Riverstone and Tellabs in Bustup

The ex-partners are pounding each other over the failure of their planned joint blitz of the MSO market

August 30, 2001

4 Min Read
Riverstone and Tellabs in Bustup

The partnership between Riverstone Networks Inc. (Nasdaq: RSTN) and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) ended with a bang today, as both companies made scathing public announcements concerning the failure of their partnership, established nearly a year ago (see Riverstone Signs Deal With Tellabs).

The fight points up the pressures companies are under as they attempt to face emerging broadband markets. And it highlights the risks they take in tying their fortunes to those of partners that also are facing considerable challenges.

The Riverstone/Tellabs partnership started off with high hopes on both sides. It called for Riverstone and Tellabs to join forces in a sweep of MSOs (multiservice operators) -- a new breed of carriers seeking to offer video, voice, and data services over hybrid fiber/coax (HFC) cable TV links.

Specifically, Riverstone would supply product for Tellabs to rebrand, market, sell, and support to its worldwide customer base. In addition, the partners would engage in joint product development and manufacturing.

There was more: Tellabs agreed to buy $100 million worth of Riverstone equipment. The companies also agreed that if Tellabs failed to buy all the gear, it would pay 60 cents for every dollar it failed to buy.

In the flush of a bull market, with carriers old and new clamoring for all kinds of broadband gear, the contract seemed a match made in heaven -- at least to the partners involved. Both stood to gain significantly: Tellabs would be able instantly to supplement its HFC product line with much-needed IP support, while Riverstone would gain access to Tellabs' enormous customer base.

But things turned sour as the months rolled by. According to Riverstone, Tellabs planned to use Riverstone's RS 8000 and RS 8600 metro routers to replace its own Cablespan 2300, a cable modem termination unit (CMTU), defined as a device in the headend of a cable TV network that channels data traffic to residential customers over the HFC network.

But Riverstone says Tellabs failed to sell the product -- at all. Instead, it purchased just $5 million worth of Riverstone kit, which subsequently collected dust in the Tellabs warehouse.

Riverstone says there's no excuse for Tellabs' failure to sell its products as planned. "We've sold tens of millions of dollars worth of these products around the world," says Andrew Feldman, VP of corporate marketing and corporate development at Riverstone.

Indeed, in a conference call this morning, Riverstone CEO Romulus Pereira didn't pull his punches: "Tellabs has been hurt in its business restructuring," he said. On top of this, their "slow ramp in IP and routing and lack of presence in data MSOs hindered an effective sales and marketing effort."

Pereira told Wall Street analysts that the failure of Tellabs to sell his product wouldn't hinder Riverstone's forward guidance, because it's already selling its products well into other markets, such as metro broadband. He also repeatedly stated that the lawsuit wouldn't stop Riverstone from pursuing the MSO market with other partners.

But he was clear that Riverstone wants its money back, plus damages, and he says the company will do whatever it has to in order to gain satisfaction (see Riverstone Sues Tellabs).

Tellabs tells a different tale. First off, they claim to have been the first to sue (see Tellabs Sues Riverstone ), and the company has published its complaint online (see http://www.tellabs.com/news/riverstonesuit.pdf).

In its motion, Tellabs says it entered the contract believing that Riverstone had a product in development -- apparently a modified or later version of the RS series products -- that could meet MSO's voice, data, and video requirements without significant modification. Tellabs says this product was to be joined with its own Cablespan 2300 in a new offering called the Cablespan 2700, in order to offer MSOs "triple header" support of voice, video, and data.

Riverstone, says Tellabs, failed to deliver. "Riverstone products have never met contractual requirements for handling voice traffic," says the Tellabs statement issued today. "Further, Riverstone missed multiple product development milestones and still cannot meet the voice requirements."

Tellabs says that on top of not delivering the product it promised, Riverstone violated the contract by attempting to sell its own wares directly into Tellabs' existing and potential MSO customer base. This was bad faith, Tellabs says, since Riverstone had agreed its products were to be resold under the Tellabs mark.

Tellabs is seeking its own set of multimillion-dollar damages and compensation covering a range of alleged Riverstone misdeeds.

Clearly, the resolution to this mess will be determined in court. But the fight sends a flood of cautionary messages to companies considering partnerships. It also points up the key issues facing the still-nascent MSO market.

Analysts say both Tellabs and Riverstone realized that getting an "in" to that market requires products that support voice, data, and video together.

"MSOs want to offer all three services -- voice, video, and data -- in order to compete with RBOCs, who can't support video very well over existing DSL lines," says Alan Bezoza, broadband access analyst with CIBC World Markets.

Neither Riverstone nor Tellabs had the full set of goods to meet the MSO market head on. Unfortunately, the courts must now assess the fallout of their failed attempt at a unified solution.

— Mary Jander, Senior Editor, Light Reading

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