Chewing the VPN fat

Over dinner together, CEOs of four virtual private network start-ups scheme how to become the next Ciscos.

By Tim Greene
Network World, 06/14/99

We recently invited the CEOs of four VPN start-ups to a refined little restaurant called Drais located deep beneath the casino floor of the Barbary Coast hotel in Las Vegas.

Our mission? Ply them with fine food and wine, let them unwind from a hectic day and engage them in a down-and-dirty discussion about where virtual private networks are headed. As we found out, these executives were among the highest rollers in Vegas that week, gambling millions in start-up money to become the next network giant among the likes of Cisco and Nortel Networks.

Joining us were Kenny Frerichs of Network Alchemy, Tom Steding of RedCreek, Per Suneby of Indus River and Tim Hember of Newbridge affiliate TimeStep. Settling in after cocktails, Suneby indulged in the possibilities of what the future holds for these young companies. "America has always looked to start-ups. This is why we have Microsoft, this is why we have Cisco," he said.

Fueling the VPN bosses' optimism is their potential to take over significant chunks of the vast remote access and WAN markets.

"It's not a zero-sum game," RedCreek's Steding said. "This market is bigger than the market it's replacing. It's huge."

Already, customers are writing their wish lists for VPN features, Network Alchemy's Frerichs, a Cisco veteran, said. "We've talked to major corporations about what they're looking at - clustered directory services, clustered Web services, database services, clustered routing protocols," he said. "When you say VPN, most companies think, 'Oh, it's a replacement for remote access server dial-up.' It's much more complicated and sophisticated than that whole environment."

But even if the VPN vendors just horn in on remote access, they stand to reap enormous rewards, Indus River's Suneby said.

"You have about 25 to 30 million corporate remote access users in the world. At the rate the remote access market is growing, you'll easily have 100 million by 2002," Suneby said. "If they were all VPN remote access users, and you collected $10 a year from each of them for maintenance, that's $1 billion. If they spend $100 to equip themselves initially, that's $10 billion. And that's just remote access for corporate users."

VPNs gain strength from the fact that they can be phased in gradually without requiring companies to rip out existing gear, TimeStep's Hember said.

"I'm a firm believer that the Internet will be the business net that will connect the global one million companies," he said. "The beauty of virtual private networking is that it's complementary to existing means of networking, so you can deploy this stuff nonintrusively."

But Indus River's Suneby said he is seeing companies launch sweeping VPNs that replace and expand their existing WANs.

"We see situations where people increase the number of remote users by a factor of 10 because they now can do it in an easy-to-use solution, and it's cost effective," he said. "We see companies saying, 'I'm eliminating all my nonheadquarters bricks and mortar,and I'm virtualizing the whole company because I can use the Internet to keep everybody connected and working.' To me that's disruptive. That's a big change."

"I don't see corporations doing that," Hember countered.

"Listen, I've got customers doing that," Suneby shot back.

For all their optimism and enthusiasm, the executives said they recognize that right now, their companies are battling to merely survive.

Looking around the table at seared tuna, steaks and grilled Chilean sea bass, RedCreek's Steding posed the question: "So speaking personally, are we digestible protein?"

"There's no way 60 VPN suppliers today can survive. Some of them will basically fade away," Frerichs said.

"There will be fewer of us a year from now," Suneby said.

"It's an endurance contest," Steding agreed.

Short term, the Year 2000 problem will hurt VPN vendors' revenues, Frerichs said. He predicted a "cold winter" in which customers just won't buy because they are waiting to see what damage the Y2K problem will do to their networks. They will hold off equipment buys until spring, he predicted.

In addition, these start-ups have to view each other warily. "You've got 18 months from the time you think about what you want to do, to the market penetration, to the actual product, to getting out there and getting customers," Frerichs said. "If you don't get that done in 18 months, you're not going to make it. There are too many well-funded, bright people out there."

Long term, the vendors face the continuing menace of the network giants, particularly Cisco, which holds such powerful sway over many enterprises. Even if VPN vendors have better products, Cisco has clout to keep its customers from buying from others.

"Cisco puts its arms around the customers and says, 'Hey, these guys at Indus River have a great offering, but I'm worried about their ability to support you and take care of you like we have. And we'll have something like they will, eventually,'" Network Alchemy's Frerichs said.

"Arrogant companies try to manage customer relationships to the exclusion of other people. This is not a new story," Suneby said.

Equally worrisome is the fact that Cisco and others just have the sheer size to dominate even if they make mistakes and are slow with products. The VPN start-ups need to bulk up to critical mass, Steding said.

In his view, similar VPN companies would benefit from merging to make themselves more attractive to Wall Street, selling public stock and using the proceeds to develop better products.

"That's a formula that works," Steding said. "Somebody's going to take a bold stroke and reinvent the whole mess, and it's going to change all the rules. The first VPN company out [with a public stock offering] on whatever basis is going to have momentum that's going to be hard to stop."

Hember agreed there was room to beat out Cisco in the VPN market, and noted that not long ago Ascend managed to slingshot past better established vendors in remote access.

"Ascend emerged in the remote access marketplace because it had a very different technology," Hember said.

But he doubted the value of mergers among VPN start-ups unless they bring together technologies that each other lack. "Doubling the size of two architectures that are very similar won't do it. It has to be something that is complementary," TimeStep's Hember said.

"You and I might be a very interesting combination because we're very different," Suneby suggested.

"We could unite against the big guys," Frerichs said.

"We could spend the rest of the night writing [a memorandum of understanding] and merge these four companies. That might be worth doing," Steding joked.

The four marveled at the sums new companies attract from venture capitalists and Wall Street.

"Change your name to RedCreek.com and they'll take you out with a $6 billion market cap. You just have to make sure you lose lots of money if you want to play that game," Frerichs said.

"Yeah, if you actually made money and then went public, it would be a disaster," Steding said.

For all their banter, the executives are taking dead aim at the perceived enemy.

"It's going to be the OK Corral pretty soon," Suneby said. "Remember, in 1990, Cisco was less than $90 million in revenue. Companies that are now dead had product lines in excess of $90 million in revenue in 1990."

As the evening wound down, Steding marked it as a possible historic moment: "This dinner is the beginning of the new age in networking. We go out the door here and take on the world." o