2/26/98 Fin. Times 27
1998 WL 3535863
Financial Times
Copyright Financial Times Limited 1998
Thursday, February 26, 1998
Companies and Finance: The Americas
Ciena high on a wave of success
By Nick Denton
The day before Ciena's initial public offering closed last year, an
investment banker showed Pat Nettles, the company's unassuming chief
executive, a table of the largest flotations of venture capital-backed
companies. Above Netscape Communications, the internet software company,
was Ciena. "I thought it was an arithmetic error," says Mr Nettles.
Ciena, which makes amplifiers to squeeze greater performance out of
existing fibre-optic communications cables, has come out of nowhere.
The six-year-old company is based, not in the densely cultivated
seedbed for new companies, Silicon Valley, but outside industrial
Baltimore. It is part of the telecommunications equipment industry,
which is dominated by multinationals such as Lucent Technologies and
Alcatel and notoriously unwelcoming to start-ups. However, Ciena has
become the leader in an important new technology which promises to
expand the capacity of the internet without digging up miles of cable.
"This will enable us to do everything from videophones to the
narrowcasting of movies, as well as offering richer online shopping,"
says Mr Nettles.
His promise has won orders from three of the four leading US
long-distance carriers, including AT&T, which traditionally buys
equipment from Lucent, which was recently spun-off.
Last week, Ciena beat Wall Street expectations for the quarter to
January with earnings of 37 cents, equivalent to net income of $39.8m.
It also revealed it had become a victim of its own success. WorldCom, a
big customer, had suspended orders as its need for additional capacity
had been fulfilled by Ciena's earlier shipments. The news prompted a
plunge in Ciena shares, though the company is still worth $4bn on the
stock market.
There are three main reasons for Ciena's sudden success.
First, its product uses wave division multiplexing, which allows a
single fibre to carry 16 parallel streams of data, each on its own
frequency. It is as if, instead of sending information in the form of
pulses of white light, the sender could weave a message in all the
colours of the rainbow.
The technique was pioneered in the UK at the University of
Southampton, and at Pirelli, the Italian industrial group, but Ciena was
the first to apply it to a commercial product.
A fibre-optic cable, boosted by a MultiWave amplifier from Ciena every
120km, can carry about 40bn bits of information a second, equivalent to
3m simultaneous telephone conversations.
Second, the popularity of the internet, after the introduction of
easy-to-use browser software in 1993, was unexpected.
"When we first went to Sprint to talk about 16 channels, they said
that was really great but we were only going to need four channels," Mr
Nettles says.
Underestimates by market research companies of the growth of internet
traffic may have chilled demand from carriers for Ciena's products, but
they also slowed the entry of equipment companies such as Lucent into
the market.
So when the introduction of commercial browser software in 1994 led to
internet traffic doubling every three to four months, leaving many
carriers short of capacity, Ciena was the only company offering a
cost-effective solution.
Third, as a start-up, the company had several advantages. It did not
make fibre optic cables and so had no concerns about cannibalising
sales, and the stock options offered to staff meant they worked harder
than counterparts at traditional equipment makers. "They are not as
likely to be in the lab as our people at midnight," says Mr Nettles.
To date, Ciena has had little competition, but Lucent, Northern
Telecom of Canada, Alcatel of France, NEC, Pirelli, Siemens and Ericsson
-- each with established relationships with telecom carriers -- are all
developing rival products.
Its lead, which it estimates at more than 12 months, is in its favour.
So while competitors struggle to deploy their promised 16-channel
systems, Ciena plans this year to launch amplifiers that squeeze 40
channels in one fibre.
Furthermore, the company is developing increasingly intimate
relationships with Sprint, WorldCom and AT&T, the three leading
long-distance carriers in the US. Although AT&T, the largest, has set no
guaranteed level of purchases from Ciena and is buying from Lucent,
Ciena is the leading supplier to the other two.
As with the making of liquid crystal display screens, it is not so
much the underlying technology as the production techniques that
distinguish manufacturers. Most of Ciena's patents -- it had by October
received 10 and notice of allowance of 11 more -- are to do with
manufacturing innovations.
"If you were to steal our optical amplifier design, only half would
work: we have a technique, which cannot be easily replicated, to bring
the yield to 100 per cent," says Andrei Csipkes, head of manufacturing.
Also in its favour is its insertion loss, a measure of the amount of a
signal lost where the fibre enters a junction, which is half the
industry average.
It is all too common, as Netscape has shown, for a start-up to pioneer
a technology, establish an early lead, only to see it eroded by powerful
incumbents as they respond to the challenge. For the moment, Ciena is
withstanding the onslaught.
Nicholas Denton
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