Shedding Darwin on Light
lightreading.com
" The weak will perish in the desert. The strong will enter the
Empyrean -- and prosper to an outrageous degree. The one thing that
isn't in doubt is the size of the optical market opportunity, which
boggles the imagination. All in all, a good thing for both service
providers and investors -- at least, those that back the right players
and the right technologies. "
TA
============================
FEBRUARY 15, 2001
Shedding Darwin on Light
Let's face it: The last four or five months have been brutal for the
optical networking industry. The problems began with concerns
about the slowdown on carriers' capital spending, and were
followed by a Nasdaq annihilation that saw the share price of many
of the public optical players fall by 50 percent or more -- a lot
more, in the case of companies like Corvis Corp. (Nasdaq: CORV -
message board), Foundry Networks Inc. (Nasdaq: FDRY - message
board), Lucent Technologies Inc. (NYSE: LU - message board),
Redback Networks Inc. (Nasdaq: RBAK, and Sycamore Networks
Inc. (Nasdaq: SCMR - message board).
Unfortunately, the optical industry's problems aren't over yet. Like
Biblical plagues, there are more woes on the way.
The next curse to strike the optical networking industry will be an
almighty winnowing amongst the startup community.
Pruning is inevitable given the "if it moves, fund it" attitude to
optical investing taken by the venture capital community last year.
Light Reading maintains a global directory of every company
(public and private) involved in the optical networking industry --
from fiber infrastructure service providers, to systems vendors, to
components manufacturers. There are now over six hundred
companies on the list (605, to be exact). We also maintain a
separate registry of companies that are still in "stealth mode,"
which means they aren't at the point where they are ready to start
talking publicly about their products. That list now totals 168.
That's too many, obviously. In fact, the shakeout has already
claimed one of its first IP system vendor victims: Ironbridge, which
shut its doors at the end of last month (see IronBridge Has Fallen
Down ). IPHighway Inc. and Point Reyes Networks Inc. look set to
follow Ironbridge into systems vendor Gehenna (see Shutdowns
Send Dark Message ).
They won't be the last. Many optical startups are already having
trouble finding further investment, and some are having to settle for
unpublicized down rounds, where a company takes money at a
lower valuation than at its previous round -- the thin end of the
shakeout wedge.
How bad could things get? Vinod Khosla, the legendary optical
networking investor, said recently that he thought that 95 percent of
startups would ultimately wither on the vine (see Khosla: Optical
Market's Still Huge ).
There are several problems with Vinny's apocalyptic prophecy.
First, it's a gigantic over-exaggeration. The real number is a lot
lower: 50 percent, maybe. And most of those companies won't
crumble into dust -- they'll be acquired. (For a more realistic taste
of what's to come, consider antecedents such as the LAN switch or
high-speed router markets).
Further, this kind of doom and gloom doesn't actually do much to
help service providers and investors work out where they should be
putting their money. The fact is that the optical shakeout will affect
the three different categories of startups (service providers,
component plays, and systems houses) to different extents, and at
different times.
Here's a brief Light Reading prognosis for each of those areas:
Service providers were the first to exhibit marks of the Beast.
Aduronet, Digital Broadband, NorthPoint Communications, and
GST Telecommunications have already gone bankrupt. Global
TeleSystems Inc. (GTS) (NYSE/Frankfurt: GTS - message board)
and ICG Communications Inc. (Nasdaq/Neuer Markt: ICGX -
message board) are both looking a bit leprous. E.spire (Nasdaq:
ESPI - message board) and Urban Media Inc. are also said to be
having problems. And lots of the pan-European backbone operators
are teetering on the brink of financial ruination.
In the long run, consolidation is likely to be the order of the day.
The big service providers (especially the IXCs) will get bigger.
Most of the smaller players (especially data-only players without
voice revenues from an established customer base) will be
acquired, or simply fade into the æther.
Of course, problems in the service provider community will
inevitably affect the systems vendors, who are next in line to feel
the pain. But, again, not all companies in this market are as
susceptible to the shakeout miasma. Clearly, the metro market is
overcrowded, with startups like Alidian Networks Inc., Astral
Point Communications Inc., LuxN Inc., and Mayan Networks Inc.
still struggling to establish a toehold against larger public
companies (many of which have themselves bought startups in order
to compete effectively in this realm).
Another subset of the systems market that is sounding alarm bells is
the all-optical switching tribe -- as typified by Calient Networks
Inc., Ilotron Ltd., Luxcore Networks Inc., Nayna Networks Inc.
These players have captured the imagination of the investment
community. (Hey, "all optical" must be good, right?) But the reality
is that the market for these products is still developing. And even
when it does arrive (in a couple of years' time) it will still
represent a tiny proportion of the overall market for optical
equipment. Expect all-optical casualties.
Components companies have so far been relatively immune to the
malaise. That's about to change. I strongly believe that the attrition
rate in this area will eventually surpass that of service providers
and systems startups combined.
The reason is that there are currently no standards -- or even a
consensus of opinion -- over which type of component technology to
use in developing the next-gen optical kit. For example, there are
more than half a dozen approaches to building all optical switch
fabrics alone -- including arrays of tiny tilting mirrors, liquid
crystals, bubbles, holograms, and thermo- and acousto-optics (see
Optical Switching Fabric ).
This lack of standards makes life hard for component startups. They
don't have the bulk to force their proprietary approach on systems
vendors. And in the current climate, the systems vendors would
rather buy from larger component manufacturers in any event, since
there's less chance of them going under. A vicious circle.
The irony is that life for these companies will be even worse when
standards do arrive. If the history of networking tells us anything,
it's that so many diverse approaches will not survive, and that
eventually one technology will win out. (The networking industry
loves a consensus, even if it takes it a long time to reach it -- just
look at Ethernet or IP.) At that point, components startups that
invested in other than the chosen approach will be denied
admission to the Promised Land.
If it all sounds a bit depressing, that's because it is.
However, it's
also important to remember that there's also an upside to any
industry shakeout. In the long term this natural wastage will have a
positive affect on the optical networking industry.
Think Darwin, with a Nietzsche chaser.
The weak will perish in the desert. The strong will enter the
Empyrean -- and prosper to an outrageous degree. The one thing that
isn't in doubt is the size of the optical market opportunity, which
boggles the imagination. All in all, a good thing for both service
providers and investors -- at least, those that back the right players
and the right technologies.
This raises another obvious question: Which areas are still hot?
Automated subsystem manufacturing is one example. It's a
"happening scene" for two reasons: First, it enables systems
vendors to shorten the time to market and reduce development costs.
Second, there aren't a lot of startups in this area. Axsun
Technologies is one of them; Cenix Inc., another.
2001 is also set to be the year of Jubilee for optical storage area
networks (SANs). Why? On the one hand, a wave of demand for
SAN equipment is coming from corporate users -- folk who
desperately need to consolidate their storage requirements and are
used to spending big bucks on communications.
On the other hand, this is a technology that uses whole wavelengths
-- which is a big attraction for carriers, because it translates into
generating revenues quickly. It means they can just plunk in some
DWDM gear and away they go. They're not faced with having to
install edge switches and the like to support and bill for lower
bandwidth, lower-value services.
How long will these Pearly Gates stay open? Until VCs start
clogging them later this year. A shakeout follows in late 2002. |
