Laying the Japanese information Pipeline

Computing Japan: First, let's discuss Newbridge Networks in general. How did Newbridge start?

Don MacLeod: The chairman of the company, Terry Matthews, has started a number of telecommunications companies. He's been in the telecommunications business for about 40 years. He started off with British Telecom, then he moved to Canada with Northern Telecom, and started his own company, Mytel, which quickly took 30% of the PBX market share in North America. He sold that to Northern Telecom and started Newbridge back in '86. He almost instantaneously had an international company, because he had contac ts all over the world. Although, we are a Canadian-based company, 90% of our sales are outside Canada -- predominantly in the States, but we do extremely well in Europe, the UK, Germany, and Switzerland.

CJ: How well has the company prospered?

McLeod: In 1987, we did about C$1.3 million in sales. Our first products were point-to-point data products: data controllers, data switchers. In 1992, we did C$307 million, and last year, C$552 million. [These figures are in Canadian dollars.--Ed.]

The fastest growing region for Newbridge is the Asia-Pacific region, and the fastest growing part of the Asia-Pacific region is China. We're putting in backbone networks [for the carriers] in China, so digital services will soon be available, where the y weren't before. While we've been in Japan for a while, it's a bit difficult here.

CJ: Who is the mainstream customer for your products?

McLeod: Sixty percent of our sales are to telephone companies. We sell to just about every telephone company in the world. Our biggest customers are people like NYNEX in NY, British Telecom, a telephone company in Germany, and the Swiss PTT....

About 40% of our sales are to companies using private networks. A lot of them are big financial companies, like Bloombergs, Unibank of Switzerland, and Bank of America. We like to keep a balance between the carrier sales and private company sales. We l earn a lot from the companies, as to what they need, and then we feed that into the carrier products. That gives our carrier products a big advantage over the competition, who just focus on carriers. We try to keep that balance: 60% to 70% carriers and 40 % to 30% private networks. They're effectively the same products, they lust have different features and services -- one of which is our management software.

CJ: In both 1993 and 2994, you seem to have had 50% to 6O% growth per annum. Is that because you brought out a new product, or did you make some fundamental change in strategy?

McLeod: It's because the carriers have started to adopt our products, like NYNEX in Manhattan; they plan to put one of our multiplexers into every building. That's the plan anyway. That's a lot of boxes. There are some very large networks -- the FAA [F ederal Aviation Administration] in the States uses our networking systems and our multiplexers for the network that ties all the airports together. We got that business jointly with MCI. So, those are big networks: TDM (time-division multiplexer) or frame relay networking products for leased line services.

CJ: How would you classify the various networking technologies? Which are technologies of the past, and which will be technologies of the future?

McLeod: I guess TDM would be a technology of the 80s, although if you look at our sales, it doesn't indicate that TDM is falling off. As a matter of fact, they are being implemented in different ways, so our sales are actually increasing. On the other hand, ATM is definitely the technology of the future. One of the trends we see is that different transmission technologies are going to be used for different things -- there is not going to be one backbone like the ATM. You cannot be a specialist in just one; you have to be able to use TDM, or frame relay, or ATM to suit the specific needs of the customer. You have to have products that will take care of all their transmission needs.

CJ: How long has Newbridge been in Japan?

McLeod: We've been here for five years, and our main business has been international networks. A lot of large American and European companies have networks that have nodes in Japan. So we have to adjust to that market. However, a lot of international c arriers also use our products to provide business services. AT&T and KDD World Partners use Newbridge. Cable and Wireless, through its relationship with IDC, uses Newbridge. A lot of the international consortiums use Newbridge as their standard product fo r delivering services to financial companies. In addition, we have quite a few private networks, including the domestic carriers in Japan -- international networks that use our frame relay products and our TDM products. And some of the big Japanese companies like Nomura Securities and TKB Bank use N ewbridge for their international networks.

CJ: Are you affiliated with any other companies here?

McLeod: No, we don't have any financial ties with anybody in Japan. Newbridge Networks Japan is a 100%-owned subsidiary of Newbridge Networks Incorporated.

CJ: Is your market in Japan growing now?

McLeod: To date, we've only been focusing on the international, which is a small market sector -- only about 10% of the market. We haven't had the interfaces for the domestic market, which is far bigger. However, about 18 months ago, we got the busines s case through to do the development necessary for the domestic market. So, we're now spending the R&D dollars on developing products targeted toward that domestic market. A second point is that we're introducing ATM LAN products, which don't have the sam e issues as wide-area network products. Interfacing, for instance, is not as much of a problem. So we're going to be entering the LAN market with our ATM LAN products over the next six months. Soon, in Japan, there will be the equivalent of a big pipe available to most companies -- whether or not they decide to use it -- a pipe that can take a data flow of 150 Mbits per second.

CJ: Many companies in Japan are going to ATM and frame relay. How will this affect you?

McLeod: Well, the market is going to grow. Especially in Japan, things like ATM -- on the LAN side -- are going to grow. For the wide-area, the growth won't be as fast as what's happening in America due to the tariff structures. Here, ATM is very expen sive; in the States, it's very cheap. However, ATM technologies will eventually be fairly cheap even here, because of the basic nature of ATM. It's not going to be the switching of ATM that is going to be important, because anybody can make the boxes; it' s going to be the software that manages the network. The kind of things you can do, the flexibility - that's where we have the lead because of our network management capabilities.

CJ: What sort of applications are you aiming for with ATM And what sort of applications would be on the bottom end?

McLeod: Seventy percent is LAN and 30% is video in the States. That's what happening now. But as PC's come on the market, and workstations come on the market, they have applications that use more video, and mixed video voice, and mixed true multimedia for the desktop. When salesmen walk around with their portable workstations, delivering sales pitches using multimedia -- which is already happening in the States -- as soon as they are flying to London or someplace else, and they want to get into the dat abase and download these huge files, there is going to be more and more demand for ATM speeds.

CJ: What kind of infrastructure does ATM take?

McLeod: Well, you can't do it over copper wires. And while the real push is for fiber, coaxial can be used. You know, there are some experiments using CATV, but the real application is going to be fiber. From a business perspective, there are all sorts of fiber out there. I mean, every time the power companies put in a cable, in the middle of that cable is a fiber. They've been doing that for five, six, ten years. When the railways put anything into the g round, they put fiber in it. There's all this fiber all over the place. It may not go into the homes, but there's fiber into this building. The fiber infrastructure is there, so what you have to do is use this fiber infrastructure, and use higher and high er speeds. It's not as if it's going to be a matter of bringing fiber to business. The home might be a different story, though.

CJ: Has the infrastructure or the condition of the market in Japan inhibited your entry into the market?

McLeod: In the US, when AT8cT broke up all the big companies went into panic mode, because they basically couldn't cope anymore. It was just split up, so it couldn't provide all the services that private companies wanted meaning that companies had to b uild expertise into their firms. So, in their MIS departments, they built these telecom departments that knew how to run telephone companies. And that's driven the applications in the US forward. To capitalize on this, we work closely with the telecommuni cations managers in the big companies, and with the carriers that were selling them services, so that's why that 60/40 split.

Now, in Japan, they still rely on carriers, and Fujitsu/Hitachi/Oki to provide them with their boxes, so there isn't as much innovation here. They tend not to be as demanding, because they aren't really ii, the driving position. It's going to be intere sting to see what happens over the next little while. Because in Japan, the improvements in company efficiency will not be a factor anymore; they can't make the factories much more efficient. They have to concentrate instead on the white-collar workers. A nd that will take some very innovative technologies.

Maybe it's an opportune time to be here, because there isn't the installed base of PCs. Since they will be building the infrastructure from scratch, hopefully they can do it right the first time. Meaning ATM will be here, where in the US there is an in stalled base: a rat's nest of older LAN technologies. If you do ATM right, which we think we have done, you're going to be able to provide some interesting products for the LAN side of ATM.

CJ: So you think the infrastructure gap will actually be a benefit to Newbridge here?

McLeod: Yes. Because we're using ATM and the LAN in a different way than the traditional LAN companies would do. So it's kind of open territory for us.

CJ: Will that lead to a divergence in the composition of the Japanese and American infrastructures, or will they eventually be the same?

McLeod: The Japanese side will always be different. [Laughter] One of the things that will drive the convergences of the infrastructures will be the fact that the communications world is becoming smaller. Tokyo, New York, and London are effectively one city. And a large bank in New York is going to want the same products and the same services, the same kit and the same PBX, the same PCs, the same LAN, the same applications that run on the PCs in New York as in Tokyo. They're going to want to see it as a virtual office, and they're going to want to see the same services from their carrier.

When we talk to NYNEX, they see that. Their customers are saying, "I like this service; I want it in London and I want it in Tokyo." Which will be the push towards a convergence in standards. So, from a foreign company operating in Japan, there is goin g to be pressure for doing it the same way in Tokyo as they do it in other parts of the world.

From a Japanese perspective, I don't know how that's going to work. But to be innovative, they are going to have to use foreign products, because innovative networking products tend to come out of the States.

It comes down to the issue: Are the Japanese going to be able to rely on one vendor! Because that's the way things have traditionally been done. In the States, they don't rely on one vendor; they tend to pick what's best, and then cobble it together fo r a very innovative solution. Will Fujitsu be the best at everything? Will Hitachi be the best at everything! Well, they can't be, so they're going to have to work with other companies. They will have to Open up some, and Japanese companies are going to u se foreign products.

CJ: What are the future plans for Newbridge?

McLeod: ATM is already very profitable for us. A lot of money is going into network management, because that's where our advantage is. And we're working with a number of other companies to improve that, through managing other people's products.

CJ: How will you be selling ATM here in Japan?

McLeod: The easiest way to sell ATM here for awhile is going to be on the LAN side, where you don't have to worry so much about the cost

CJ: For that sort of solution what sort of company will you be aiming for 1 know that a lot of multimedia startups would love to have the Kind of bandwidth offered by ATM to push around their graphics and files, but the price right now seems prohibi tive.

McLeod: The price right now is prohibitive. We're not in the market yet, but ATM will become a very affordable technology. It will soon be inside the workstation, connecting backplane to backplane. So it won't be backplane to an NIT card.

CJ: So you're developing ATM cards to replace the networking ability of Ethernet?

McLeod: Well, 1 can't really say, but we're working with some very predominant, very big workstation companies. There is some neat things happening. I think ATM will provide efficient transmission technology, and LAN and WAN backbones, and broad bandwi dth. However, I don't think we will be able to predict the future opportunities and services -- they are going to come, and they are going to come quickly. There are already betas of applications that I would never have thought of. Unfortunately, I can't tell you what, but it's like "Wow. I wouldn't have thought of that."

CJ: So you think that the bandwidth made available by ATM will in its own way drive the creation of multimedia products?

McLeod: Yes. Multimedia is going to happen. You're going to have mail with video. How much of it in reality -- I don't know, because many people will want to make sure they are pretty for the camera and what-not. I still think there is going to be a lo t of email, just text e-mail. However, the things that will be most exciting, I don't think you can say what they are going to be right now. It is just that, with ATM, a huge pipe will be available in Japan, as it is now in the States. And that will gener ate all sort of interesting applications, services, and opportunities.