Riverstone Networks has a total staff of 370, a majority of whom are dedicated to research and development work. The company's sales force consists of approximately one hundred personnel.

Commenting on the research and development focus of the company, Mr. Feldman stated that this is perceived as crucial to the success of Riverstone Networks, today and for the future. Highlighting this commitment is the fact the company has maintained its R&D budget over the past year despite financial constraints. Additionally, a small research and development company, Pipal Systems, was acquired in January 2003. Mr Feldman added that development of advanced next generation products remains a priority, and central to Riverstone Networks strategy of achieving differentiation through technical superiority. The company conducts all design and engineering work in-house while production processes are outsourced to a contract manufacturer.

Discussing the financial footing of Riverstone Networks, Mr. Feldman stated that current cash reserves total $270 million - this sum is net of a loss of $108 million announced for the year ending February 2003. Research and development activities account for between $35 million and $40 million annually. Despite having cash adjudged sufficient for several years continued operation, Mr Feldman stated that Riverstone Networks management monitors very closely the ongoing cash-burn rate. The company is confident that not only will it survive the present market downturn, but will be in a position to take full advantage of a market recovery - this confidence is stated to be shared by both Riverstone Networks customers and its investors.

Riverstone Networks has developed products tailored to a specific and, it believes, neglected market segment, after perceiving a preponderance of aging systems on offer from current vendors addressing the sector. As a result, the company now claims technical superiority in the sector, built on a combination of product performance, features, redundancy and reliability. Mr. Feldman stated that Riverstone Networks offers solutions demonstrably superior to those of the competition.

"One of our target customers are military bases, typically of a similar size to a medium-sized town, with perhaps 100,000 people on site. A military customer will demand extremely high levels of reliability and redundancy when procuring communications equipment - akin to the demands of a carrier customer."

As a mid-sized company, Riverstone Networks takes great care when directing its resources in support of gaining new business, aiming to avoid expending effort where the chances of winning an order are low. Mr. Feldman commented that a perpetual pitfall for medium-sized companies is the allocation of resources in pursuit of orders that are not winnable. This tactic is particularly important in Riverstone's case, as the prime competitor in this market sector is Cisco - wielding vastly greater resources.

Customer focus

Following on from the practice of only bidding where a win is considered likely, Riverstone Networks takes care to define customer requirements through intensive preliminary network analysis and planning work, to tailor as far as is possible system design prior to commencing work at the customer site. This increased preparedness reduces the level of support required by the customer - support far more easily provided by a large company such as Cisco.

Riverstone's strategy brings an additional benefit with the formulation of a range of system feature sets that may be applied to a number of customers, effectively a selection of off-the-shelf customised solutions. The need to customise systems for each new contract is a further drag on resources, potentially having a significant financial impact for medium-sized equipment vendors. Mr. Feldman emphasised that the key to efficient operation is effective product planning from the outset - put simply, understanding the requirements of the market and the demands of the customers within it. The features underpinning Riverstone Networks' solution from its inception are network security and reliability - these features are a prerequisite when addressing the market for which it is designed.

The strategy of carefully selecting potential customers is founded on an effective sales force - one that does not attempt to sell to customers whose requirements Riverstone Networks cannot meet. Mr Feldman commented, "It is crucial that our sales team fish where there are fish, where the fish can be caught, and the fish caught can be eaten!"

The specialised nature of Riverstone's products, and hence comparatively small target market, simplify this process, as does the presence of common characteristics across a range of vertical and geographic markets. Illustrating this point, Mr. Feldman noted that school districts in both the U.S. and Japan have purchased Riverstone Networks systems, as have military institutions in the U.S., Austria and South Korea.

Technical leadership

In support of the much-lauded technical superiority of the company's products, Mr. Feldman commented that, as a general rule, the major systems vendors rarely lead the market from a technological perspective. The technical sloth of the large vendors is seen to be due to their practice of obtaining innovative technologies through acquisition or licensing when they emerge, inevitably resulting in a delayed entry to the market. Whilst this policy enables the large vendors to avoid wasting resources or developing dead-end technologies, they will tend to pay a high price for the successful technologies, as well as being late to market. Summing up, Mr Feldman added that Cisco itself would not claim to aspire to technical leadership.

Riverstone has a neutral stance to acquisitions. Mr. Feldman said that such a strategy is seen as legitimate where it can offer a path forward, particularly from a technology perspective, although it is not the default mode of operation for Riverstone. He added, "Where a small company is deemed to fit with Riverstone Networks, perhaps from a technological, staff expertise or cultural angle, it would be considered a potential target for acquisition. Within Riverstone Networks there are staff who constantly reconnoitre the market space to identify and investigate potential target companies, for example through keeping tabs on key personnel and on companies working in specific fields."

Mr Feldman said that the company is satisfied with the returns, adding that the maintenance of a relationship with a major vendor such as Alcatel has proved 'demanding and challenging'. Offering an opinion on the reasons behind the limited sales deriving from this agreement, he noted that whilst Alcatel is able to bring to bear huge resources and global sales channels, it is also offering a vast portfolio of products, of which Riverstone's system is one. "At the end of the day, Alcatel as a company, and a sales person as an individual, is not going to go hungry if no routers are sold. It is obviously a very different situation for Riverstone Networks."

Discussing more broadly the major global equipment vendors, such as Alcatel, Ericsson, Marconi, Nokia and Siemens, Mr. Feldman noted that none of these has instigated a long-term partnership for products in the routing and switching market sector, while all are lacking expertise in the related IP technology field. For core router products, Ericsson has a long-standing partnership with Juniper Networks and Siemens with ADVA.

Commenting on the practicality of scaling systems, Mr. Feldman said that, when scaling down, the resulting product will inevitably be over engineered, bringing a number of disadvantages when competing against inherently lower capacity devices.

Mr. Feldman compared these difficulties to the truck industry, "When relocating from one city to another, the transfer of household contents is a three stage process - from the household to a local city depot, cross-country from one city depot to the destination depot, and then to the new household. Due to the way the system works each leg costs a similar amount. Small trucks are used from household to depot, large eighteen wheel trucks from depot to depot - each suited to their mode of operation. If a large truck manufacturer decides to start producing small trucks numerous considerations come into play, relating to the differing operating environments. To do the job properly requires much more than simply adapting, cutting down, a large truck - basically a completely new design and production line. The same scenario holds true for communications systems manufacturers."

Citing the example of Juniper Networks, Mr. Feldman noted that its large router device displays a number of design features hampering its application to the metro routing and switching system market - a key factor being the lack of layer-two functionality at the hardware level, as this was simply not a requirement when originally designed. Further disadvantages are the large system footprint, comparatively high system cost, and unsuitable feature mix. Currently both Juniper Networks and Avici Systems are facing these challenges in their attempts to scale down and adapt large router products. For this reason Cisco is expected to remain the major competitor for Riverstone for the foreseeable future.

Cisco Systems

Riverstone Networks believes it holds one significant advantage when competing against Cisco - the definitive technical superiority of its solution. For this reason alone, it has been able to thwart Cisco's total dominance of this market sector. Mr. Feldman claimed that, when entering products for customer trials against Cisco devices, Riverstone Networks without fail wins the contract when technical criteria are paramount. However, such considerations are not always the deciding factor. He cited an example where Riverstone was competing with Cisco for a contract with a major RBOC - judged on fifteen criteria. Riverstone's product came out top for fourteen. Cisco ultimately won the order, after threatening to revoke the RBOCs resale license for its equipment (valued at approximately $300 million annually) and subsequently improving the terms of the resale agreement.

As mentioned previously, Riverstone Networks, as a medium sized vendor, also faces a challenge of sheer scale when competing with Cisco. Mr Feldman estimated that Cisco is probably able to field one hundred sales staff in California alone - equalling Riverstone Networks entire sales force. An inevitable result of this is the necessity to ignore a certain proportion of market opportunities due to a lack of resources. Mr. Feldman noted however that this will at times hold true for any company however large, "being a mile wide and one inch deep is a certain recipe for disaster."

There are also disadvantages to being a large company, foremost being a lack of agility. A facet of this issue is that the large company will tend to be looking back, focusing on what the customers are demanding now, rather than forward, to what the market will be asking for in the future. An illustration of the risks associated with this attitude are efforts by Cisco to 'shoe horn' 10 Gigabit Ethernet capability into an existing router chassis.

Market share

The routing and switching market in which Riverstone plays is valued at 'several billion' dollars worldwide - Riverstone Networks achieved sales of $211 million for the year 2002, equating to a share of approximately 15 percent. Cisco holds a share of 65 percent of this market, therefore, Mr. Feldman noted, Riverstone will always find itself bidding against Cisco. The remainder of the market is divided up between a handful of vendors, including Avaya, Extreme Networks, Foundry Networks and Nortel Networks, each accounting for a share of a few percent. Comparing this situation to the core router market, in which Cisco holds a similarly commanding position, Mr Feldman commented that the most notable difference is the size of orders - contracts for core router equipment are generally of far greater value but also scarcer.

Riverstone succeeded in building from nothing a substantial presence in the routing market over a period spanning little more than one year, attaining a share in excess of 20 percent by mid-2002; since that time the company has conceded ground to stand at the present 15 percent market share.

Mr. Feldman noted that Juniper Networks has followed a similar trajectory in the core router market, achieving a share of over 30 percent within eighteen months, before settling back in the low twenties now. He added that there are seen to be a number of inflection points operating in the equipment market, any of which can have a significant impact - currently 10 Gigabit Ethernet capability is expected to provide equipment vendors with an opportunity to rapidly build market share. Mr. Feldman commented, "building a presence in the routing market demands the development of an innovative, well designed, product that delivers what the customers want, and, crucially, doing so at least six months ahead of Cisco."

Regional focus

Riverstone has concentrated efforts on developing a presence in the Asia-Pacific region, primarily China and South Korea, markets that are now extremely important for the company. Mr. Feldman noted in passing that certain telecommunications markets in Asia - most notably South Korea - rank amongst the most sophisticated in the world, citing the data communications networks of South Korea as more advanced than any in the U.S.

Riverstone believes that it has gained a disproportionate share of the market in Asia, although Mr. Feldman emphasised that, for China in particular, there is little accurate market data available, and it is not thought that anyone, including Riverstone Networks, has a clear picture of the market, its value, or the constituent shares. The company estimates that it is winning two in every three - and perhaps as high as three in every four - of bids made in China. These wins are often at the expense of Cisco, and are due to both the customer's focus on technology as well as pricing. Cisco is not seen to have the same psychological stranglehold on the Chinese market that it has in North America, due mainly to the presence of credible local vendors such as Huawei Technologies. As noted previously, Riverstone Networks is in the process of concluding a major partnership agreement with an equipment vendor in Asia, and is pursuing further alliances in the region.

With regards to other geographic regions, Riverstone Networks is now directing its attention towards Europe, having largely ignored the market to date. The company expects to reap significant rewards from activities in the region over the next year - beginning the second half of 2003.

Asian vendors

Commenting on the general absence of the major Chinese equipment manufacturers outside of Asia-Pacific, Mr Feldman said that this situation is likely to change in the future:

"I believe that the communications equipment vendors in Asia-Pacific today are in a similar position to the Japanese car manufacturers during the late 1960's, with regard to expanding their markets. The car manufacturers spent a decade trying to break into the U.S. market; when they finally hit upon the right strategy they proceeded to trounce the domestic U.S. car companies."

An overriding factor inhibiting the success of routing equipment manufacturers situated outside of the U.S. is felt the be a fundamental lack of technical expertise, which Mr. Feldman noted is basically all sitting in the U.S. today. It is anticipated that countries such as China and India will gradually develop and procure such expertise, at which time local companies will break out of their domestic markets and begin to compete on a global scale.

Regarding Riverstone Networks partnership with Alcatel, and particularly its value when addressing the Chinese market, Mr. Feldman said that this had delivered less than had been hoped for. He added, however, that with hindsight, original expectations were perhaps overly optimistic - with a fuller understanding of the Chinese market and the Alcatel-Shanghai Bell relationship, the performance delivered by this agreement is understandable and acceptable.

In the near-term, Riverstone's objective is leadership of the 10 Gigabit Ethernet revolution, as it has done with Gigabit Ethernet. Mr. Feldman explained that standards for 10 Gigabit Ethernet were ratified in September 2002, since that time the initial stirrings of the market have begun. This market is expected to commence in earnest by early 2004. It is anticipated that wide-scale adoption of 10 Gigabit Ethernet will instigate a fundamental transition in metro and mission critical networks, and Riverstone Networks intends to take maximum advantage of this perceived opportunity.

Commenting more generally on advancement of the company, Mr. Feldman stated that key to future success is continued expansion of the addressable market, through identifying segments within vertical markets displaying network requirements appropriate to Riverstone's capabilities.

"Very simply, we must continue to execute our proven strategy and continue to exceed customer expectations - the aim is to expand the horizons of our customers through expanding Riverstone Networks' horizons."