Wow! A Telecom That Doesn't Suck
With its singularly unsexy ''softswitches,'' Sonus Networks plans to outpace leaders like Nortel and Cisco, render current telecommunications equipment obsolete, and become as big as Microsoft. Some smart, sophisticated observers believe the company has the timing, technology, and leadership to do precisely that.
by Matt Kelly - PHOTOGRAPHS BY DANIEL J. VAN ACKERE
EXECUTIVE ACTION: SONUS PULLED OFF A COUP WHEN IT RECRUITED HASSAN AHMED AS ITS CEO. "THERE WERE 50 COMPANIES ON I-495, AND ALL 50 OF THEM WANTED HASSAN,"SAYS SONUS COFOUNDER RUBIN GRUBER
There are no lazy Friday afternoons at Sonus Networks. The company knows its competitors are close behind, hoping for a misstep.
That's why, on a perfect late-summer day, Sonus is humming with activity. In the main lobby at the company's Westford headquarters, busy men and women dash from one part of the building to another. A side door suddenly opens, and someone scurries through. Then a second door opens, and another. A man and a woman stride across the room from different directions, chatting while they talk, but never stopping, before they finally vanish behind still more doors.
Upstairs in the engineering department, workers have yanked aside ceiling tiles to install additional wiring-a frequent sight at telecommunications companies like Sonus. Pink wires snake across the floor and around cubicle walls. Employees step over them without breaking stride.
Around the corner from the engineering department is the design lab. It is filled with rack after rack of a new kind of telecommunications device: a "softswitch," the singularly unsexy equipment that Sonus Networks makes. Sonus wants to conquer the world with these switches. A number of smart, sophisticated observers believe the company has the timing, the technology, and the leadership to do precisely that.
The brave new world of telecommunications revolves around softswitch technology, but it's pretty much terra incognita. Nobody really knows how different and diverse this future will be-the ideas are too numerous to count. Nobody knows how great the business opportunity is: estimates start in the billions and only go up. "It's going to be a very cool world," says Hassan Ahmed, Sonus' chief executive officer. "Things that are very difficult to do today will be very easy to do then."
Ahmed is not merely puffing up his own company's potential. Everyone in the business knows that telecommunications is undergoing nothing less than a sea change, an upheaval as profound as touch-tone service or the dial tone. The real contest is to see who will set the pace of that change. The winner could emerge as powerful as Microsoft.
At the moment, Sonus leads that race. Giants like Cisco Systems and Nortel Networks are sucking wind in their core networking-equipment businesses, allowing Ahmed and his crew precious time to nudge the future in their direction. A host of startups are still struggling to match Sonus' lead in customers, technology, and money.
Sonus Networks knows it has to establish itself now, before a rival catches up and knocks it aside. Says Rubin Gruber, one of the company's founders: "We all have a really healthy dose of paranoia around here."
Sonus has to establish itself now, before a rival like Cisco or Nortel catches up and knocks it aside. Says cofounder Rubin Gruber: "We all have a really healthy dose of paranoia around here."
The revolution in telecommunications is already underway. Most people haven't seen it yet because the upheaval is happening far from their telephones, but the changes are racing through networks everywhere. By 2010, the technology pioneered by Sonus and its rivals today will be in place all over the world.
The breakthrough is in the switch, a boxy piece of equipment that tells data where to go on a network. Switches have grown tremendously complex since Alexander Graham Bell invented his nifty contraption in Boston some 120 years ago. But they have always followed a basic design: a caller picks up a phone, and Ma Bell creates a single, continuous circuit connecting to the other person. Data-your voice, which engineers call "traffic"-flows cleanly and directly from one end to the other.
Internet traffic works in the opposite way. This data-email, an MP3 file, the Library of Congress-is split into countless tiny "packets" of information. Those packets are stamped with a destination and sent out using any path possible. One packet could travel from Boston to Chicago via Atlanta, and the next through Kansas City. The packets are reassembled at the end, and you receive the completed message.
The Holy Grail for telecom engineers has been to discover a switch that can manage voice traffic using that same Internet protocol. It isn't easy; the human ear is an extremely sensitive instrument. If one of those packets is lost or misplaced in a telephone conversation, a person can hear the error.
Sonus Networks has built that switch.
The implications are immense. If voice traffic can travel as a series of virtual bits, it can be managed by software. That means telecommunications carriers like Verizon or Qwest will be able to prune their equipment costs, since softswitches are smaller and cheaper than the hardware they use today. It means businesses and consumers can get new services simply by installing a software application that fits their needs. It also means voice can travel over the Internet, which has obvious implications for long-distance carriers like AT&T, Sprint, and so on.
What's more, softswitch technology allows carriers to add applications as yet unthought of. It's akin to the Windows operating system invented in the 1980s, which spawned all manner of software in the 1990s. Sonus wants to provide that same underlying platform and let a new industry of telecommunications software grow around its standard. "We're focused on doing exactly that," Ahmed says. "The time is really right to transform the networks."
Sonus has moved quickly to do so. At the heart of its business plan is the Open Services Partner Alliance, a de facto consortium of more than 150 telecommunications companies that work with Sonus. Partners incorporate Sonus' softswitch principles into their own products, so customers know they can mix and match products without worrying about interoperability. Meanwhile, Sonus gains acceptance as the platform on which all those deals are built.
The results show in the numbers. Last year the company recorded $52.6 million in sales, at a time when the whole fledgling softswitch market was estimated at a few hundred million. Though Sonus did reduce revenue estimates in September, it pulled in $94.1 million during the first half of this year-nearly double last year's total-and still expects full-year revenues to reach $170 million. All this, when most other telecom companies are reporting Armageddon. Sonus, in short, is one telecom that doesn't suck.
Wall Street, however, hasn't exactly seen it that way. Over the past 18 months, Sonus' shares have plummeted 97 percent, to less than $3 this past September. Investors are apparently unwilling to wait it out until Sonus' technology pays off. The skittish market aside, industry experts still believe Sonus' switches represent the future of telecommunications.
"Carriers are still very interested in their technology," says Mindy Hibert, an analyst at the Yankee Group. "They all see that is the next step."
Sonus' great leap forward certainly has dazzled telecom executives, most of whom know Ahmed personally and work in Boston's clubby world of cutting-edge telecom startups. "Sonus has developed the right technology for Internet protocol telephony," says Michael Champa, chief executive of the wireless startup Winphoria Networks, in Tewksbury. "They've executed extremely well, far better than any of their competitors. They made the right picks early."
BRAINSTORM: SONUS STARTED WITH MICHAEL HLUCHYJ'S OFFBEAT CONCEPT-THAT VOICE TRAFFIC OVER THE INTERNET WAS ONLY A MATTER OF TIME."IT WAS AN IDEA UNHEARD OF AT THE TIME, BUT IT MADE SENSE," SAYS PAUL FERRI, OF MATRIX PARTNERS.
Sonus Networks started as the offbeat concept of its chief technology officer, Michael Hluchyj. With a doctorate from MIT and years of work at companies like Motorola and Bell Labs, the 46-year-old Hluchyj (the name is Ukrainian, pronounced Hull-loo-chee) figured that voice traffic over the Internet was only a matter of time. "I had been watching this for 20 years," he says. "It was pretty clear back then that packet technology would be the technology that forms the basis of telecommunications going forward. It just takes time to get there."
By the summer of 1997, Hluchyj believed the time had arrived. He talked his way into a meeting with Paul Ferri, of Matrix Partners, in Waltham, to ask for seed funding. "It was an idea unheard of at the time, but it made sense," Ferri says. "And Mike is a guy you have to pay attention to for technology."
Nevertheless, Ferri didn't take to Hluchyj's idea at first, and steered him to Northbridge Partners and Charles River Ventures. Luckily, a friend at Northbridge called Ferri and asked him to join Hluchyj's seed round. Ferri relented, and the three firms gave Hluchyj $300,000 to start chasing his idea.
Rubin Gruber entered the picture several weeks later. Gruber had founded, managed, and sold several telecommunications companies since the 1970s. The year before, he had sold his most recent business, a company called Videoserver. Itching to start yet another business, he too approached Ferri with the idea of voice traffic over the Internet. Ferri, in turn, steered Gruber to Hluchyj. "We checked each other out for a while," recalls Gruber. "We were agreeing on everything. I said, 'Yeah, we can work together.' "
And so, on August 7, 1997, Sonus Networks was born. The hits came quickly. The company received its first round of venture funding that November: $7 million from a pride of VC lions, including Matrix, Northbridge, Charles River Ventures, and Bessemer Venture Partners. Less than a year later, it secured a second round of $16 million.
Then, in November 1998, Sonus pulled off a coup. It hired Hassan Ahmed to be chief executive officer. "We needed Hassan in there," Ferri says. "He made all the difference in the world."
Then and now, the 43-year-old Ahmed was one of the most respected names in telecommunications. In the late 1990s, he was chief technology officer of the legendary Cascade Communications, whose executives have spawned Sycamore Networks and a half-dozen other avant-garde startups in the Boston area. "There were 50 companies up and down I-495 at the time," Gruber says. "All 50 of them wanted Hassan. Everyone was looking for Hassan."
Ahmed chose Sonus Networks because he agreed with Hluchyj's and Gruber's novel idea-that voice traffic could travel over Internet protocol networks. "Sonus went down the IP path early," Ahmed says. "We looked weird, frankly. [But] I thought it was the right weirdness."
Other telecom companies looked a little askew at Sonus at first-and for good reason. The behemoths, like Cisco, Nortel, and Lucent Technologies, were still raking in billions by selling traditional switching equipment. Startups, meantime, were betting more cautiously on hybrid switches that used the existing standard called "asynchronous transfer mode," or ATM.
"My initial reaction was, 'Gee, that's very different than what the rest of the world is doing,' " says Winphoria chief executive Champa. He didn't know whether Sonus' approach would work-but if it did, he says, "it would be a real home run, a grand slam."
Ahmed, Hluchyj, and Gruber held fast to their Internet protocol. Finally, in the summer of 1999, they landed their first customer in Frontier Communications, now part of Global Crossing. Other carriers such as Qwest Communications, Bell South, and Level 3 Communications followed. Sonus was off and running.
Early customer wins do not an empire make. Ask Steve Jobs. Customers help, but a fair amount of success depends on positioning. That's doubly so in the telecommunications industry.
One critical decision Sonus made in May 2000 was to go public. Investors had just shifted from dot-coms to equipment makers like Sonus. Telecoms were in fashion, albeit a short-lived one. Sonus raked in more than $100 million in cash and had plenty of shares left over to acquire other promising technologies. Within six months, the IPO window slammed shut on the fingers of the company's softswitch rivals, cutting them off from a crucial source of capital.
Another stroke of good fortune for Sonus: the strokes of misfortune that have befallen the major equipment makers. Cisco, Nortel, and Lucent have all seen their businesses screech to an abrupt halt. These days, they are too busy slashing jobs and restructuring to move into the softswitch market. "We have a little lead," Ahmed says, risking an understatement. "Our focus is to widen that lead."
Wisely, Ahmed declines to speculate as to how long Sonus has before Cisco and Nortel get their acts together and come after him. (Lucent is widely seen as woefully behind.) But analysts and observers estimate that Sonus has one to two years.
However long its lead, Sonus has to use its time wisely. Carriers are notoriously fussy customers. They routinely test equipment for weeks and months on end, and expect all sorts of specific calibrations to ensure it works with their networks. On the other hand, once a carrier signs on to a technology, it's 'til death-or criminal incompetence-do them part. Says one local telecom executive: "You really have to screw up to get kicked out."
Courting the carriers, however, presents a host of problems. For one thing, they are adopting softswitch technology at different speeds. Upstarts such as Level 3 and Qwest are more likely to use softswitch technology for their main switching duties, because it makes no sense for them to buy old-fashioned ATM switches on their way to obsolescence. That's the bright side of the picture. The dark side: those same carriers are hemorrhaging red ink.
Which is why the Baby Bells like Verizon and Bell South (known in the industry as "incumbents") are much more attractive targets for Sonus and its rivals. Baby Bells have far more customers and profitable businesses. They also have large existing networks that must be upgraded to softswitch technology, but they can afford to move at a more deliberate pace.
No surprise then that Sonus' first customers were upstarts such as Qwest, XO Communications, and Level 3. Its first major deal came in March 2000 with Williams Communications, a contract worth $20 million immediately and as much as $100 million by 2003.
For all that, the real breakthrough came this past July, when Sonus landed Bell South, its first incumbent carrier. The companies did not disclose a dollar amount for the contract, but Bell South has said it plans to adopt softswitch technology "aggressively."
"Their urgency in moving is a lot more limited," Ahmed concedes of incumbents. Still, he dismisses the idea that the Baby Bells will curb their enthusiasm for softswitch technology because upstart carriers have become less of a competitive pressure.
"That's a bunch of garbage," Ahmed says. "Somehow I have a hard time believing Bell South was shaking in its boots because of 'Madison River Telecom' or some outfit like that."
Courting the telecom carriers is a challenge for equipment makers like Sonus, but once a carrier signs onto a technology, it's 'til death do them part. Says one telecom executive: "You really have to screw up to get kicked out."
The Baby Bells' hesitancy aside, everyone agrees that softswitches are a growth industry. Verizon alone will spend $17.5 billion on equipment this year. Do the math. Many analysts have, and they're now predicting the softswitch market will soar into the tens of billions by 2010, as it displaces the dying ATM switch market.
Hundreds of startup companies have already swarmed the softswitch market, eager for a piece of that action. Hoping to beat Sonus, however, many have found it wiser to join it. The logic of it would put a blush on Bill Gates' cheeks. For starters, most sell software applications that provide specific telecom services: prepaid calling, unified messaging (wherein you can speak a message into a telephone and it arrives as an email on a computer screen, and vice-versa), conference-calling, or more. By and large, those third-party software companies use Internet protocol to deliver their services. Since Sonus Networks developed its Internet protocol switch early on, the companies have little choice but to sign on and adopt its Open Services Partnership Alliance.
Take Joel Hughes of Snowshore Networks. His company makes a device called a media server, which provides telecommunication services by, as he puts it, "adding on software that surrounds a Sonus-type of architecture."
"It became more obvious over the last year that Sonus had the traction we wanted," Hughes says. "It's nice for all of us to have a Sonus to hold up. [It's] a good indicator of what Snowshore can expect down the road."
For all of its market success now, Sonus does have plenty of legitimate competition. Convergent Networks, just a few miles up the road, in Lowell, takes the tack of gauging what a client has for telecommunication needs, then building an appropriate system with other partners around its softswitch platform for that specific client. "They'd much rather do that," Sally Bament, vice president of marketing, says of Convergent's target customers. "They can have one neck to squeeze when something goes wrong."
Convergent, which launched in May 1998, was looking to go public earlier this year, but it pulled its offering. Having secured a whopping $74 million in funding in September 2000, however, it won't go away anytime soon.
The question now is whether telecommunication carriers will prefer Convergent's one-stop solution, or Sonus' open-ended approach. XO Communications, already one of the largest providers of dial-up Internet access, says it chose Sonus so it could add new services incrementally to its IP network. Ramani Pandurangan, XO's director of voice systems development, says his company wanted flexibility to grow: "Sonus was the clear winner. There were other rivals, but it was never a doubtful thing."
Ultimately, Sonus' efforts conjure up doomsday questions of what is known in the parlance as "creative destruction": the company has unleashed a technology that renders standard equipment obsolete. Hluchyj, Ahmed, and Gruber envision a new industry revolving around at least the ideas Sonus has put forth, if not around Sonus equipment itself.
"It may take a decade, but that's okay," says Ahmed. "There aren't too many markets you can find that have the potential to create growth for decades."
Adds Gruber, who's now 56: "This is actually my retirement. Where am I going to go? I can't golf." |
