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Riverstone and Tellabs in Bustup

Light Reading
News Analysis
Light Reading
8/30/2001

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
http://www.lightreading.com

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ownstock
ownstock
12/4/2012 | 7:53:08 PM
re: Riverstone and Tellabs in Bustup
Without ethics, there is no basis for business. May as well go back to basics...let's all carry weapons...shoot for money, food, sex...well, have to shoot after for the last...

http://www.siliconinvestor.com...

-Own
gladysnight
gladysnight
12/4/2012 | 7:53:08 PM
re: Riverstone and Tellabs in Bustup
let's all carry weapons...shoot for money, food, sex...well, have to shoot after for the last...

-ownstock
------------------------------

To each his own, I say . . . . .
NingWy
NingWy
12/4/2012 | 7:53:05 PM
re: Riverstone and Tellabs in Bustup
Mary,

MSOs are not a new breed. They've been around for a few decades. MSO is short for multiple systems operators. Noting them as a "new breed" makes them sound like CLECs. They're not. They're as stable as any ILEC.

Ning Wy
lightmaster
lightmaster
12/4/2012 | 7:53:05 PM
re: Riverstone and Tellabs in Bustup
A few observations:

It appears that Tellabs filed their suit but didn't make a public spectacle of it. They were not even asking much for damages. Then Riverstone, realizing that this could be a PR fiasco for them, files a suit in defense and issues a press release. Tellabs, shocked by the fact that Riverstone would air this in public, issues a release as a defensive measure.

I think this illustrates the basic issue between these two companies: they have corporate cultures that are 180 degrees out of phase.

Read both filings and you'll see:
"They didn't meet contractual obligations, the product does not meet spec" versus "Why don't these guys just quit complaining and sell something?"

Which is right? Probably both (or neither). The courts will decide who has the better legal position, but this relationship was doomed before it started.

opto
opto
12/4/2012 | 7:53:04 PM
re: Riverstone and Tellabs in Bustup
1. MSO=Multiple System Operator - an MSO is a larger Cable TV conglomerate that operates multiple systems. A system is typically a franchise area, and since there are different contractual obligations with each franchising authority, MSO's typically operate each system as a separate business entity. The term MSO is not as referred in the article, nor is it a new term. And all bigger MSO's have been working on expanding revenues with digital video, data, and voice services for many, many years. Nothing new about that.

2. Tellabs has never had an especially good sales presence in MSO's. Their CableSpan product was originally strictly a telephone over coax product. It morphed into a CMTS (not CMTU) only, which is basically a good sized router with RF modems that communicates via RF with the home cable modems in a serving area of an hfc system, (as defined by the CableLabs DOCSIS standards). Cisco is the big dog in CMTS's currently. If Riverstone was smart, and had done their due diligence, they'd have partnered with Moto, SA, or maybe even C-cor or Harmonics. Shame on Riverstone for thinking they were getting much clout with MSO's by going with Tellabs.

3. CMTS's: All you need to add to a good router is good RF modem design (easy to acquire), and a good management system, which presumably you'd have with any good router. Riverstone qualified their CMTS Oct 10, 2000. That is a big milestone in their favor. My guess is that Tellabs did good work on the RF modem design (Lord knows, they spent enough money on that program), so that technology was used with Riverstone's router to create a joint product.

4. Adding IP voice was probably difficult for Riverstone, as the appropriate standards and technologies have been a moving target. It's not like any other vendor has IP voice wired either. Anyone can do IP voice in a closed system like a corporate network. The issue is getting the interface with the public switched network - SS7 connectivity is very, very difficult, and very necessary for a robust, fully workable service offering. Sounds like Tellabs and Riverstone did a poor job of defining what Riverstone was to accomplish, based upon what was realistic for this nascent market. Sounds like, as is frequently true with partnerships, not enough time was spent spelling out exactly what each party was to accomplish, and in designing in flexibility to transform the relationship as necessary.


opto
opto
12/4/2012 | 7:53:03 PM
re: Riverstone and Tellabs in Bustup
Mary - suggest you not quote Bezoza again. Pretty lame quote from someone that does not seem to know the business.

RBOCS do not offer video. They stopped trying, they won't go back. Dead issue. Most MSO's do not consider RBOCS competitors any longer. DirecTV is another thing.

And while MSO's want to expand services revenue, they do not think that traditional voice is much of a business in residential. Unfortunately, everyone who has tried has lost money. ATT(TCI) is forging ahead (with a more classic circuit-switched approach), but profitability is a long ways off. However, a true IP voice service, with a reasonably-priced home interface unit might fly...
whoknowsnothing
whoknowsnothing
12/4/2012 | 7:53:02 PM
re: Riverstone and Tellabs in Bustup
too bad there isnt a local bar in NYC where these discussions can take place....

ownstock
ownstock
12/4/2012 | 7:52:59 PM
re: Riverstone and Tellabs in Bustup
The old joke went something like this...

The pirate captain to his flunkie:

I told you: rape, pillage then burn...don't get it backwards again!

:-) Lighten up! It's Friday!

-Own
manoflalambda
manoflalambda
12/4/2012 | 7:52:36 PM
re: Riverstone and Tellabs in Bustup
Hehe,

This reminds one of the short-lived Lucent-Tellium agreement where Lucent would resell Aurora 32s along with their own Bandwidth Managers and other stuff. Tellium would call the same customers are try to sell their boxes directly at cost...

Salute,
Manoflalambda
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