In mid-January this year, Ascend Communications Inc. and Lucent Technologies Inc. announced their intention to merge in a deal valued at approximately US$20 billion. Upon receiving stockholder approval, the transaction is expected to take place in May or June this year, according to Tony Wise, vice president and general manager of Ascend's Asia-Pacific region.
For Ascend, which has traditionally been a provider of wide area network (WAN) core switching and access data networking equipment, the merger will enable the firm to overcome its small-guy status. Currently, Ascend employs 3,000 people globally while Lucent, with its Bell Laboratories research and development team, employs 140,000 staff worldwide. And with Lucent's long history in building voice communication networks, its acquisition of Ascend will be one of a number of mergers finalized over the past two years in that company's effort to beef up its data networking portfolio.
In an interview this week with Computerworld Hong Kong staff reporter Megan Scott, Wise discussed the convergence of voice and data, and Ascend's strategy for the future -- a future that will see the likes of Cisco Systems Inc. as key rivals following the proposed acquisition.
Computerworld Hong Kong (CW): Let's start by discussing Ascend's strategy for Asia in light of the proposed merger with Lucent.
Tony Wise (TW): In general, Ascend's strategy for quite a while has been to address the data market for service providers. Our view of what's happening is that there's this convergence of voice and data, and simultaneously there's this deregulation of the market, as we've just recently witnessed in Hong Kong.
What's happening is the carriers are seeing that there's new competition with the ISPs, the new competitive carriers such as Hutchison, and more recently the ISR (International Simple Resale) of voice. They're using data technology to deliver data services and voice services. Since that market is growing very quickly and that's the market to be chasing, we're not really chasing the corporate market in Asia -- it's the new competitive carriers and the incumbent carriers.
Relating that back to the acquisition with Lucent, Lucent is also seeing this convergence of voice and data. Lucent has traditionally sold voice networks. The best way Lucent saw to address that voice and data convergence issue was to acquire the data technology, and they chose Ascend. The ex-Ascend components will become the data part of Lucent's technology.
CW: Can you sum up what will happen in Greater China with the Lucent and Ascend merger going forward?
TW: I think Lucent has done very well in the traditional voice market. However, Lucent has not had a good product set to address data. Ascend has done very well in China and Hong Kong with the data part. There's now one company that can say, "Here's a voice technology, here's a data technology." We own the whole lot. And going forward, we control all of the technology so that you can plan a network based on this new voice-data paradigm. With one company owning all of that technology, we can say what's going to happen in the next two to three years here.
CW: What's going to happen to the products where there's overlap?
TW: As it turns out, the overlap is very minimal. The Lucent technology for their voice is architected in a TDM (Time Division Multiplexing or circuit switched-based)-type architecture, and our voice is architected over data. While it's voice, there are different ways of achieving the same thing.
Lucent is acquiring where they want to be. So the strength areas are: Lucent knows a lot about voice as carriers are implementing it today, and we know about voice as carriers will be doing it tomorrow. So the overlap -- though it's all voice -- is quite minimal.
CW: What's going to happen to the Ascend people in Greater China? Is there overlap, and will there be redundancies?
TW: What I can say is the merger is all about growth. As far as I can see, there are two types of mergers. One is about saving costs and the other is about growing. Ascend has a lot of technology and access to customers that Lucent doesn't have. And all of the plans are that we will grow, not that we will consolidate and reduce staff.
The other thing I can say is that, believe it or not, the Ascend people and staff really think this is a good thing. And it's quite unusual for a company that's really been taken over for the staff to think, "Hey, this is good." The reason is that Ascend has very fast product development. We're very close to our customers, but we're competing against a number of large competitors. By working with Lucent, it fixes a lot of the problems that we've had. For instance, customers have said, "Well you're a fairly big company but you're not as big as X, Y, Z or C." This merger completely addresses that issue and it turns the tide completely. We spent a lot of time addressing the small-guy concerns with customers, and now that whole issue has gone away.
CW: So with this potential new team, what do you expect the impact will be on Cisco and the other large networking vendors in Greater China?
TW: Cisco is great at making routers. We have lost almost no deals to Cisco in the carrier market in Greater China, in Asia or in the world.
Perhaps not relating directly to Cisco, the other thing that's becoming very obvious for companies who are selling to service providers is that they need to own the technology. In the past, the companies who were traditionally strong in voice -- like Lucent, Alcatel, Ericsson and Northern Telecom -- saw that there was this change where data was becoming more important and they did what DEC and IBM did 15 years ago, which was resell other people's equipment. But, because of the merger -- mania and because of the way the technology is changing so quickly, it was becoming obvious that simply reselling the equipment didn't provide enough of a long-term strategy for the customers. So Nortel acquired Bay, Lucent acquired Ascend, Alcatel recently acquired Xylan and Assured Access. The whole game is sort of changing.
It could be that Cisco is the last man standing who doesn't have a good voice strategy. Despite what Cisco says, the carriers don't believe that Cisco has reliable-enough equipment to provide an infrastructure for the US$100 billion to $200 billion worldwide voice market.
CW: Do you see the Voice-over-Internet Protocol as a large part of the move forward with Lucent?
TW: Yes. I think it's part of the reason for the merger. It's part of that voice-data convergence.
CW: When will VoIP become mainstream in Hong Kong and the Mainland?
TW: We're seeing some major carriers with their engineering effort deploying it right now. That will become a marketable, usable service in the next three to nine months with quite a few carriers. The technology is here.
CW: When will the quality become comparable to traditional phone calls?
TW: There's no quick answer. There are probably two main things controlling the quality. One is the technology within the access equipment and how well that can convert voice to data. I think that issue -- not just for us but for most vendors now -- has been addressed fairly well.
The other issue is how the data network is architected and constructed, because there are characteristics of voice that are different from characteristics of data. For example, if you get the best Voice-over-IP equipment and put it across the Internet, it will sound terrible. If you get the worst Voice-over-IP equipment and put it over a well designed IP network, it will sound OK. Companies are getting confused between Voice-over-IP and voice over the Internet because the Internet is IP-based.
We're seeing that the companies who are being successful in the U.S. and Europe in deploying these networks are building what's called a Quality of Service-based, or QoS, backbone. A QoS network says, "This is a voice call. I have to give it a priority." For example, if you compare the network to a freeway and prioritized voice traffic to a carpool lane, for those companies who build a network with a carpool lane, the call will work great. But if they build a freeway without a carpool lane it will sound terrible. The companies who will do it successfully are the ones who will be building a QoS-based network.