Nortel's problems were Bay-sic

As Nortel goes through its last stages, there are a lot of people analyzing what went wrong, particularly in the time since the dot-com bust. But for me, the watershed moment was just before then, when Nortel bought Bay Networks.

It was 1998. Bay was second fiddle to Cisco in enterprise networking equipment, but it was still a viable competitor. In April 1998 my colleague Bob Brown interviewed Dave House, the chairman, president and CEO of Bay, and that interview is still available on our site. (Here's the link, but if you go there, be warned that the page formatting is, shall we say, old-school. And never mind those messages of "an error occurred while processing this directive.")

Bob noted that House had been credited with turning Bay around financially. Bay was formed in 1994, when router maker Wellfleet Communications merged with switch maker SynOptics Communications, and that merger had numerous challenges. In the interview, House talks about the "new product category" of the routing switch, and the fact that while Bay had great technology, it also needed the great marketing that Cisco had. It was working on it, making progress. Things seemed to be looking up for Bay.

Two months later House led Bay to Nortel, which paid $9.1 billion for it. Nortel knew it needed to get into data networking, that everything - voice, video and data - was headed toward IP. It knew that it had to integrate IP into its DNA, and the "Networks" part of its new name was supposed to reflect that. 

What happened next is probably an area of speculation, but in two short years it was clear that the Bay acquisition hadn't worked out the way it was supposed to. Jim Duffy wrote (the link - again, you've been warned) that Nortel's router market share fell from 15.7% in 1998 to 11.2% in 1999, while Cisco increased its own share. And those routing switches? Nortel lost its market leadership, and its share plummeted from 37.8% to 17% amid product delays.

The transformation into an IP company that was supposed to have happened by then, didn't.

Dave House stayed around a year, and then later went on to head up Allegro Networks. He currently is chairman of the board at Brocade.

There was certainly plenty that happened afterwards that didn't help Nortel - the dot-com bust, the accounting fraud from 2000 to 2003. Could the integration of Bay have been handled better than it was? Was Bay's position really as good as it seemed in 1998? It's hard to know for sure, but I wonder if things could have been different.

This week, reports surfaced that Nortel is looking to sell its enterprise division for $500 million.

Jeff Caruso is site editor at Network World.