Despite the mystery of how Pipal's technology will actually be used, analysts say the acquisition is consistent with Riverstone's Ethernet/MPLS aggregation business case - though challenges remain.

"The Pipal Systems acquisition represents no major change in strategy for Riverstone - rather it has decided to lock in Pipal's MPLS technology now when an acquisition can be done reasonably cost effectively," states David Dunphy, an analyst at Current Analysis, in a recent report. "Though Riverstone gained early implementation of a metro MPLS solution, consensus on the role of MPLS has yet to be established in the metro. Riverstone needs to prove it can successfully expand into its new market segments without losing focus as it widens its net in search of additional revenue."

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