Company Focus
Sycamore Networks: wired for speed
Analysts say Sycamore makes the smartest optical
systems and great interfaces. But will powerful competitors beat it to the
finish line?
By Michael Brush
Imagine a highway in which the entire course of one lane is blocked off for
each traveler, even though he or she might be going only a small distance
along the route. Meanwhile, traffic cops stop everyone frequently to ask where
they are going -- whether they need directions or not.
The resulting mess would be similar to today's optical superhighways. And as
more and more bursts of data traffic clog networks designed for voice
connections that stay on and hog lanes until a conversation is finished, the
problem will only get worse.
This explains the demand for products made by
Sycamore Networks (SCMR, news, msgs), a
relatively new arrival on the networking scene.
Sycamore came public last October. The
Massachusetts-based company makes futuristic
optical gear, which is likely to play a major role in
reducing network congestion over the next several years.
No one knows who will ultimately dominate the market for these newfangled
optical solutions, but Sycamore stands a good chance, given its first-mover
advantage. "They have a very innovative approach," says Jae Lee, a
technology analyst with American Express Financial Advisors, which holds
shares in the company. "Sycamore is ahead in optical switching and
provisioning."
Clearly, anyone who bought shares in Sycamore's huge follow-on offering six
weeks ago now needs to wait some time for that stock to grow into the price
paid at the time -- around $150 a share. The stock went as high as $200
before settling to around $65 after the recent tech rout. The company now has
a market cap of $16.5 billion on trailing 12-month sales of only $11 million.
Sycamore shares are also weak right now because of a huge lockup release
(49 million shares). It was scheduled for April 18, but trading volume shows
that holders were probably let out early, beginning around April 13.
Whatever the reason, the fall in the stock price provides a more reasonable
entry into shares of one of the likely leaders in optical networking equipment.
"Despite all the noise in the stock market, the signal remains strong," says
Sycamore Chief Executive Officer Daniel Smith. "People need a lot more
bandwidth and flexibility, and they need it more cheaply. We provide the tools
to allow customers to light up their infrastructure to do just that."
To see why, it helps to understand a little background on the current
networking technology and its shortcomings.
The SONET system
Today's optical networks are based on a set of standards known as
Synchronous Optical NETwork (SONET), designed to let equipment from
different vendors work together. In this system, traffic enters as an electrical
signal but gets converted to optical for the trip along the SONET network,
which is basically a series of connected rings around the country.
Telecom carriers running these systems use devices called "dense
wavelength division multiplexers" (DWDM) to get more of these rings out of
each strand of fiber -- typically up to 96. Gadgets called "add-drop
multiplexers" (ADMs) and "digital cross connects" link the rings together.
ADMs, for example, move traffic from slower speed rings at the edge of the
network to faster rings at the core.
At several points along the network, optical data must be converted back to
electrical so it can be regenerated or examined to determine what data needs
to be extracted. Data tagged to keep moving is transformed back to optical for
the next leg of the trip.
This setup was great for voice traffic, but the increased flow of data through
the network creates the following problems:
Carriers have two unwelcome choices if they want more capacity or
speed. First, they can lay more fiber. Or, they can upgrade an existing
ring -- which means replacing all the equipment inside of it. These
"forklift upgrades" are a lot of work, and the old gear often gets thrown
out.
Provisioning bandwidth can take months because it is hard to clear
availability in each ring.
Traffic passing between two points on a SONET ring reserves
bandwidth around the whole ring, no matter how close they are.
At least half the capacity in this system is always on reserve for
backup.
To the rescue: data-friendly equipment
Sycamore's two main optical transport products, called the SN 6000 and SN
8000, help carriers use their existing SONET infrastructure more efficiently in
the following ways.
First, they can add capacity in a relatively cheap manner by creating new
rings, or optical channels. Williams Communications (WCG, news, msgs),
for example, uses the SN 6000 to "interleave" up to 28 new OC-48 channels
in its Nortel OC-192 SONET systems. The new rings are set up between
existing channels. This fix is convenient because it lets carriers add capacity
or speed without going through an expensive forklift upgrade. "The product lets
you tap into an existing system in a nonintrusive way to provide capacity
more cheaply and quickly than by expanding the infrastructure," explains
Smith.
Next, Sycamore products reduce the number of stops an optical signal has to
make -- by increasing the distance it can travel before it gets weak and needs
regeneration. Instead of having to stop every 500 kilometers, signals can go
up to three times as far. The company's equipment also reduces the number
of times optical signals have to be converted to electrical signals and back
again. And the gear permits point-to-point connections, which eliminate the
need to reserve an entire ring for a trip between two points along that ring.
Sycamore products
reduce the number
of stops an optical
signal has to
make -- by
increasing the
distance it can travel
before it gets weak
and needs
regeneration.
Instead of having to
stop every 500
kilometers, signals
can go up to three
times as far.
Both the SN 6000 and the SN 8000 perform many of the same functions. The
essential difference is that the SN 6000 upgrades existing infrastructure, while
the SN 8000 is meant to help build a new transport system.
The company's third main product, called SILVX, is a network manager. It
helps carriers provision end-to-end data pipelines and keep track of what is
going on inside of them. SILVX makes the job easier by using software to
carry out many of the labor-intensive network management tasks, like
checking performance or the availability of pathways in rings.
"Carriers have no tools to tell them what bandwidth is available in what ring at
what time," says Smith. "This means huge delays when someone wants
bandwidth, because they have to go out and shake the tree to know what is
there. Our tools give them the ability to determine what capacity is available
where, and to provision it on a point-to-point basis."
Combined, the Sycamore products can help carriers reduce provisioning time
dramatically. "In many cases it would take months to provision a high-speed
circuit, and we were able to bring that down to six days," says Smith. This
helps carriers offer channels for short pieces of time on short notice.
"Ultimately we want to bring that down to real time."
From mess to mesh
The product that would accomplish this, and revolutionize the nature of optical
networking along the way, is currently being tested by potential customers. It
is scheduled for release later this year. Industry analysts expect this
"intelligent optical switch," known as the SN 16000, to bring big changes to
the optical network by helping to convert it from a ring-based system to a
more efficient mesh network.
In a mesh system, data does not need to be sent on a set course from the
start. Instead, it can take a number of possible routes, depending on distance
and the level of congestion. "It is pretty much agreed that mesh architecture
is the way to go, and Sycamore appears to have the leading solution today,"
says Lee.
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A mesh network offers several advantages. First, it will allow carriers to deliver
optical pathways instantly -- on a "per transaction" basis. It will also allow
carriers to get more revenue out of their networks by eliminating the need to
keep 50% of capacity on hand for backup. "If one route gets cut, it just uses
another route," explains Lee.
Competitive risks
Many sell-side analysts say Sycamore currently has the smartest systems
with the best interfaces. Despite this kind of praise, investing in Sycamore
shares is risky because of the lineup of powerful potential competitors on the
horizon.
Ciena (CIEN, news, msgs), for example, stands ready with its MultiWave
CoreDirector, another intelligent optical core switch that will compete with
Sycamore's SN 16000. And tough networking competitors like Lucent
Technologies (LU, news, msgs), Nortel Networks (NT, news, msgs),
Alcatel (ALA, news, msgs), Cisco Systems (CSCO, news, msgs) and Pirelli
have recognized the explosive growth opportunities in the optical market. The
market for "intelligent optical equipment" is expected to grow 200% a year to
$10 billion by 2003.
So far, Sycamore has racked up some promising victories. It has signed up
buyers like Williams (the main customer by far), Enron (ENE, news, msgs),
Millennium Optical Networks and a few European midtier service providers like
Utfors in Scandinavia. Analysts at Morgan Stanley Dean Witter expect
Sycamore to follow through on this record with one or two customer wins per
quarter. That's an impressive start, for sure. But the race has only just begun. |
