Chapter 13 - Data Communications: Adaptation 1979-1986
By the summer of 1986, executives of Codex knew their T-1 multiplexer strategy had serious problems. The rapidly growing T-1 market was approaching $200 million and they were stuck participating in the marginalized point-to-point segment with their product OEMed from Avanti. Codex needed a networking multiplexer if they were going to be a credible factor in supplying large corporations – their target market – with the network switches they needed to build out their WANs. Any doubts they may have had were instantly swept away in September, when they learned that DCA had acquired Cohesive Networks. It felt as if they were drowning with no life raft in sight. They needed to act and act quickly. But what were the options? The idea of buying Timeplex took pride out of their souls, let alone the painful thought of having to negotiate a deal with Botwinick, CEO of Timeplex. Botwinick might argue that he, yes he, as if he were Timeplex, should buy Codex. Quick phone calls confirmed their fears that NET was not for sale. In fact, NET was discussing going public. How could they, Codex, the Data Communication giant, have so misjudged and mismanaged a market opportunity so close to their core? They needed inspiration and they needed it fast! Fortunately the investment bankers of Montgomery Securities introduced an option. One that would look increasingly better after every meeting: Stratacom.
Stratacom was founded in January 1986, although technically it was the final stage in the legal reorganization of Packet Technologies. (AMOCO, the Oil Company and sole financial backer of Packet Technologies, resisted the company’s efforts to raise more money. AMOCO eventually relented, giving a spinout the right to sell a T-1 multiplexer, a technology it considered unimportant.) Packet Technologies, founded in 1983 by a team including Paul Baran, had initially planned to build products enabling two-way communications over cable networks. Then out of conversations with Michigan Bell came the idea of building a more efficient product for intra-central office T-1 communications. Not surprisingly, therefore, the T-1 multiplexer that the spin-off Stratacom was beginning to sell was based on packet switching, a very different architecture than the circuit switching of all the existing T-1 multiplexers being sold.
Codex had two things Stratacom was in short supply of: capital and distribution. So in the early spring of 1987, Codex invested $2.5 million in Stratacom and agreed to cap their ownership of Stratacom to no more than 20%. Codex, in turn, gained worldwide rights to market, install and service Stratacom’s Integrated Packet Exchange (IPX) T-1 multiplexer. In 1987, Stratacom had revenues of $5.3 million. Sales of $3.2 million to Codex represented 60% of their sales. Reflecting the ever higher costs of market entry, Stratacom lost $6.0 million. Codex had secured the rights to a networking multiplexer, but sales of $3.2 million of an OEM product hardly made them a market force.