Chapter 12 - Networking: Market Order: LANs 1983-1986
Michael Pliner, President of Sytek, had every reason to feel confident that his company’s strategy of selling broadband networks into large campus networks both unique and destined to succeed. With engineering focused on demonstrating a metropolitan-wide network for his corporate investor, General Instruments (GI), Sytek’s direction seemed set. That was until he gave a talk at Brown University in the spring of 1983. Pliner remembers:
We expected 90 people to show up; 200 people showed up. Hot, spring night. And, so we were all crammed in this room and about 12 IBM representatives were there including Jim Turner from Entry Systems Division. And we had customers talk, and he looked at this technology and he said, “This is fantastic, we can put IBM PCs on campus-wide networks, Metropolitan-Networks.” They bought into the same thing that GI kind of said, carry video, multi-media, put it all in the same network. So, ESD [Entry Systems Division] got really interested in broadband. And, they had a good team and they were really riding the success of the PC, you know, because the PC was invented there. Estridge was still there, they were king of the roads. They could do anything they wanted. They were mavericks. They came to us and said, ‘We like this broadband stuff, and we like that product that you had trouble with, LocalNet 40.’ ‘I don’t know if we could do that, [create LocalNet40 for the PC]’ I said, ‘and, furthermore, we don’t think we can meet your price point,’ because the price point they wanted was for the PC. I said, “Why don’t you go talk to Ungermann-Bass, they can do that with Ethernet.” And, they did but they kept coming back and said, ‘No, we want broadband. We gotta be able to go on campus networks.’
So we said, ‘Ok, this is a risk-taking company — are we gonna do this thing and take this great idea and deal off the table or are we gonna pass on it, because they really want our product and they’re willing to pay more for it?’ So we went and did it, and we knew that when we signed up to do that deal, we knew that there was only 60-40 shot we would ever make it, ok, because we were doing things that were just never done before.
Pliner quickly redirected most of Sytek’s engineering resources to developing a broadband product for IBM. Fortunately most of the effort required to demonstrate the metropolitan network had been completed. Pliner remembers:
We actually demonstrated in Sacramento interactive cable TV on a Metropolitan-Network. I mean you’re talking about a thousand or $1500 for a box that was going to sit in front of your TV that would allow you to interact with a terminal. People weren’t going to pay the money necessary for cable companies to get their money back out in order to make a profit. We were too early and it just wasn’t going to happen. But that’s why GI invested in us and that’s why we let the investment happen, because we looked for that. And that was the end of Metropolitan-Networking for awhile.
The investment from GI may have failed to materialize a viable metropolitan network, but the GI manufacturing plant in Mexico looked like the solution to achieve the aggressive cost target for the IBM product. However, a four-month development overrun before prototypes were finished complicated the handoff of a difficult to manufacture high-technology product to the GI facility.9 With a product introduction scheduled for August, IBM expressed concern whether they would have enough initial inventories to meet demand.
On May 8, 1984, IBM announced both their IBM Cabling System and intention to implement a “star-wired token ring local area network using the IBM Cabling System within the next two to three years.” Sytek management did not react with alarm to the idea of IBM selling a token ring LAN given IBM’s management expression of commitment to “their” PC LAN.
On August 14, 1984, IBM finally announced its LAN. Only it was the PC LAN, the reengineered Sytek LocalNet. What would be telling in the specifications was that it limited the number of stations to 72, when the compelling advantage for broadband came into play with a large number of stations. Pliner remembers the enormity of getting ready for the PC LAN introduction:
So when IBM came out with the PC LAN, it was three boards shrunk down to one and we were able to manufacture it, and before we even announced the product, we had manufactured 14,000 of them, and we filled up the IBM distribution channel. So it was a good relationship at that time.
In September, IBM invested $6 million for 4.9% of Sytek, valuing Sytek at over $120 million. Even the difficulties of manufacturing product in Mexico did not seem to dampen their relationship. Pliner recalls.
We TRIED to manufacture in Mexico. We never successfully did that. We said: ‘This is too high tech of a product. It cannot be manufactured in Mexico,’ and moved it back and we set it up here, and we had an excellent, high quality manufacturing plant.
Good news continued. In December 1984, Sytek signed an agreement with DEC under which they the two companies would market each other’s products.
As Pliner had promised at the Alex. Brown conference, he began discussions with investment bankers to go public.
“Out from the shadow: Sytek emerges,” Dataquest Research Newsletter, Feb. 1986