More Gloom and Doom OG!
Does Cisco Have a Problem?
By Tiernan Ray
smartmoney.com
DOES CISCO SYSTEMS (CSCO) have a problem? A
gaggle of startup companies backed by a handful of
competitors have been itching to take the company down
for a few years now. It started in 1996 with Juniper
Networks, a Silicon Valley-based outfit backed by the
troika of Lucent Technologies (LU), Ericsson (ERICY)
and 3Com (COMS), with a little help from German
computer giant Siemans AG and some venture
capitalists.
And then they really piled on. Cisco's Internet switches
top out at 40 gigabits per second, but privately held Avici
Systems of North Billerica, Mass., which got $72 million
last year from Nortel Networks (NT), among others, can
rout multiple connections at speeds of 10 gigabits per
second, for a total of 5.6 terabits, or trillion bits per
second. Privately held Pluris of Cupertino, Calif.,
advertises a whopping 184 terabits per second. Cisco
has to be mildly concerned.
Enter Dr. David Huber, fiber optics pioneer, who took Ciena (CIEN) public in 1997 in the most
expensive IPO ever at the time, valuing it at $3.4 billion, only to bail out last year after a fight with the
board and with CEO Patrick Nettles. Huber speaks in a patient West Coast drawl about transforming
fiber optics and, maybe, saving Cisco's bacon. In the past year, his former employer, Ciena, has been
rushing to keep up with large competitors such as Nortel and Lucent, building ever faster wavelength
division multiplexing (WDM) equipment to improve fiber optics transmission. Huber, now with a new
venture called Corvis that is backed by Cisco and venture capitalists Kleiner Perkins, thinks Ciena and
others are sadly mistaken.
"I don't think it's any secret that some of the second generation WDM actually has a higher cost per bit
than the first generation, and of course that's wrong," Huber observed as I talked with him from the floor
of Supercomm, the networking trade show in Atlanta this week. "What you want is the cheapest cost
of transmission."
That's a nice way to pull the legs out from his former employer, which is at the show this week talking
about WDM systems that can move two trillion bits, or two terabits, in a second. How did Ciena go
wrong? It all started simply enough. A few years back, straining from exploding Internet use, the
long-distance phone companies wanted a way to carry more traffic without digging more trenches for
fiber-optic cables. Ciena and Huber arrived with the first commercial offering of WDM technology.
Huber's fiber optic equipment split a beam of light into eight colors, or channels, each of which carried
the same amount of information, effectively multiplying the bandwidth eightfold.
Then some phone companies decided they would capitalize on the growth of the Internet by doing
nothing but digging up the streets and laying more fiber. Qwest Communications (QWST) is
completing construction of an 18,500 mile network coast-to-coast this summer, some parts of which
will run as fast as 2.5 gigabits per second. Frontier Communications (FRO), Williams Companies
(WMB), Global Crossing (GBLX), etc. -- all are building huge new fiber networks. To aid them, Ciena
et al. have upped the offerings in WDM. From systems running at 100 gigabits per second, Ciena is
moving up to two terabit capacity. Nortel currently offers equipment that lets fiber move up to 1.6
terabits per second. The arms race is ceaseless.
Huber has gone in a different direction. Conventional WDM is like a big funnel, moving bits from one
point to another. It still needs conventional routers to make choices, to decide whether to send bits to
New York or to Texas. So Corvis is also offering an optical switch, a fiber optic system that doesn't
need a router. It will decide how to send the bits not by examining packets, as routers do, but by
redirecting light waves. Just as Cisco's routers added intelligence to conventional networking earlier in
the decade, allowing the company to surpass 3Com and Bay Networks (now a division of Nortel
Networks), Huber's box leapfrogs existing optical systems. The immediate effect, however, is to remove
conventional routing from fiber optics, which Huber says will save some money on equipment.
That may be true, but it's clear as well that Cisco's hand is all over this thing. An optical router would
allow Cisco to leapfrog the Avici's of the world by making light waves, not Internet packets, the
intelligence of the Internet. After years of talking about Internet Protocol (IP), Cisco could have the last
laugh by changing the rules of the game. In fact, Cisco has made private investments in two
competitors of Corvis, Monterey Networks of Richardson, Texas, and Optical Networks of San Jose,
Calif. It seems no amount of optical routing is too much for Cisco. Gonna buy Lucent next OG? LOL!
The punch line is, it's not clear phone companies will want optical switches costing hundreds of
thousands or even millions a pop. Exact technical details are still under wraps, and Corvis is soon to
move from its present Maryland headquarters to a larger facility to gear up for manufacturing. But the
arguments for Corvis' equipment are frighteningly similar to those made in Ciena's defense shortly
before the company collapsed from the high 70s to $8.00 per share last fall. Huber says, "You've got
exponential growth in the information age, and to fuel that you've got to have an exponential decrease in
the cost per bit."
Well, one analyst I highly respect remarked of Ciena last year just before its fall, "I'd be a buyer of this
stock at just about any price, because [the technology] lowers the cost to send a bit." He may have
been right, but it didn't help once WDM became a fiercely competitive business and Lucent and Nortel
quickly overtook Ciena. The company lost a major contract from AT&T (T) once it became clear there
were cheaper and cheaper ways to send a bit. The problem is it became just too easy for everyone and
his brother to churn out WDM equipment. Already, the dogs are on the trail of optical switching. Ciena
issued $463.5 million worth of stock earlier this year to buy another light switching company called
Lightera, and is talking up its own optical switch this week.
Corvis has some other advantages, though. Its WDM lasers run at only 400 gigabits per second, but
they stretch farther: between two optical tin cans, it can send bits up to 3,200 kilometers, or a little over
2,000 miles, two-thirds of the way from New York to California. Conventional systems run only 500-600
kilometers. Again, that should save on equipment costs. "What you have to look at is how far you can
send information before you convert it back to electronics," Huber says. "Because as long as you stay
in the optical domain your costs are cheap."
Lucent and Ciena may catch up in short order. Lucent is demonstrating at Supercomm this week a
system that uses a special kind of laser amplifier, called a Raman amplifier, that can multiply
transmission distances by several times over conventional fiber.
Time will tell if Cisco's money and Huber's daring can bring about a transformation equal to WDM.
Already it smells as if optical switching may be the next arms race. That would be good for Ciena, for it
might breathe new life into the company. At 30 3/8 on Thursday morning, Ciena has been slowly
working its way back from last fall's nadir. If optical switches catch on, it probably means there's
enough demand for bandwidth to feed Cisco and all the Avicis and Plurises out there, at least in the
near future. Probably, too, it signals a scary turning point for companies lower down on the food chain,
like Tellabs (TLAB) and ADC Telecom (ADCT). It is no exaggeration in this case to say that
technology is moving at the speed of light.
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