Chapter Five
Data Communications: Market Order 1973-1979
LSI Modems, Statistical Multiplexers and Networks
5.9 Modems, Multiplexers and Networks 1976-1978
In the mid-1970’s, the modem
and multiplexer markets were revitalized, not stalling at some maximum size as
forecast by Frost & Sullivan in 1972. LSI semiconductors and
microprocessors made possible new product innovations that in turn enabled
customers to construct data communications networks. The evolution from
point-to-point data communications to far-flung multi-point, distributed data
processing networks, with management and diagnostics, fitted perfectly with the
needs of customers installing more and more computers.
In March 1977, the headline
in one of the largest information technology weeklies read: “Data Com,
Distributed EDP Push Modems Toward $200 M Year.” Sales of modems for 1976 were reported as $184
million, far surpassing the $67 million forecast in 1972. Sales of high-speed
modems alone reached $91.7
million. Little wonder Milgo and Codex were so successful. The article notes
growth for the coming year would come from networking/distributed processing.
(For an analysis of the competitive mix see Exhibit 5.2 Datapro Multiplexer and
Modem Surveys 1976 and 1980.) Each of the leading firms in data communication
responded differently to these market dynamics. Cumulatively the firm decisions
and actions constructed a social network, or population, known as Data
Communications. Within Data Communications were more tightly connected networks
such as modems or multiplexers, and even within these networks there were
sub-populations or sectors such as high-speed modems versus dial-up modems.
Intertel
In early 1973, Jerry
Holsinger started asking how Intertel, the company he founded in 1970, was going
to be successful against competitors such as Codex, his former employer, or
even against Milgo. Doubting he could continue to grow the company on OEM sales
as originally envisioned, he began asking some large end-users if they had
problems that were not being solved. From discussions with companies such as
Manufacturers Hanover Trust Company and Eastern Airlines, one rather
significant problem emerged. Holsinger remembers:
“In the old days of point-to-point, there were skilled
people at both ends of the line. If you have a problem, you call the guy up at
the other end and he gets out his patch panels and his test equipment and you
work on it. In a multi-point network, you have operators at the remote end on
terminals. They don't know nothing from nothing. So you were now operating in
an environment where the only technically skilled people were at the computer
site, and in the meantime, these were on-line networks where, if it was down,
it wasn't like: "Oh well, what the hell, we don't run our batch today,
we'll run it tomorrow." It was like: “Hey, they're not working.”The bank
wasn't doing transactions or the airline wasn't making reservations, and that's
really how it was. People were starting to understand they've got problems.”
Working with Gunther Kempun,
their contact at Manufacturers Hanover Trust Company, Intertel engineers
designed a diagnostic card that would go into their modems; modems that would
also have dial back-up capability to restore malfunctioning lines. Holsinger
recalls.
“As I recall, we sold off xeroxed spec sheets to good old
Gunther Kempun, because he was a real pioneer. You know, all this leading edge
stuff you sell to pioneers, the guys that want to do the leading edge kind of
thing, and they get excited because they are influencing your product, so if
you get the right guy, then it is a dynamic interaction. and then he's really
hooked. So in 1973, we sold our
first stuff to him.”
At first selling network
control products proved very difficult. In 1974 network product sales could not
offset the loss of a couple of big OEM’s, and sales remained flat with 1973 at
$3.4 million. In 1975, network products began having market traction and 1976
and1977 were great years, with sales approaching $20 million. Intertel had
established itself as leader in the shift to networking modems. In 1978, they
ran an ad that came out just before the TCA trade show challenging customers to
ask their Codex, or Milgo or Paradyne salesmen if they could match the features
of Intertel modems. Matt Kinney of Milgo remembers thanking Holsinger:
“When we got to this show, I made a bee line to go and thank
him for legitimizing my company in the network management business, because the
leader of the network management business said that we were in it. I chased down
Art Carr and the two of us went off and we had a beer together and roared.”
By now, however, Holsinger
had decided he had had enough. He remembers:
“I said, after a lot of soul searching: "I want to go
out and get a president, a guy that's a good marketer, experienced manager and
all that good stuff, and let me go back and dream up new things." And we
went through a search; spent about 18 months looking for a guy, brought in a
fellow by the name of Sy Rosen, IBM background in marketing, Harvard MBA. On paper,
he had run a division of General Instruments, he even had a physics
undergraduate degree, which I found to be valuable to make people feel
comfortable in the technical world. English majors don't feel real comfortable
with technical people. So this guy
on paper was perfect, smooth, polished, the whole thing.”
Rosen took over in May 1978
and within nine months Holsinger, still Chairman and CEO, knew he had made a
mistake. Holsinger remembers:
“It was clear that either he went or the company was going
under. So I did my thing and he left and I stepped back in. It was painful
because I didn't really want to go back in at that time.”
General DataComm
In 1973, General DataComm
began exploring if they could OEM a 201 modem from Intertel. Bob Smith remembers:
“For various and sundry reasons the deal didn't work out.
However, they were aware of and had access to our diagnostic card. At the ICA
show in New Orleans in 1974, you look at the front panel of their diagnostic
card, it looked that same as the diagnostic card we had here. So Intertel's out
there in the marketplace selling diagnostic systems, and the first one that
they sold successfully was Manufacturers Hanover Trust Company. We bid that job
against them and lost by a big number of dollars and I was later told that they
bought that job because they wanted the contract. The history is that Intertel
became very successful on Wall Street. They owned the Wall Street community in
terms of data communications.”
Recognizing the importance
of diagnostics from their earliest days, management invested in new products.
Yet as is common, engineers move from company to company, often taking ideas
with them, or companies incrementally innovate on the success of others. Smith
remembers:
“Around
1976, there was a guy working here who left and went to Paradyne. He took all
of these diagnostic ideas to Paradyne. One trade show, they show up and they've got a little tape playing in
the back of the booth with all these crazy displays that come up on the screen,
and that was the beginning of their Analysis system.
Now, some time later, I
interviewed a guy who was working at Bell Laboratories. The story as he tells
it is: “We look out in the world and we see this company, Intertel, selling all
these diagnostic systems, and we did a study. We decided that the market really
could use a good diagnostic networking modem, so they proceeded to develop
Dataphone II. It is my conviction
that the Paradyne Analysis, AT&T's Dataphone II, the Intertel DMS and then
the competitors like Milgo and Codex, seeing this coming along, all started
here at General DataComm.”
Paradyne
In 1972, Paradyne management
began a process that would transform their company from one struggling to grow
sales beyond a few million dollars into one of the world’s leading modem
suppliers. They won a contract from Datran to jointly develop a 9600 bps LSI
modem -- months before Codex started working with Rockwell.
[55]
By the end of 1973, management recognized the need
to find a seasoned President. In hiring Robert Wiggins in April 1974, they made
a brilliant decision. Wiggins would lead Paradyne for over a decade. With
thirteen years of marketing and product development experience with IBM, having
worked for a timesharing company, and most recently having headed the
Information Systems division of GTE, a division attempting to agglomerate a
series of data communication companies and a minicomputer company into a
presumed working whole, Wiggins fully understood the importance of a 9600 bps
LSI modem. In 1975, Paradyne began shipping modems to Datran and, in early
1976, won a follow-on contract worth $5,2 million. To take advantage of the
emerging opportunities, Wiggins hired a seasoned Vice President of Corporate
Marketing, Jay Hill, who shared his views as to how to build a successful
company. In early August 1976, Hill, who was “captivated” by
Wiggins and had been with IBM before building a successful career in sales and
marketing at Inforex, a very successful data processing firm, came aboard full
of a newcomer’s enthusiasm. Within days he received a rude awakening. Hill
remembers:
“I didn't quite understand the significance of the problem
when they were running around the halls saying: "Oh my God, Datran just filed for bankruptcy. How much
inventory do we have? How much do they owe us? It's been locked up
by sheriffs," and things like this, but that wasn't the important part. It was whether we could
survive the loss of the top line and the attached profit that went with it. Bob
just succinctly came into my office and said: "We've had a very unfortunate thing happen to us. Our
largest customer is gone and you have to make up for it. Get going."
Hill buried himself in work,
recalling:
“When I saw all my direct reports I was frightened to death.
As a matter of fact I told my wife: "Don't unpack. This may not work. These bozos are from a different world,
and I'm scared to death." I called on a friend of mine who worked with me
at both IBM and Inforex and was just a really solid, good guy. His name is
Jerry Kendall, and I said: "Jerry, I need one guy I can trust. I've been here 30 days, and
nobody speaks my language, and I need one person to tell me what the customer
is saying so that I can understand it. I'll treat you well. Please consider
coming over." It took me a month to get him.
[56]
The ever-composed Wiggins
never lost his confidence. He remembers:
“We had an LSI technology where we could build a 9600 bit
per second modem, I believe, less expensively than anyone else, and we were
very aggressive in pricing those products, because technology permitted it, and
we needed to gain market share, because we had to have business.”
Over the next two years,
Hill began building an “IBM-like” salesforce largely on the back of a rapidly growing
market for high-speed point-to-point modems
[57]
Then in late 1977, engineering delivered a new
product that allowed Paradyne to sell networks of modems with network
management and diagnostics. The Analysis Network Management System catapulted
Paradyne into the role of supplier to then emerging need of large corporations
to tie together their far-flung computers and peripherals into on-line
networks. Hill remembers Analysis as being “the breakthrough and one of the things in
Paradyne’s history that really gave it a big lift.” Hill elaborates…..
“After
1978, we would sell one Analysis to a major insurance company like Hancock, and
100, 200, 300 modems would go out, and at that time, pricing of modems played a
very key role in Paradyne's success. The list price on a 4800 modem back then
was $3,000, and we would sell them in any reasonable quantity, at $2,400 per
copy and an aggressive bid, back then, and this is '78, '79, we would just get
below $2,000, and our gross margins never on a sale like that, got down to
50%.”
Success in modems did not
translate to mastering statistical multiplexing however. Wiggins recalls the
relationship with Case, the firm Evans of Micom once worked for and whose
multiplexer technology had begun with ADS:
“What we had tried to do, realizing that it was going to be
difficult to fund development programs in every area of technology, we set
about trying to forge a working relationship. Case had a good multiplexer technology. They were not
selling in the US, and we were furnishing them our modems, so we said what
we'll do is forge an agreement in principal that will be a working relationship
so that we'll keep you competitive in the high-speed modem marketplace, and you
keep us competitive in the statistical multiplexing marketplace. That went
along well for a while, and we were moving multiplexers pretty well, and then
Case decided to come into the US marketplace, and they bought the old Rixon
company, and became competitors.”
In July 1978, Paradyne
became a public company; selling stock for $10.00 per share, raising
approximately $5.9 million and having a market valuation of $30 million.
Milgo
Throughout the 1970’s, Milgo
remained market leader in modems due to early entrant advantages and not making
mistakes. But there was more, as Kinney explains:
“I would attribute some of Codex's growth, and frankly ours
too, to the fact that the market was so damn big, and there was so much
potential that there was no way that one single organization could grow fast
enough to accommodate the entire thing. You could not move fast enough to
dominate it. There were literally a few years when Codex's sales group and our
sales group never saw one another at all. They were exploiting one set of
opportunities. We were exploiting another set of opportunities. They were strained
to the maximum to be able to grow at the rate they were growing, as were we. I
don't think competition as such became a real factor in this industry until the
mid '70s.”
But then came Paradyne and
market competition. Kinney remembers:
“Paradyne considered itself a latecomer into the marketplace
and did what most latecomers do, and started slashing, cutting, burning the
prices. So that opened up the users' awareness that they can get equivalent
products for a lot less money So they started playing us one against the other
as you would expect, and competition became a real factor in the industry.”
Milgo was not averse to
pressing its own advantages, whether real or perceived. As early as July 1971
Milgo had attempted to forestall competition by filing a patent lawsuit against
Rixon Electronics, et al., claiming three of its patents had been infringed
upon, including those on its 2400 bps and 4800 bps modem. Proving others could
play the same game, in December 1974, Western Electric, a division of AT&T,
sued Milgo, claiming ten modem patent infringements.
[58]
After conferring with the Justice Department, that
the prior month had filed an antitrust suit against AT&T, Milgo, in
February 1975, counter sued Western Electric charging violation of the 1956
Consent Decree involving patent royalties on the manufacture of modems.
[59]
Codex unintentionally added
to the confusion after receiving their QAM signal structure patent in 1975.
[60]
Forney remembers:
“The most dangerous time in a company's existence is when it
gets issued, a patent. It looks at this thing and says: “This must be worth
something," and you're very tempted to go out and assert the damn thing.
So we got this patent. Milgo clearly had been using the technology. They
weren't the only ones, but what we finally wound up doing, not really knowing
what we should do, we wrote Milgo a letter and said: "We have this issued patent, and it seems you've been
using it, and we ought to have some discussions about it." Well, what we
were told later by people at Milgo is that they got this letter and what made a
profound impression on them was that it came by certified mail, and so they
took a paranoid view of this letter, that it was a prelude to a lawsuit.“
After years of slow motion,
legal confrontations shifted into high gear. In January 1976, the court awarded
Milgo a victory in its patent suit against Rixon et al.
[61]
Not leaving others long to wonder what they would
do, ten days later in February 1976, Milgo sued AT&T, asking for
injunctions stopping Western Electric from manufacturing and AT&T from
distributing its 4800 bps and 9600 bps modems. Milgo also sued Yellow Freight
Systems of Kansas, a user of Codex 9600 bps modems, claiming they had violated
its patents. Thirdly, Milgo sued Codex seeking “declaratory relief” since Codex
patents violated Milgo’s patents.
[62]
Codex responded almost immediately by filing
lawsuits against Milgo in Miami and Boston in March. In reflecting on Milgo’s
behavior Forney offers:
“I think it was very much an afterthought that they swept us
into this litigation. Their
concern was almost entirely for AT&T, but secondarily, they had a problem
with Codex's patent on the signal structure. So, it is interesting how these
things start. In retrospect, it was a great mistake for Milgo to sue us. They
had lots of hooks in AT&T and they hassled them to death. We were, it
turned out, a much more formidable foe for them.”
Later that same March, the
Federal Court sided with Milgo and ordered Western Electric to defend itself
against Milgo’s claims of violations under the 1956 Consent Decree before it
would hear Western Electric’s suit against Milgo.
[63]
In April, Milgo asked the Federal Court for $44
million in damages it claimed “to have suffered as a result of alleged antitrust violations and
unfair competition by Western Electric, AT&T, and the Bell System in the
licensing of modem patents and the sale and rental of modems.”
[64]
Then, as if Milgo did not have
enough legal concerns, on November 8, 1976, Applied Digital Data Systems
(ADDS), a computer terminal manufacturer with sales of $17.8 million, announced
a take-over attempt of Milgo, offering a swap of stock valued at roughly $50
million -- a $15 million premium over Milgo’s public valuation.
[65]
The much larger Milgo, seen as struggling after a 56% drop in earnings for
fiscal year 1975, albeit sales still totaled $40.4 million, rejected the offer
two days later claiming it was “not
in the interests of the shareholders and does not reflect the long-term
prospects of the company.”
[66]
After weeks of jockeying, on December 1, Milgo, in a maneuver to stave off
ADDS, announced its intentions to sell 312,000 shares of stock to its UK
partner, Racal Electronics. ADDS immediately filed a restraining order to block
the sale that the court issued on December 9. Jockeying continued and by
February 7, 1977, Racal and ADDS each claimed 45% ownership of Milgo’s stock.
By the 18th, Racal appeared to control over 50% of Milgo’s stock, and on the
23rd, ADDS tendered its stock to Racal, ending the hostile action, and giving Racal
subsequent ownership of Milgo for $62 million.
[67]
(Milgo’s other legal battles ended with an out-of-court settlement with
AT&T and, in June 1981. they lost their lawsuits with Codex.)
---------------------
Multiplexer firms faced
different challenges as they responded to customer needs for networking,
competition and their own organizational dynamics.
Timeplex
At the end of 1973, Timeplex
became one the last technology companies to go public. Even so, the cash raised
did not ensure Timeplex’s success. Botwinick remembers:
“The company essentially was insolvent at the end of fiscal
year June of '76. What had happened was that the auditors had come in and
finally figured out that the assets were significantly over-valued. All of the
profits were sitting in overstated assets, and there was no management. It was
a simple as that. Anyway, they struggled through 1976 with Allen & Co.
pounding on Chemical Bank to keep the doors open.”
In order to keep the bank happy, an effort was made to sell
the company. Codex came to look the company over, as did Milgo. Neither saw
enough value to make a bid. However, neither Timeplex’s poor financial performance nor lack of
interest on the part of potential buyers prevented a power struggle for
corporate control from developing between the investment bankers, Allen &
Co., company management and eventually a group led by Botwinick. By the spring
of 1977, Botwinick had exhausted his financial resources in buying enough
shares of Timeplex’ public stock to end the stand-off. On June 27, 1977, he
became Chairman of the Board and Chief Executive Officer. Botwinick remembers:
“The second week I was here, I went out to lunch with the
guys from Chemical and United Jersey banks, and at the end of the lunch they
said to me: "This is all very interesting. You're the first guy we've ever
talked to in this company that seemed to know what he's talking about, but
we've had it. You have 60 days to tell us how we're going to get our money back
or else." I don't know what the 'or else ' would have been, because there
was nothing there if they wanted to shut it down. So I didn't take that
terribly seriously. On the other hand, I was in imminent danger of going broke
personally.”
Botwinick immediately began aggressively
collecting over due receivables to raise desperately needed cash. In doing so,
he learned the company had shipped defective product in order to record sales,
defective product that would need to be replaced. He then began selling
whatever assets had any value. Combined, Botwinick recovered enough cash to pay
the banks and create some breathing room. He then took a hard look at the
recently introduced Dynaplexer, a statistical multiplexer hub that worked with
its TDMs but had no terminal or computer ports. While offering their large
installed base the option of upgrading to the latest multiplexer technology,
Botwinick remembers:
“I got a close look at the DynaPlexer and I realized
that it was conceptually flawed. First of all, they had no capabilities to
develop it. It was too complex. They had no software skills. They didn't
understand microprocessor software development -- it was an old icon of a
hardware company. Second was that the concept was flawed, because the old TDMs
that were in the remote sites were all hard wired. There was no way to remote
configure them.
It wasn't going to sell. Also, they were never going to get
it to work. We pushed the delivery schedule out considerably. We said we were
redesigning the product, putting in all kinds of hot new features.”
Realizing the Dynaplexer was
not saleable, and might never be, Botwinick turned his attention to developing
a microprocessor-based stand-alone statistical multiplexer. Investing long
hours with a focus only desperation can inspire, Botwinick and his new
engineers innovated their Series I Microplexers that was introduced in 1978.
Then in one of those strokes of good fortune, Western Union, literally up the
road, decided to end their efforts to develop a statistical multiplexer to
compete with Codex. Botwinick leaped on the opportunity and hired a trained
team that immediately started developing a product to replace the feature-weak
Series I Microplexer. The Series II Microplexer was introduced in 1979.
Botwinick remembers:
“Series I came to market and it held the doors open. In
fact, it stimulated sales of our old TDMs, which were still the bulk of our
business. At that point, we did get some people from Western Union because they
had gone out of the StatMux business. They came in and did the Series II. Now,
the Series II was the first networking unit that we did, and that's what we
built the company on.”
Infotron
When James Hahn, founder and
President of Infotron, saw Codex’s Series 600 statistical multiplexer
literature in early 1976, he instantly knew they needed to develop one as well.
To do so meant hiring an engineering manager with microprocessor experience,
because no one on staff knew the least bit about these miniature computers. In
discussing where he might find someone with his wife, Leigh, who still worked
for Ultronic Systems, the company Hahn had left to found Infotron, she
recommended they interview Bill Drambracus, a young engineer who had just
developed a specialized terminal to display stock quotes for brokerage firms
using Motorola 6800 microprocessors. Hahn’s overture couldn’t have been better
timed. GTE, under the leadership of Wiggins, was consolidating Ultronic Systems
and a number of other companies to form an Information Systems division to be
homed in the facilities of the minicomputer company they had bought in
California. Drambracus did not want to relocate. The idea of working just a few
blocks down the street, with the challenge of managing a high profile
statistical mulitplexer project, made for an easy decision. Drambracus joined
Infotron in March charged with having product to ship by year-end.
Drambracus knew he did not have
the luxury of generating an entirely new design and that he had to use as much
existing TDM circuitry and packaging as possible. If their existing TDM’s were
field upgradable into statistical multiplexers, Infotron might just pull the
carpet out from under Codex’s grand design. The marching orders: keep it simple
and get it done on time.
Drambracus strengthened the Infotron team with some hires
from Ultronic Systems and set to work. In October they announced the Supermux
780, for a base price of roughly $6,000, subject to having Infotron’s TDMs.
Arguably no where near the product of Codex’s 6030, it nevertheless gave an
interested buyer a much cheaper alternative with which to test this new
technology. Drambracus remembers:
“While
Codex did a revolutionary design, where they had a whole fresh start on the
whole box, they had a lot of headaches and a lot of start-up problems. So even
though they announced the product, we ended up bringing our product to market
and beating Codex pretty good. And it was a big hit for Infotron.”
Indicative of the impact, over
the next three years, over 3,000 Supermuxes were sold compared to 950 Codex’s
6030s and 6040s.
[68]
In dollar
terms, however, Codex’s sales exceeded Infotron’s. Drambracus comments on what
happened:
“Codex quickly made a 6010 which moved down into
the lower price range. It was cheaper and simpler. But they started off, I
guess, saying that statistical multiplexers would be sold like a very special
thing, and they didn’t realize it would drop down into the dirt so quick and
end up being the bricks and mortar of getting data around. You know, it’s funny
how these things start off to be very exquisite, special things, and then they
drop down to being something that people throw around like modems.”
Under Drambracus’s
leadership Infotron would introduce a range of statistical multiplexers over
the next few years. Then in early 1979, headhunters called on him with another
opportunity. In June 1979, Drambracus would leave Infotron to head Milgo’s
efforts to develop their own statistical multiplexer as Director of Data
Network Products.
