.. ~. ~


SB Networks*
As Nigel Allyn, director of strategic technology, sat at his desk in a business park outside London, he considered the situation facing SB Networks (SBN). Since joining SBN in early .1991, he had watched the firm grow from a 70person start-up company to a 2,100+ employee global corporation. In that time he also saw the company enter a market monopolized by IBM and, over a period of six years, establish itself as the acknowledged technology leader in the world of Token Ring networks. : When he came to SBN, Allyn was to be the liaison between management and the engineering side of the company. Later he became a salesman responsible for selling "everything that was not on the price sheet." In 1996, he was responsible for 5 percent of SBN's revenue. While SBN typically took in be.tween $2 and $3 million a year from leasing out its intellectual property, it spent less than a quarter of a million dollars paying for the intellectual property it brought in. SBN's policy was to patent its intellectual property, about five patents per year, but SBN seldom found it cost effectiveto prosecute.cases of infringement. This is because companies small enough to successfully prosecute tend to not have enough money to make the effort worthwhile, whereas companies large enough to be worth suing have enough money to make the prosecution effort very time consuming and costly. In instances of particularly valuable patents, industry practice is to give one's patent to a law firm with the stipulations that
"Graduate student Jim Mimlitsch prepared this case under the supervision of Professor Kathleen Allen, Ph.D., as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The company name and names of all parties in this case have been changed. Copyright © 1997 by James Russell Mirnlitsch, Jr.




Houghton Mifflin Company; Kathleen R. Allen; Growing and Managing an Entrepreneurial a Business with Character; Cases (No.1) .


1'" Edition, (1999); Pa rt Vl! Building

The protocol dictates that only one computer has the right to send data at a time. it waits until itreceives the token and then addresses the data to its destination and passes it " 'to its neighbor. UI mg . SBN improved this technology by introducing active management that provided fault-tolerance.5. Cases (No" 1) Business. pay the company a fixed amount year.Case 7 S8 Networks 603 the firm pay for all patent defense itself. building.sending data without having the token or not passing data on to its neighbor. In 1987. The adapters. IBM. otherwise it retransmits the data along to the next computer. 1" Edition . which contain a protocol based on the IEEE (Institute of Electrical and Electronics Engineers) standard 802. SBN introduced its first Token Ring adapter products for personal computers and its first hub products for connectivity. create a "logical ring in which each computer can send data to its neighbor. The neighbor then reads the data and checks the address to see if the data is meant for itself. Kathleen R. Allen. Growing and Mallaging an Entrepreneurial With Character. and split any profits over and above those costs with the company. A ring built with all computers connected to a MultiNet hub would continue to operate even if the cable-between a computer and the hub were seve. almost single handedly controlled the Token Ring market. and marketing Token Ring network products. to exchange data. it keeps the data and gives the token to the next computer in the ring. Sowell respected were SBN's products and reputation for technical excellence that SBN quickly took industry leadership for Token Ring away from inventor IBM and began to set the standards for the technology. At the time. Difficulty raising start-up capital for a company thatwanted to challenge the biggest name in the computer industry finally led Brooks to mortgage his family's pastureland in southern England. Simon Brooks founded SB Networks with the goal of designing. " This was the technology as IBM invented it and the IEEE codified it. This is done by installing Token Ring adapter cards in each of the computers and then connecting all the computers with cables. per "History In 1986.more important. SBN also introduced technology that improved the throughput a Busmess HOlJg~ltoll Mifflin Company. which may be of different types (like mainframes and pes)". When one computer on the ring wants to send data to another computer. This second wave of products and several others that followed established SBN's name and reputation for welldesigned and well-built technology. " ~'Smart!1'Products "Token Ring networks allow computers. ". Brooks recruited several technically bcilliant engineers from across the United Kingdom and began to design and build Token Ring products. Additional products quickly followed up these offerings. This "right" is signified by a piece of code called a token. (1999]' Part Vll B Old" "."for instance. Having literally "bet the farm" on his success. If it is.'ed"or.J. if one computer in the ring began misbehaving. who invented the technology.

This was a major shift in focus for SBN. This gave SBN instant access to yet more new technology.) However.1) Business. SBN acquired LANNET Data Communications. Cases (No. SBN's marketing strategy was to charge pre- . In 1995. (Exhibit 1 provides a partial list of awards that SBN products boast. 604 Case Studies of Token Ring adapters by reducing latency. this time public-switched digital services such as T-1 and ISDN (Integrated Services Digital Network). -:. and it followed this up with a string of superior products... Competitive Environment Early product successes laid the foundation for SBN's reputation in the industry. and adapters were generally perceived as commodity items.. a player in the Internet market segment.. /. In 1996. Houghton Mifflin Company: Kathleen R. These acquisitions allowed SBN to offer a broad range of products at a time when a new competitive environment was beginning to emerge in the network industry. . an Israeli company known for Ethernet networks.data. a Ul lIlg .. Growing and Managing an Entrepreneurial a Busmess wIth Character. A Token Ring adapter that contained the new chipset could read the destination address of the data it was being sent without having to read the data itself as other adapters did. l~Edition (1999): P rt Vl! B ildi • . which had previously only manufactured and sold Token Ring network products. SBN had come to be known as an adapter company. SBN acquired Teleos Communications Inc. Allen. . This improved the rate at which these adapters could handle..

. (Exhibit 2 shows a ranked list of industry players and their February 1997 market values. Majorindustry players all wanted to Exhibit 2 Ranked List of Iim:JiustR'll' Players and TbehfeblrU3VY 1! 99'1 Market Values *Newbridge·and Fore. There were many Fortune 500 companies that preferred to purchase all of their network equipment from one vendor like these. (Exhibit 3 presents a partial list of mergers and acquisitions in the network industry in 1995 and 1996. Routers. but it became harder and harder to sell SBN 16Mbit Token Ring adapters for $400 when customers could purchase 10Mbit Ethernet adapters that started at $40. the hot segment of the network industry was routers. which pass data between local network segments like Token Rings. and other "closet" products (devices which support the network infrastructure as opposed to individual computers and are kept in wiring closets) were the darlings of the industry media and of Wall Street. The Industry In 1996. Part VI! Building . Router manufacturers like Wellfleet (which later merged with SynOptics to form Bay Networks) and Cisco grew at a dizzying pace and came to dominate the network industry and for some to symbolize it. 'The scope of the industry had expanded and now included voice and video in addition to' data transmission over private and public analog and digital services. the companies that offe~ed afull line of products dominated the market. Houghton Mifflin Company. (1999). In 1993.1) BUSiness.'t.'.} The rush to acquireniche players was driven by a desire to offer a full range of products. mium prices and to offer high levels of service in support of its products. believing that this would ensure interoperability and dedicated service. These companies offered a full range of "closet" products as well as hubs and adapters. but the difference in price/performance ratios could no longer always support the decision to buy from SBN. when SBN made its IPO. Kathleen R Allen. 1~ Edition.) Thenumber of. whereas the other companies listed do not. ]f It· Case 7 SB Networks 605 l Ii i" !. Even the Ethernet manufacturers would acknowledge the superiority of SBN's adapters' performance.firmsin the industry had decreaseddramatically because of the high-profile merger ofWeUfleet and SynOptics and the less well knownacquisition of dozens of smaller firms.both derive significant portions of their income from the telecommunications industry. Growing and Managing an Entrepreneurial a Business with Character. . Cases (No.

. which is connectionless. Allen. Previously. ATM holds the promise of opening the telecommunications market to the network industry and the threat of opening the network market to telecommunications players. SBN unveiled its strategy for integrating Token Ring with ATM and became a founding member of the Desktop ATM 25 Alliance. Data communications. ArM ATM technologypromised tounify the wide assortment of products and services that existed in the world of information transmission. SBN has introduced several ATM products and taken a leadership position in the area of LAN emulation. ATM. for example. to ·bematched with the type ofapplication in order to achieve acceptable results. 606 Exidmt 3 PalrtiallUst of Network ~miru!stry Me~ers Acquisitions. there is data to be sent. an industry group that promoted the 25Mbit ATM standard developed by IBM. Despite this blurring of lines. nication at some point in the future. Since that time. This is termed connectionless communication and conforms to available bandwidth . Growing and Managing an Entrepreneurial a Business with Character: Cases (No. are optimized by sending large amounts of data only when. 1995 31l1id 996 1 aS1id establish a presence in all of these markets in order to be well positioned when ATM (asynchronous transfer mode) networks began to replace traditional network technologies as most industry experts predicted it would." \ ~. works by sending extremely small amounts of data extremely quickly and offers methods of ensuring service levels and emulating connections. a technology that will allow ens- Houghton Mimin Company. technology needed.1) Business.however. 1" Edition. SBN and ATM In 1994. Kathleen R. It is widely held that ATM will replace most other methods of cornrnu.Voice and especially video ·app·li~ati~ns. require established connections and predictable servicelevels. II. consolidation has mainly stayed within traditional industries. (1999): Part VI! Building . also known as fixed bandwidth.

. To maintain compatibility with existing systems. As an easy means of generating revenue. . 1" Edition. 3.a very time-consuming. 4. intellectual property is often employed to keep developers focused on their own areas of expertise. SBN has not been able to offer the "one stopshop" approach to ATM that many customers desire.in order to . process in such a fast moving industry. order to ensure interoperability. 2. Despite this. . Inthis environment..achieve any or all of the foHowing objectives: 1. To reduce the time it takes to bring a product to market. To ease the burden of testing. The lesson applies equally well to the network industry. For example. In. Standards in the network industry are often incomplete and open to interpretation by various manufacturers. Cases (No_ 1) Business. and employing licensed technology reduces the amount of testing that isrequired to bring a product to market. . More than 50 percent of all networking products contain some amount of third-party intellectual property. the vast majority of ISDN solutions employ signaling code for call set-up that is licensed from another company.:: Case 7 SB Networks 607 tamers to extend their investment in existing technologies such as Token Ring and Ethernet. To create an industry standard. Companies Can inexpensively add more to their bottom lines by getting others to license their intellectual property. (1999): Part VB Sundin . Licensing in the Network Industry Licensing intellectual property in the network industry is extremely common. One needs to look no further than the example of Microsoft to see that the companies who set the standards are the most successful in the long run. Product testing is . any means of reducing time to market is likely to be adopted. Allen. Kathleen R. In addition to licensing the intellectual property of others. 2. g . To develop a reputation in the industry. Products in the network industry have an average life span in the field of less than five years but can expect to be replaced by newer products in less than six months. HOUg~ltOIl aBus)lless Mifflin Company.. however. Outside of these areas. licensed technology is often used. 3. The network industry is rather small and a reputation for good products or good code benefits companies because of the halo effect. To keep from reinventing the wheel. Growing and Managing an Entrepreneurial WIth Character. Companies license the intellectual property of others. Most companies or at least divisions have clear focuses and are able to innovate in these areas. most companies license out their own intellectual property as welL Firms do this for any or all of the following reasons: 1.

which could not." that makes up the logic of an IC or chip) for use in Cisco's line of switch products. • In 1995. Part VI! Building . With this license agreement SBN attempted to establish RingRunner as the standard in switching silicon. 608 Case Studies SBN and LicensiJlg.. • From Cisco. to Newbridge Neta line of products to source of income for or market to New- • In 1996. SBN licensed the code to its Token Ring protocol stack software to Microsoft. of SBN licensing technology to and from others include the following: t In 1988. SBN licensed the Cisco lOS (Internetwork Operating System) for use in a WAN (wide area network) AccessSwitch. . Growing and Managing an Entrepreneurial a Business with Character: Cases rNo. at the time SBN had just completed its acquisition of Teleos and needed the cash infusion. 1·" Edition. Problem Although SBN engages in both licensing to and from other companies. SBN again developed a licensing agreement with Microsoft. Kathleen R_Allen. this ailowed SBN to become a standard for Token Ring networking with users of the Windows NT operating system.establish the young firm as a respected name in the network industry.otherwiseafford todevelop bridge's customers. Although SBN would later develop a competing product. Business. • Also in 1995. This was primarily done for the revenue. Cisco licensed SBN's Ringk. • From Novell Corp. SBN and Newbridge agreed to jointly develop be marketed and sold by . Instances. or "microcode. SBN has a long history of licensing its products within theindustry.unner switchingsilicon (the software. SBN could quickly gain access to the huge installed base that Novell had developed.Newbridge. Cisco's lOS was generally considered an industry standard. SBN licensed-its RingRunner silicon works. this time to have SBN's Token Ring driver code incorporated into the Windows NT operating system.~~ . At the time. SBN's licensing Houghton Mifflin Company. This was a good SBN.. 1) . and SBN could not afford to reinvent the wheel. and the license agreement also helped to . the balance of licensing weighs in the favor of outgoing intellectual property. SBN licensed its Fastmac technology to Cisco for use in Cisco's routers. This was an expansion of SBN's earlier license with Cisco. As with the previous example. Cisco Iicensedrhehigh-density ISDN switchingtechnology that SBN acquired with Teleos in order to integrate it into a high-capacity. When it was a small company and focused on a single niche. t 'In 1996. • In 1990. This allowed SBN to quickly become a standard for Token Ring networking with users of the Windows operating system.. Cisco was better positioned to use the technology for "closet" products than SBN was. (1999). By licensing NetWare Hub Services. universal access server. SBN licensed NetWare Hub Services for use with its Smart 16/4 MC Hubcard.

Phone interview with Nigel Allyn.. Upside Magazine. Personal interview with SBN District Sales Manager. prestige._ I' I· -~ :' Case 1 SB Networks 609 of its technology brought in revenue. However. 1·" Edition. . various articles-and advertisements.sbn. ' 1997. . Dir . The restructuring came after several quarters of declining revenue and net losses.. SBN announced a corporate restructuring and an jaccompanying layoff. Can SBN continue its practice of licensing out its intellectual property and remain a competitive force in the networking industry? Does licensing out intellectual property stand in conflict with the notion of sustainable competitive advantage? Is licensing intellectual property (in or out) a short-term or a long-term strategy? Aftermath In July 1997. Allen. Part VI[ Building . it began to develop products that were in competition with those of its former partners..of Strategic Tech. 1) Business. Houghton Mifflin Company.. 31 January 1997. Sources Phone interview with SBN Public Relations. The financial ill health was the result of slower than expected acceptance of ATM by network industry customers. .coml. (1999). . The restructuring trimmed the ATM arid consulting business units from the company and the layoff led to the termination of 100 employees worldwide (about one-third of the total work force). Kathleen R. and mindshare. Cases (No. SEN NV. 30 January 1997.!lwww. . Growing and Managing an Entrepreneurial a Business with Character.. February 1997 . as SBN continued to grow.. http. 4 February SBN's web site.

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