Simplicity is golden for BlueCat servers

Unlike big rivals, the startup is growing on its easy-to-use, low-cost hardware

Few people look back fondly on the collapse of the technology sector, but Michael and Richard Hyatt are that rarity: two souls who found fortune in the market meltdown that began in late 2000.

Around that time, the Hyatts needed a domain name server (DNS) for their engineering-software firm, Dyadem International Ltd. A DNS translates the numeric Internet address into the more widely recognized text address; without it, you can't surf the Internet or receive e-mail. Furthermore, having such a device allows a company to host its own Web site. So the Hyatts went out and bought one for $50,000 (U.S.).

"It took Richard at least two weeks to figure out how the hell to use it, and I knew that if Richard took two weeks -- and he's really good technically -- it would take somebody else a long time," says Michael Hyatt, 29. Eventually, his 30-year-old brother, Richard, got fed up with the machine and returned it. He went to a local computer reseller, bought a bunch of standard parts and wrote a server program from scratch.

What Richard Hyatt came up with was Adonis, a software application that his brother touts as "the world's first plug-n-play DNS server." Adonis is what's known as an "appliance" or "dedicated" server, which is a powerful computer made for specific tasks, such as Web caching or Internet access. Adonis's main selling point is its ease of use: It can be effortlessly integrated into an existing network and configured within a minute. At $10,000 a unit, it's also a fraction of the price of most appliance servers, which generally run between $50,000 and $300,000.

The Hyatts made Adonis the flagship product of their new firm, Richmond Hill, Ont.-based BlueCat Networks Inc. A few months later, they followed up with Meridius, a mail relay system that enables companies to get their electronic mail as well as protect themselves from unsolicited e-mail, or spam.

BlueCat's timing was propitious. At a point when companies had begun to retreat into thrift mode -- hollowing out IT departments and seeking low-cost network solutions -- BlueCat had come along with a server that was cheap and didn't require much manpower or extensive network training to operate.

"A lot of companies have these big behemoths that are difficult to use, because they want to charge you fees to come set it up. Ours, you didn't have to do that," says Michael Hyatt, BlueCat's president; his brother is the chief technology officer. "Most companies don't need all those features. Most companies just need a simple box like ours."

What BlueCat didn't bargain on was the depth of interest they'd receive for their price-busting appliances. The Hyatts expected to cater to the small and medium-size enterprise market. While BlueCat still remains below the radar for many analysts and industry observers, the Hyatts have amassed a stable of Fortune 500 clients, including Sony Corp., General Motors Corp., Lockheed Martin Corp. and Ernst & Young. The brothers are projecting their privately held company will post a profit of more than $1-million this year. The company would not disclose revenue figures.

Raj Brahmbhatt, data centre manager with commercial real estate firm C.B. Richard Ellis in Torrance, Calif., bought four BlueCat servers about a year ago and is now considering several BlueCat mail relay servers to handle the company's e-mail traffic. He says the DNS devices require none of the cumbersome maintenance of competing products.

"It's a one-time installation," he says, adding that the servers are programmed to upgrade themselves with software updates. "It's a no-brainer solution. We don't have to have a dedicated person doing all that stuff, so it saves money in the long run."

He also said the servers are much more secure against hackers and don't crash on a regular basis the way competing devices do.

The appliance market grew out of the IT industry's need in the late nineties to simplify server functions and cater to the specific network needs of companies. Greg Ambrose, an industry analyst at International Data Corp. Canada (IDC), says major vendors such as International Business Machines Corp., Dell Computer Corp., Sun Microsystems Inc. and Hewlett-Packard Co. -- which produce general-purpose servers -- have all entered the appliance space. But because they're managing diverse product lines in a gloomy economy, Mr. Ambrose says, "it has not taken off for them the way that they might have anticipated." This, he says, works to the advantage of a company such as BlueCat.

"A startup or a smaller company can really exploit a niche without having the overwhelming overhead or overkill that would come from an IBM going in and doing it," Mr. Ambrose says.

Another advantage of BlueCat's technology is the software platform. Its products run on the Linux operating system. Linux's code is "open-source," which means a machine with a Linux OS can be tweaked to meet a company's specific needs. Mark Fabbi, vice-president of Gartner Inc., a U.S.-based information technology research firm, feels that companies using the open-source approach will benefit. Citing anecdotal evidence, Mr. Fabbi says many companies currently using products based on Microsoft Corp.'s proprietary Windows system are "getting frustrated at the level of commitment they have to have to keep things up to date."

The appliance niche stands in stark contrast to the more stagnant segments of the network equipment market that have battered companies such as Nortel Networks Corp. and Lucent Technologies Inc.

According to figures published by IDC, approximately 200,000 appliance servers were shipped worldwide in 1999, for revenues of about $1-billion. The estimate for 2004: 2.3 million units for $12-billion.

However, Mr. Ambrose remains guarded. "We don't foresee a lot of strong growth for the next five years. We see slow, steady growth, and really a retrenchment of companies looking at what they need to put in and managing their networks very carefully," he says. "That will either be good or bad for niche players."

BlueCat's most immediate competitors are Lucent, Nortel and Cisco Systems Inc. While they are considered "traditional players" in this sector, Mr. Fabbi says "none of those three vendors focus on the marketplace," which enables a specialized firm such as BlueCat to pounce and win market share.

One of BlueCat's biggest advantages as a startup is that it hasn't relied on venture capital -- the company actually rebuffed several financing offers. The Hyatts' ability to self-finance is advantageous in such a capricious market, where investors will exploit new businesses desperate for cash. Companies seeking investments are "going to get the worst term sheets possible because [investors] can give you the worst term sheets possible," Michael says.

Adds brother Richard: "We're trying to grow the company organically instead of going out and trying to waste all of our time trying to raise capital from a hundred VCs who really aren't interested in lending it to startup companies. We're really not interested in spending all of our time pursuing those avenues."