BBN Corp.

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BBN Corp.

150 Cambridge Park Drive
Cambridge, Massachusetts 02140
U.S.A.
(617) 873-2000
Fax: (617) 873-5011
Web site: http://www.bbn.com

Public Company
Incorporated: 1953 as Bolt Beranek & Newman, Inc.
Employees: 2,000
Sales: $234.3 million (1996)
Stock Exchanges: New York Boston Cincinnati Midwest Pacific Philadelphia
SICs: 3812 Search, Detection, Navigation, Guidance, Aeronautical & Nautical Systems & Instruments; 7372 Prepackaged Software; 7373 Computer Integrated Systems Design; 8711 Engineering Services; 8731 Commercial Physical & Biological Research; 8748 Business Consulting Services, Not Elsewhere Classified

BBN Corp. is a leading provider of Internet services and networking services and solutions to businesses and other organizations and a provider of a range of contract research, development, and consulting services to governmental and other organizations. Known as Bolt Beranek & Newman, Inc. until November 1995, the company first gained recognition for its research and development of computer technologies.

BBN’s strategy is to capitalize on its extensive internetworking experience and unique capabilities by offering Internet services with global reach, as well as Internet and intranet business applications solutions. BBN’s objective is to create a growing, recurring service revenue base by providing high-bandwidth managed access with managed security and value-added services. Through its research and development activities under government contracts, BBN’s strategy is to leverage its advanced network and related technologies into Internet offerings.

Private Company, 1948–1961

Bolt Beranek & Newman began in 1948 as a partnership of two Massachusetts Institute of Technology (MIT) professors: physicist Richard H. Bolt and communications engineer Leo L. Beranek, who had received a consulting contract for the acoustic design of the hall to be built for the United Nations General Assembly. Robert A. Newman, an MIT graduate student in architecture, joined the two shortly after the partnership was established. BBN, which was incorporated in 1953, soon won research contracts in other fields. In the 1950s it was hired by the federal government to seek ways of keeping jet engines quiet enough so that airplanes could land near residential areas. In studying this problem, the company invented a measurement called the “perceived noise decibel” that was still being used in the 1980s.

Other federal contracts followed, because BBN had a reputation for doing the job on time and without cost overruns. The company was hired by the National Aeronautical and Space Administration (NASA) to measure the vibration of the Mercury space capsule during its launch. Later, it was chosen to analyze the famous 18-minute gap in one of the White House tapes involved in the Watergate investigation and also a tape of the assassination of President John F. Kennedy that included gunfire noises, from which BBN concluded that four rather than three bullets had been fired. Much of its work was for the military, including research on reducing submarine noise under-water and devising software for battlefield simulations and communications and computer networks. The firm also was engaged in biomedical technology.

In 1960 BBN was leasing 56,000 square feet of laboratory space in Cambridge, Massachusetts, and smaller facilities in Los Angeles and in Downers Grove, Illinois. The firm had 189 employees and earned $183,756 on a little more than $2 million in income in fiscal 1960 (the year ended June 30, 1960). It made its initial public offering of stock in 1961, seeking to sell 160,000 shares—90,000 for its own account—at $12 a share. Beranek remained the company’s president and chief executive officer until 1967, and Bolt was its chairman until 1976. 39

Computing Pioneer in the 1960s

In the late 1950s BBN devised a time-sharing system for computers when they were still scarce and expensive, forming a subsidiary called Telcomp to market the system. Telcomp was the first company to sell computer time shares. One of its clients was Massachusetts General Hospital, which used the system for keeping medical records. Telcomp, which was sold in 1971, also placed time-share terminals in six high schools in the Boston area. BBN also was credited with inventing electronic mail, designing the first modem for connecting to computers through a telephone line and demonstrating the first computer-based communication system in 1964.

During this period, while under contract with the Department of Defense, BBN also developed packet switching, a method for making computer-to-computer interactions more reliable and efficient. Out of this development work in 1968 BBN created ARPAnet, the largest, fastest packet-switching network in the world, connecting more than 100 computers of different makes and thousands of terminals in a massive data-communications network. Designed to ensure that government and military communications would continue even if telephone lines were knocked out in a nuclear war, ARPAnet was a forerunner of the Internet system.

On the basis of its expertise in underwater acoustical research, BBN also became a contender in marine science. In 1967 BBN and the steamship line Moore and McCormack Co. Inc. created a subsidiary to explore such commercial possibilities in ocean science and technology as the development and operation of stable floating platforms for research or mineral exploration. Two years later it acquired Moore & McCormack’s share of the venture for $500,000 and another Moore & McCormack subsidiary for $3.5 million. Under the auspices of BBN-Geosciences Corp., a subsidiary, marine research grew to account, in the mid-1970s, for as much as one-quarter of corporate revenue from continuing services.

By 1970 BBN had raised its annual sales to $18.8 million. Its office and laboratory space in Cambridge had expanded to 120,000 square feet, and it was also leasing space in New York City, San Francisco, two southern California sites, Downers Grove, East Orange, New Jersey, and Arlington, Virginia. It also held a minority interest in a West German company. However, its net income came to only $252,300 in fiscal 1970, and most of its revenues were coming from consulting and research rather than from the products its brainpower had helped to develop.

Seeking Commercial Rewards in the 1970s

In 1973 the company formed Telenet Communications Corp. to exploit the commercial potential of packet switching. Unfortunately, this venture proved to be ahead of its time. Telenet generated too little cash for BBN to expand the net-work, which was necessary to win more business. The parent company’s interest in Telenet was reduced to 37 percent in 1976 and about 25 percent in 1978. When Telenet was acquired by General Telephone & Electronics Corp. the following year, BBN received payment in GTE stock, which it sold in 1981 for $15.1 million.

A finance-oriented entrepreneur within BBN, Stephen R. Levy, became its president in 1976. Sales increased from $30.2 million in fiscal 1978 to $37.7 million in 1979 and $46.9 million in 1980, but net income fluctuated wildly, from a deficit of $397,000 in 1978 to a profit of $10.1 million in 1979 but only $2.9 million in 1980. In fiscal 1980, 84 percent of company revenues came from consulting, research, and development services in acoustics and computer-science systems and software. Office and laboratory space in Cambridge now totaled 313,000 square feet. Officers and directors held 24 percent of the out-standing shares of common stock in September 1980, while financier George Soros and two of his companies held a combined 17 percent.

By this time BBN was transforming itself from contract work, mostly for the government, to the development and exploitation of a gradually broadening stream of products to be designed, manufactured, and marketed by BBN subsidiaries. Three such subsidiaries were formed between 1978 and 1980. BBN Computer was designing, manufacturing, and selling the high-performance communications multiprocessor Pluribus and packet-switching C/30 and a time-sharing system, C/70, to help computer programmers design software. Manufacture of these products was in Cambridge and Hong Kong. BBN Instruments was producing and marketing a line of accelerometers, portable noise monitors, and digital vibration analyzers. BBN Information Management specialized in software packages, including an electronic-mail system called Infomail.

This corporate structure insulated laboratory researchers from commercial pressures in order to combat poor morale, which had led some of BBN’s stars to move to other think tanks. Computer technology accounted for 57 percent of company revenues in fiscal 1979 and acoustics for 43 percent.

Still Dependent on the Military in the 1980s

BBN Instruments was sold in 1983 to Vibro-Meter Corp. for an undisclosed sum of cash. Later that year Wang Laboratories Inc. contracted BBN to design and build a system linking computers over telephone lines for a 199-city network, using its latest packet-switching technology. In 1984 BBN established a $3.1 million limited partnership to pay for development of a systems program to integrate advanced database management and graphics functions for scientists and engineers. The following year the company developed a special microprocessor, dubbed the butterfly chip, to coordinate the problem-solving efforts of parallel processing. The largest of these systems was capable of running 60 million instructions per second and cost about $1.2 million. It was used by various government agencies in robot control, artificial intelligence, vision processing, and battle management for the Navy.

Some of these ventures had to be abandoned because of heavy competition from other companies or poor marketing and servicing. Packet switching remained BBN’s main field of activity, accounting for half of company revenues and two-thirds of profits in fiscal 1987, when about 75 percent of its revenue came from the federal government. This dependence on the military became a major problem with the end of the Cold War. The company lost $25.1 million on revenues of $291.6 million in fiscal 1989—down from its peak of $305 million the previous year—and $34.8 million on revenues of $261.9 mil-lion in fiscal 1990. At the end of the latter year its long-term debt had reached $84.7 million. The price of company stock fell from nearly $19 a share in July 1988 to under $8 in May 1989.

Focusing on the Internet in the 1990s

BBN became profitable again in fiscal 1990 and 1991, but it had to cut costs sharply to do so. In 1991 it merged its unprofitable Advanced Computers Inc. unit into other company divisions, suspending development of its next-generation parallel-processing computer, code named Coral. Parallel processing had never brought in revenue of more than $10 million to $12 million a year to the company, despite its potential and high profile. BBN already had significantly downsized the division in 1990 after selling only 14 of its recently developed TC2000 machines to the commercial real-time computing market.

Despite its problems making high technology pay, BBN was excited in the early 1990s by the progress it was making on speech-recognition software. Using Unix computer language, its software could recognize spoken words by processing the sounds into a computer language, follow up a spoken query by searching a data base, and respond with a written answer on the computer screen. This work was being funded by the Department of Defense for the military’s automated system for routing and keeping track of personnel and supplies.

In fiscal 1993 BBN’s revenues fell by $25 million, and it incurred a loss of $32.3 million. When revenues dropped to $196 million the following year, BBN held its loss to $7.8 million, but only by cutting its work force from 3,200 to 1,600. In 1994 Levy resigned as chief executive officer, turning the job over to George H. Conrades, a highly regarded former IBM executive who had been head of that company’s domestic operations. Conrades had been called in to manage LightStream Corp., a joint venture with Ungermann-Bass, Inc. created in 1992 to manufacture and market asynchronous transfer mode (ATM) products, which enable computer networks to carry much more data at faster speeds and can also carry voice and video. LightStream, in which BBN held 80 percent, was sold to Cisco Systems Inc. in 1994 for $120 million.

Conrades brought in a new management team and established three subsidiaries: BBN Software Products, for data-analysis software; BBN Hark Systems, for speech-recognition systems; and BBN Planet, to manage Internet access. A retired Navy admiral was recruited for the company’s research-and-development arm, Systems and Technologies, to direct maritime warfare-related programs.

The Internet became BBN’s chief focus. Used by an estimated 20 million people in mid-1994, this system, originally mainly for nonprofit communications among academics and researchers, was a natural outgrowth of ARPAnet, the military communications system BBN had devised as a precursor of the Internet. BBN had, in 1993, acquired Nearnet, the New England Internet services provider, from the Massachusetts Institute of Technology. The following year it purchased BARRnet, the largest Internet access provider in the San Francisco area, from Stanford University. Before the end of 1994 BBN also acquired SURAnet, the leading Internet access provider in the Southeast, bringing the number of its Internet customers to more than 1,100 and making it the largest provider of Internet access and security services to corporations and institutions.

In July 1995 AT&T Corp. bought a minority share of BBN Planet, shortly after concluding a partnership agreement by which BBN Planet would provide a broad array of Internet services to AT&T clients. BBN thus became one of the nation’s “backbone” Internet service providers, like IBM Global Network, MCI, and Sprint. As such it was operating trunk telephone lines connecting major regions of the United States and owned major regional computer networks that stored and sent data for its clients. The transaction also gave BBN access to AT&T’s fiber-optic network. A January 1996 report by a Cambridge research firm concluded that BBN/AT&T provided the “best security, soup-to-nuts management, and leading ideas for private and guaranteed real-time Internets.”

BBN Planet also won a five-year, $55-million contract from America Online, Inc. in March 1995 for 50,000 modems. In October 1996 this transaction was widened into the company’s largest contract, a $340-million, four-year pact to provide America Online with 280,000 modems and provisions for additional telecommunications circuits from local and interexchange carriers. In January 1997 the agreement was enhanced further, with BBN set to deliver a minimum of 400,000 modems and associated services over the life of the contract, now valued at $500 million.

BBN’s speech-recognition effort also was yielding fruit in 1995. Its software was licensed by IBM to be included in a hardware and software package that automatically answered and directed large number of calls. In addition, AT&T licensed its software as part of a new “virtual call center” for Avis Inc. by which customers would be able to reserve rental cars by telephone, speaking to a computer. With net income of $64.8 million in fiscal 1995, BBN was again an investor favorite, its stock climbing to a high of $40.75 a share during the year, from a low of $4.25 a share in 1993. The company officially shed the Bolt Beranek & Newman name in November 1995, becoming the BBN Corp.

In order to raise more funds for its Internet network, BBN sold all but 15 percent of BBN Domain Corp., a unit making software for pharmaceutical and manufacturing firms, to ABS Capital Partners in 1996 for $36 million in cash. The sale raised BBN’s capital for investment in Internet-related activities to $150 million, according to a spokesperson. In June 1996 BBN sold 2.4 million shares of its common stock to private and institutional investors at $22.08 a share, raising $53 million more. This sum was to be used to expand BBN’s network infrastructure and distribution channels and to develop value-added services to major corporate accounts.

As part of a company reorganization, the Hark Systems subsidiary was merged into the parent company in April 1996 and the Planet subsidiary in September 1996. The reorganization left BBN with two divisions: BBN Planet, accounting for $73 million in revenues in fiscal 1996, and BBN Systems and Technologies, accounting for the remaining (before intercompany eliminations) $164 million. BBN ended the fiscal year with a loss of $56.6 million, mainly because of investment in Internet-related services. Management warned that it expected to incur substantial operating losses in fiscal 1997, principally as a result of its continuing investment in Internet businesses. Its long-term debt was $82 million at the end of fiscal 1996.

In fiscal 1996, 55 percent of BBN’s revenues were derived from contracts and subcontracts involving the United States government and its agencies, compared to 70 percent in fiscal 1995 and 80 percent in fiscal 1994. Almost all of this work was being done by the Systems and Technologies division. BBN’s headquarters remained in Cambridge, where it occupied a 15-acre complex of about 15 buildings, partly owned by the company. BBN was also leasing office space at 18 other domestic locations and in two foreign countries.

Principal Subsidiaries

BBN Advanced Computers Inc.; BBN Canada Ltd. (Canada); BBN Certificate Services Inc.; BBN Instruments Corp.; BBN International Corp.; BBN International Sales Corp. (U.S. Virgin Islands); BBN Manufacturing H.K. Ltd. (Hong Kong); BBN Securities Corp.; BBN U.K. Ltd. (Great Britain); Bolt Beranek and Newman Corp.; Parlance Corp.; Realtech Corp.