SynOptics Communications, Inc.

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SynOptics Communications, Inc.

4401 Great America Parkway
Santa Clara, CA 95054
U.S.A.
(408) 988-2400
Fax: (408) 988-5525

Public Company
Incorporated: 1985
Employees: 1,255
Sales: $388 million
Stock Exchanges: NASDAQ
SICs: 3661 Telephone and Telegraph Apparatus; 3577 Computer Peripheral Equipment

SynOptics Communications, Inc. pioneered computer communications through the use of telephone lines and is one of the world’s leaders in local area networks (LANs). SynOptics controls one-third of the market for “intelligent hubs,” which are used to link personal computers. SynOptics attained its leading position in the market quickly; in less than a decade, from 1986 to 1992, the company’s revenues increased astronomically, from $1.8 million to over $388 million.

The foundation for the company was laid in 1983, when Andrew K. Ludwick and Ronald V. Schmidt first shook hands at Xerox’s highly-regarded Palo Alto Research Center (PARC) near San Francisco, California. As an employee at Xerox, Ludwick’s task was to identify new technologies developed at his company which were suitable for commercialization and market distribution. While working at this assignment Ludwick met Schmidt, who was developing Ethernet applications at PARC. Like Ludwick, Schmidt was also interested in applications of new technology for commercial development, and the two men spent a good deal of time discussing what kinds of products might be brought to market.

It was not until 1984 however, that Ludwick and Schmidt both recognized a development which signaled enormous consequences for the industry. IBM announced its introduction of a shielded twisted pair cabling system, which provided support for the entire range of IBM communications products, and at the same time introduced the “Token Ring,” a new LAN access method that would operate on IBM’s new structured cabling system. Since this system employed a star configuration, the entire network activity of an office, for example, could be concentrated in selected control points, such as a building’s wiring closet. The advantages of IBM’s new product and what distinguished it from other cabling systems at the time was its physical layout—not only would there be improved network performance but system maintenance would be drastically simplified.

While people within the industry were trying to figure out the implications of these developments, Ludwick and Schmidt quickly recognized the importance that IBM’s new cabling system and Token Ring would have on Ethernet. Ethernet, a widely used a coaxial-based network access system created by Xerox, Digital Equipment, and Intel, was in danger of being eclipsed by IBM’s new product. Because Ethernet’s system ran on the linear bus topology used by coaxial cable, while IBM’s new cabling system ran on a star topology, IBM’s cabling system would not support Ethernet. Long one of the most overlooked aspects of computer networking, IBM’s announcement made it clear to the two young men that computer network cabling systems would play an important role in the development of the industry.

Without losing any time Schmidt, confident that he could come up with a competitive response to IBM’s cabling system and save Ethernet at the same time, began working non-stop in his PARC lab. In the course of his research over the previous few months, Schmidt already had Ethernet running in a star topology over fiber optic cables. He now devoted himself to creating a simplified version of Ethernet operating on a shielded twisted pair cabling system, similar to IBM’s. After Ludwick was notified of Schmidt’s work, Ludwick immediately devised a business plan to revitalize and develop Ethernet by using the IBM cabling system.

The crucial part of Ludwick’s business plan focused on the assumption that local area networks (a local area network is a collection of personal computers, printers, file servers, and work stations operating on a common system), which were used in a minor capacity for workgroups at the time, would ultimately expand to become part of the necessary framework for all future business communications. Moreover, Ludwick and Schmidt correctly predicted that the star topology cabling structure they were now concentrating on would soon become the essential factor as the reliability and financial aspects of local area networks grew more important.

With such a grand opportunity knocking at the door, Ludwick and Schmidt decided to commercialize the new technology and convinced management at Xerox to help them set up their own company. Xerox agreed to back the new venture, and created a spin-off company to bring the new product to market. By June of 1985, the two men were able to procure enough funding to open a small operation with 12 employees and headquarters located in a trailer. Christening the new company “SynOptics,” work began immediately on its first product, LattisNet. Lattisnet was a concentrator designed to support Ethernet running on a shielded twisted pair cabling system and meant for installation in an office building’s wiring closet. From the very first day of company operations, Ludwick and Schmidt focussed on cabling systems for computer networking, which they both were convinced would herald a revolution in the industry.

As Ludwick worked on the production and marketing needed to bring LattisNet to market, Schmidt was developing a project that would allow Ethernet to run on unshielded twisted pair cabling, otherwise known as ordinary telephone wire. When it became known that Schmidt was working on this cutting-edge technology, many experts within the industry doubted that he could bring it to fruition. Although unshielded-pair cabling is already installed and used in most office buildings throughout the United States, with the added benefit of being extremely inexpensive, it was nonetheless assumed that this type of cabling would be too easily affected by environmental factors such as interference from common radio frequencies and electromagnetic transmissions for Ethernet to operate effectively. Even the people at Xerox who agreed to spin-off the new company doubted the technological feasibility and the market prospects of linking computers over telephone wire.

In 1987, SynOptics surprised industry experts and naysaying pundits by introducing the first ever unshielded twisted-pair cabling that would support Ethernet products. It was immediately recognized as a revolution within the industry; local area networking would never be the same. First of all, this technological breakthrough meant that unshielded twisted-pair cabling—normal telephone cables already installed in office buildings—could provide businesses with the ability to use Ethernet for their networking needs. Secondly, and even more importantly, since SynOptics’ unshielded twisted-pair product line was configured in a star topology and employed an electronic concentrator found in the wiring closet of any office building, there was no need to rip out walls in order to install the special coaxial cables then in use. With its emphasis on focusing network activity in a wiring closet, suddenly the efficiency and inexpensive cost of using unshielded twisted-pair cabling for computer networking became obvious to everyone in the industry.

SynOptics’ revenues shot through the roof when their line of LattisNet unshielded and shielded twisted pair products was introduced on the market. In 1987, company revenues amounted to $6.1 million, but by 1988 revenues reached $40.1 million. There was such growing demand for the company’s LattisNet product line during the same year that management procured over $4 million in new financing to expand its manufacturing base. Along with the financing came a decision to implement an international distribution network, which had an immediate affect on company sales. When Xerox and other investors lobbied SynOptics to make a public stock offering, the resulting 1’/: million shares brought in more than $20 million. Management wisely used the money to continue expanding its production facilities, and improve its international distribution network in order to deliver products to customers even more quickly and efficiently.

Ludwick and Schmidt’s prediction that local area networks would dominate modern business communications surpassed their expectations. By 1988, personal computers were not only found on the desks of employees in the corporate world, but on the desks of individuals working for all kinds of organizations, from not-for-profit foundations to government agencies. As these organizations grew, they turned to LANs to help provide them with the ability to share information throughout their offices. Unfortunately, LANs were growing more rapidly than anticipated, and the amount and flow of information within these systems was increasing at unmanageable rates. Soon there were numerous LAN overloads and failures, some of which had catastrophic consequences in Wall Street brokerage firms.

In order to solve the problem of system-wide network failures, organizations turned to either client-server computing or added bridges and routers to their LANs. The client-server model of computing was an attempt to distribute computing power equitably throughout the network so that computer failures or downtime would be less likely. Yet this model did not solve the problem of increasing the distributed computing power on an entire system. In short, the client-server model lacked a mechanism for systematically controlling and developing the computer network. In a similar fashion, the attempt to add bridges and routers to connect LANs and then reorganize them into more manageable subnetworks in order to control the flow and amount of data worked well, but these devices increased the complexity of an already overwhelmingly complex system.

SynOptics’ management believed that both these solutions were inadequate. The two co-founders had earlier envisioned the development of “intelligent hubs”—concentrators located in wiring closets—that accommodated any combination of Ethernet connections. In December of 1988, SynOptics introduced its LattisNet Network Management system, a combination of both software and hardware that controlled hubs and related physical elements of local area networks. The company’s new product provided a means for integrating different LAN types and services and, equally as important, provided a foundation for the systematic growth and control of LANs. On the cutting edge of new technology once again, SynOptics’ introduction of its intelligent hub signaled another milestone in the industry.

The company’s LattisNet Network Management system propelled it to the forefront of the market. In 1989, SynOptics brought out the LattisNet System 3000, an intelligent hub product line that allowed customers to adapt their network systems in order to meet specific needs. As the company continued to add to its intelligent hub line of products, revenues continued their upward climb. With sales of over $77 million in 1989 and $176 million the following year, SynOptics was confident enough to declare a two-for-one stock split in June of 1990.

SynOptics’ success, however, soon attracted numerous competitors, and the company’s market share began to erode rapidly. In 1988, SynOptics possessed an undisputed monopoly on the market, yet by the end of 1991 its share had diminished to about 40 percent. Along with the loss in market share, the company’s profits decreased and its stock plunged from a price of $51 to $14 per share. The company most responsible for cutting into SnyOptics’ hold on the market was Cabletron, a New Hampshire-based operation which implemented an aggressive advertising campaign and emphasized lower prices for intelligent hubs.

Management at SnyOptics moved quickly to counteract the growing perception in the industry that the company had given up its leadership in the intelligent hub market to Cabletron. SynOptics reduced prices on most of its networking products by approximately 40 percent, cut back the number of value-added resellers that marketed and sold its product lines, increased the amount of funds designated for research and development, and substantially increased its marketing budget while at the same time revamping the company’s advertising strategy. SynOptics also relocated its production facilities to Santa Clara, California, in order to lower the cost of manufacturing. The company was soon back on track. Revenues for 1992 reached $388 million and SynOptics’ stock jumped to $83 per share.

The most important factor in SnyOptics’ revival, and in its continuing success and leadership in the intelligent hub market, is the company’s commitment to developing new products. Nearly 60 percent of the firm’s total sales in 1992 were due to products which were introduced during the previous year. SynOptics introduced its own LattisNet Token Ring System Products, and also entered into a joint venture with IBM to manufacture LattisRing workgroup hubs. Along with the continued expansion of its product line in the Ethernet field, the company has brought out a Fiber Distribution Data Interface (FDDI), which has become the standard for high speed data transmission. All these products are designed to reduce the cost and complexity of installing and managing local area networks, while simultaneously ensuring compatibility with different networking environments.

As long as SynOptics continues to introduce the kind of cutting-edge products that first established its reputation, the company will not have much difficulty maintaining its leadership position within the highly competitive computer networking products industry. Indeed, with Ludwick still president and chief operating officer of the company and Schmidt acting as the chief technical officer, SynOptics is poised for whatever vagaries the future might bring.