Another article regarding optical networking appears in today's Business Week Online. It declares Nortel the current leader in optical networking with a number of other companies ferociously mounting significant challenges.
BUSINESS WEEK ONLINE
April 11, 2000
A Fever Pitch in Optical Networking
Some of the world's hottest companies, from Cisco to JDS Uniphase, are madly scrambling for position
When optical networking component manufacturer JDS Uniphase paid $750 million for mirror maker Cronos Integrated Microsystems last week, there was barely a hiccup in the stock market. That's because the big companies that make fiber-optic gear have been snapping up small ones such as Cronos in a quest to snag big chunks of the optical networking business, a rapidly growing sector with sales of $19.5 billion in 1999, according to California consultant groups RHK Inc.
Over the past six months, in fact, more than $11 billion in stock and cash has changed hands as optical network companies have gobbled up rivals. Among the major buyers: Nortel Networks, which has added crucial components to its product line. Nascent optical components maker JDS has swallowed competitors so fast that it has attracted the attention of U.S. trustbusters. Meanwhile, Cisco Systems has continued its quest to buy into the fiber-optic-network game with the February purchase of the optical networking division of Pirelli. Even Lucent Technologies, a company that has generally preferred to rely on its potent Bell Labs unit to do its own research, paid $2.95 billion for Ortel Corp., which makes fiber-optic equipment for video transmissions.
All of these acquisitions are part of a frantic jockeying to grab chunks of the booming but still immature business of providing big fiber-optic systems for telecom companies around the world. According to RHK, this market should be worth $52.3 billion by 2005 as more metropolitan areas and telecommunications companies try to accommodate the rapidly increasing flow of data traffic over their wires, all driven by the Internet.
DENSELY PACKED. The boom is also being fed by a rapid switch to optical networks. Many telecom networks still use digital switches and copper wire that rely on electrons to transmit information. But electrons travel at a snail's pace compared with photons, and scientists have devised ways to pack information far more densely into light beams than they ever could hope to do with copper wires. Until recently, even the best fiber-optic systems had to convert the information from photons back into electrons every 150 miles or so, then pass it through amplifiers and shoot it out as light again.
Recent advances have removed the need for those costly intermediate steps and have enabled the development of switches that don't need to convert photons into electrons except at the very end of the journey. Then, the data or voice is fed into a telephone or a computer via data routers, such as the ones Cisco Systems makes.
Only a few telecommunications networks today have this advanced fiber-optic equipment. But the vision of a world that is interconnected has made the development and installation of more advanced fiber optics a necessity for telecoms. Developing components for and installing these networks is an expensive business that requires massive research outlays. The next best alternative: gobble up startups with hot technologies.
Plenty of startups exist, all selling technologies that they claim will further improve fiber-optic networking. They include Corvis Corp. in Columbia, Md., Sycamore Networks in Chelmsford,Mass., and Redback Networks in Sunnyvale, Calif. Redback is a financial standout because it turned its first profit in the fourth quarter of 1999, when it earned $2 million on revenues that were up 480%, vs. the same quarter in 1998, to $26.1 million. These new players hope to emulate the original upstart, Ciena, which has soared to become one of the Big Three providers of these optical networks.
ASTRONOMICAL. All of the players are struggling to keep up with a market that, for the most specialized, high-end equipment, is growing by more than 50% annually. "To keep up with demand, we need to assume that we have to double [production] capacity this year and double capacity over that next year," says Kathleen C. Szelag, vice-president for global marketing in Lucent's optical networking group. Lucent discovered the price of failing to keep up when it couldn't make enough equipment last quarter to meet demand. Its share price plunged when it missed earnings targets.
JDS Uniphase and its rivals, meanwhile, are jousting for leadership of a second tier of the market. They make components that go into optical networking equipment such as mirrors, filters, and lasers. Nortel and Lucent also make this gear, as does Alcatel, NEC, Fujitsu, Pirelli, and a host of smaller companies in niche markets. Optical giant Corning has also stepped up its presence in this sector, which RHK believes will have sales of $23 billion by 2003.
Despite the recent technology sell-off, Wall Street has bid up the shares of optics companies to astronomical levels -- and seems untroubled by the huge losses at some companies. JDS Uniphase's shares, for example, are up 1,000% percent in the last year -- even though the company lost $171.1 million on sales of $282.8 million last year because of heavy spending on acquisitions and new factories. Nortel's market cap still stands at a huge $167.8 billion, even though heavy spending on expansion caused it to lose $197 million on revenues that were up 26%, to $22.2 billion, last year. Even more astounding is tiny Sycamore, with a market cap of $23.6 billion, as its shares have soared 873% in the months since its IPO, to just under $100. Though it's growing fast, Sycamore lost $1.6 million on sales of $29 million in its most recent quarter.
DOGGING THE LEADER. Nortel is the leader in the optical networking sector right now, with larger Lucent trying mightily to catch up, and Ciena, Alcatel, NEC, and Fujitsu also dogging the leader. But Sycamore and privately held Corvis could pose major threats. They have rolled out new technologies they claim will provide equal or better fiber-optic performance at significant cost savings. And old-school telecom operators, under pressure from upstart service providers such as Qwest, are not averse to taking a flier on new technologies. "Carriers are much more willing to turn to emerging suppliers for these kinds of key technologies because that's where the innovations are," says Daniel E. Smith, CEO of Sycamore Networks.
Lucent and Nortel are moving quickly to sell the type of all-optical switches that Corvis pioneered. Szelag claims that Lucent has slashed product cycles by up to 80%, to a single year. And Nortel's costly acquisitions are aimed at neutralizing the advantages claimed by Sycamore, Corvis, and Lucent.
The upstarts don't appear cowed, however. "We are going to be one of the main players in the networking space," promises Glenn Falcao, executive vice-president at Corvis. Sycamore's high market cap would make it tough for even a much larger rival to swallow. And Corvis, if it goes public as expected, could gain similar might. High market valuations would mean that the pair could even start bidding on acquisitions, to fill out their product lines.
Indeed, the spate of acquisitions in the sector underscores a brutal reality. "There is room for [only] three to four stand-alone optical networking companies," says Todd Brooks, a general partner at venture-capital firm Mayfield Fund. Everyone else is takeover bait.
By Alex Salkever in New York
Regards, Huey |
