Alcatel's Packet Engines Break Down

Alcatel halts work on products it acquired through Packet Engines, looks to buy an Ethernet company

August 8, 2001

3 Min Read
Alcatel's Packet Engines Break Down

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) is discontinuing development on several carrier-class products it acquired by buying startup Packet Engines -- and the company is looking anew at potential acquisitions in an effort to revamp its approach to selling Ethernet equipment to telecom carriers.

Yesterday afternoon, Alcatel told employees that over the next several weeks it would be reducing its workforce of 150 employees in Spokane, Wash., by roughly one third. That facility, the former headquarters of Packet Engines, has focused on the development of Alcatel's PowerRail Distribution Router, which until yesterday was marketed to carriers by Alcatel's Broadband Networking Division. Alcatel bought Packet Engines for $315 million early in 1999.

"This is part of our effort to restructure Alcatel's carrier activities in several locations," says a spokesperson. Indeed, the move seems clearly in line with ongoing restructuring moves the company has promised worldwide in recent months (see Alcatel Cuts Canadiens,Alcatel to Lay Off 2,500 in US, Alcatel: What's Next?, and Alcatel Profits, Forecasts Drop).

Development on the Alcatel 7652, 7622, and 7212 PowerRail Distribution Routers has now ceased, Alcatel says. But the company says another series of products with the Packet Engines pedigree will continue to be supported "one hundred percent." Those products include the OmniCore series of switch/routers, which are marketed to enterprise customers by Alcatel's E-Business Networking Division, headquartered in Calabasas, Calif. That division will take over remaining resources in Spokane.

"The OmniCore products have sold well. The PowerRail hasn't been as popular as we had hoped," says Alcatel's spokesperson. "We will focus on another strategic approach to that market."

Sources claiming familiarity with the situation in Spokane say Alcatel is looking at the possibility of buying a startup in order to launch a fresh onslaught on the carrier market for metro Ethernet. The names being bandied about include Extreme Networks Inc. (Nasdaq: EXTR), Gotham Networks, and Riverstone Networks Inc. (Nasdaq: RSTN).

But Alcatel refuses to comment on any aspect of future plans for a new Ethernet strategy for carriers. "That's nothing more than rumor and speculation," spokespeople say.

Meantime, the Spokane staffers are "furious," according to sources close to the company. Reportedly, engineers worked doggedly to finish recent upgrades to the PowerRail series, only to be told they may be laid off -- as products are left unsold to accounts that wanted to buy them. Alcatel's spokesperson could neither confirm nor deny claims about the disposition of the new products at press time.

The uncertainty in the Spokane office contrasts with Alcatel's early hopes for Packet Engines.

According to Packet Engines founder Bernard Daines, who now heads up optical Ethernet startup World Wide Packets Inc., Alcatel wanted a leg up in carrier Ethernet when it bought Packet Engines. And it wanted a group of employees it could depend on.

"Alcatel was on a campaign to buy a company like ours, and one of the things they liked about us was that we weren't in Silicon Valley. Employee retention was very important to them, they said. Packet Engines' lead in rolling out Gigabit Ethernet in carrier networks was also important," Daines told Light Reading in an interview last year (see Bernard Daines).

According to Daines, who left the company after it was sold, Alcatel bungled the acquisition, reneging on promises it made and putting in aggressive and arrogant management that "stole morale" and stymied product development. "It's been going downhill ever since," he asserted.

- Mary Jander, Senior Editor, Light Reading

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