Photon Profits
By Bill Scanlon, Interactive Week
March 19, 2001
Remember easy money?
Remember back when any optical player that had a new
twist or small variation on a switch, router, chip or
marketing scheme could get funded, go public and
watch its stock soar?
Not today. Not with tech stocks taking a beating,
carriers slowing their build-out plans and venture
capitalists tightening their hold on money.
The optical market is overcrowded with players.
Companies late to the market, those with shoddy
business plans and those with untested technology will
be the first to succumb. But even those with good ideas
are in trouble if they placed their bets on wrong
solutions, says Scott Clavenna, a principal analyst at
optical research firm Pioneer Consulting.
Be a little late developing 10-gigabit-per-second optical
switches, and see your stock fall 85 percent, as Lucent
Technologies' shares did. Deal with too many customers
that can't pay you, such as many of the struggling
competitive local exchange carriers, and you're deep in
the red. Have a great product but no way to ramp up
manufacturing volume, and you're ripe for being acquired.
"Everything can't win, even if it is good," Cla venna says.
"Carriers can't be asked to pick from 20 vendors for a
single product. That's just too many."
A company might have a good technology and a
workable system, but carriers still won't buy it if they've
moved on to something new.
Ciena found that out when it made a run at the metro
market. Ciena acquired Omnia Communications and its
Asynchronous Transfer Mode-based platform for $429
million in stock in 1999. Omnia had first-rate engineers,
but Ciena ultimately abandoned the project because the
industry was turning away from ATM.
Ciena was smart enough to do two things: It put Omnia's
engineers to work on projects that were more
marketable, and it jumped right back into the metro
market late last year when it acquired Cyras and its K2
platform, pegged to the venerable Synchronous Optical
Network (SONET) technology.
"The first thing we learned was that when you find
yourself in a hole, stop digging," Ciena Chief Executive
Patrick Nettles says. The Omnia engineering team went
on to design Ciena's hot Core Director optical switch.
"The second thing we learned was that when you're
looking at an acquisition, you should focus on the
customer contacts and traction that the company has,"
he says.
Ciena slipped only once, so it is counted among the
winners as 2001 moves into its second quarter. Last
month, the company sparked a spike in the stock
market when it announced revenue of $352 million for the
quarter, up 130 percent from the same quarter a year
earlier. Nettles projected that Ciena's 2001 revenue
would be 95 percent to 105 percent higher than last
year's.
Nettles believes that optical technology stands at the
crossroads this year. "It's a datacentric world, and data
behaves in a different way than voice," he says. With fat
pipes and fast switches speeding bandwidth at 10 Gbps,
the Time Division Multiplexing solutions of SONET and
ATM are increasingly irrelevant, he says.
The newer, faster Internet Protocol (IP) network will cost
less to build and will have operational efficiencies. "The
sea change will fundamentally differentiate the carriers
that use that solution from those that don't," Nettles
says.
The North American optical transport market is expected
to double by 2004 to $45 billion per year, according to
telecom research firm RHK. By then, 60 percent of
vendor equipment revenue will be in IP systems, while
the shares for the older frame relay and ATM offerings
will shrink, analysts predict.
Lasting Legacy
Lucent and Nortel Networks have long been the leaders
in supplying equipment for telecommunications
networks. But both had commitments to older
technologies for networks built for voice conversations,
and both were late with high-speed equipment for
datacentric next-generation networks.
Nortel's mascot could be Buck, Jack London's wonder
dog of the Canadian north: huge yet fast, smart, nimble
and cutthroat when it has to be.
A network equipment company born of the breakup of
Canada's staid old national telephone company, Nortel
owns an astounding 53 percent of the overcrowded and
burgeoning Dense Wavelength Division Multiplexing
equipment market. DWDM divides light into dozens of
channels — each capable of carrying voice, video and
audioraffic — and is expected to be the highest-growth
area in the red-hot optical market.
What could go wrong? How about last month's forecast
by Nortel's CEO John Roth that the company's sales
would grow just 15 percent this year, an estimate that
sent its stock plunging 33 percent?
Nortel is an agile giant by most standards, but in optical
networking it seems there is always another company
with a newer architecture, a more sensitive finger on the
pulse of the market.
Nortel is "perfectly positioned to deliver old solutions,"
Nettles says. "They have their whole business built
around SONET and ATM. They talk a lot about new
systems with new-generation products, but as far as we
can see, they're not delivering much of their touted
open-system DWDM systems. They have infrastructure
and sales, but they're missing product."
But expert observers say Nortel is still plenty nimble.
"No incumbent vendors are going to stay on top by
continuously leveraging simply what they have," says
Grier Hansen, optical analyst at Current Analysis.
"Nortel is a very good example of incumbent vendors that
have seen the space explode and know there are a lot of
compelling technologies out there from start-ups, and
have taken the necessary steps to compete with them."
Service providers will particularly feel the tightening
money supply, Nettles says. "There's going to be a
separation of the haves and have-nots — those that have
capital and can move ahead with deployments vs. those
who will have to take a conservative wait-and-see
approach," he says. Level 3 Communications, McLeod
USA, Qwest Communications International, Sprint and
others that anticipated the tightening and prefunded their
build-out plans will enjoy a widening advantage over
those without money, he says.
Deploying the hottest new technology will bring
advantages to carriers. Last month, Corvis and Williams
Communications sent a signal a record-breaking 4,000
miles without regeneration. Williams, one of the
new-generation carriers not tarrying in the long-distance
voice market, has committed to purchasing $300 million
worth of Corvis' optical products.
Corvis' all-optical products can slash network costs in
half because the signals never have to be regener ated,
says Shyam Jha, vice president for marketing
communications at Corvis. Still, it's tough competing
with the legacies of Lucent and Nortel, he says. "They
have the advantage of incumbency," Jha says. "We're
the new kids on the block, and loyalty counts for
something. We have to convince them that this is a
better technology."
Ten years ago, when all routing was done by
mainframes, Cisco Systems had a tough time
convincing companies that they could save up to 90
percent by buying something called a router, Jha notes.
"What Corvis has going for them that no one else has, is
they have a switch that works," Hansen says. "Their
competitors have lambda routers in trials." Corvis took
some heat last quarter for relying on only a few key
customers. "But they have one in a network now passing
traffic," he says. "That solidifies the validity of their
solution."
Hansen applauds the newer companies such as Corvis,
Sycamore Networks and Tellium on their all- optical
products. "Certainly, it's harder to get in now in the
all-optical market," he says.
Says Corvis' Jha: "Different people see the market
evolution differently. The bandwidth barons — Williams,
Qwest and Broadwing — are the first to build true optical
networks, while the legacy long-distance companies —
Sprint, WorldCom and AT&T — are slower. The game is
changing rapidly. The newcomers such as Broadwing
are selling bandwidth to the granddaddies."
Lucent is everyone's favorite whipping boy, but after
overhauling product development and assembly at its
optical plant in North Andover, Mass., it is vowing to be
the first to market — targeting later this year — with
40-Gbps switches. It also will bring to market this year a
lambda router capable of switching up to 1,024 signal
channels.
Lucent needed a shock to its complacency, but will
come back, says Roger Wery, an analyst at Pittiglio
Rabin Todd & McGrath. "They still have some amazing
technology and will produce some great products," he
says.
Lucent must trim its complex layers, so the spin-off of
its microelectronics division, Agere Systems, and the re
ported interest in selling its fiber-optics plant are
probably good moves. Layoffs, the spin-off, the possible
sale and the recent $4.5 billion in bank loans will net
Lucent plenty of money to buy cutting-edge technology
and vault it into the lead when carriers go on their next
spending spree, experts predict.
Nortel, too, will bounce back, Wery says. A good way to
start would be to recognize that competitor Cisco has
about one-third the employees, with total revenue in the
same ballpark. "This may be a trigger to be more nimble
and get rid of some of their past and their overhead, to
trim down their cost structure and become a sleek
athlete," he says.
Nortel may have slipped a bit, but it hasn't been
complacent. Last month, the company announced a
suite of products that can make Web surfing easier, and
help advertisers target banner ads to individual Internet
users. A week later, Nortel purchased a Swiss
subsidiary of rival JDS Uniphase, paying $2.3 billion for a
company that makes 40 percent of the world's
980-nanometer pump lasers. It's those pump lasers that
are needed for each channel of a DWDM system.
Huge Pipes Are Not Enough
The fastest switches powering the biggest pipes won't
necessarily win the game. If size and speed is the only
differentiator, everyone will fight to be the discount king,
and wavelength will become a commodity in a long price
war.
Carriers are looking to vendors that can combine
hardware switches with intelligent software so they can
offer different classes of Internet services to their
customers.
"If you really want to offer carrier-class services over a
data network, you need a way to guarantee the
performance of the packets," Light Reading's Clavenna
says. "The only way is with new forms of switches and
routers, and equipment at the edge" of the network.
Celox Networks in January came out with a switch that
can serve 6 million subscribers at a time and de liver 16
levels of service, from firewall protection to voice-over-IP
to bandwidth on demand. It allows service providers to
offer the basic $29.95-per-month service, but then easily
ramp up to about $60 per customer with the lure of the
gold-plated options. >>
The services-creation field is crowded with new products
from CoSine Communications, Lucent's Spring Tide
Networks, Nortel's Shasta line, Quarry Technologies and
Redback Networks, among others. They're all stuck in
second gear, waiting for a killer application to come
along so carriers can fill their bandwidth and start
clamoring for faster switches that can deliver even more
traffic.
Equipment vendors would do well to remind themselves
how pragmatic and bottom-line oriented their carrier
customers are — especially now that financing is tight.
Global NAPs, an eastern seaboard carrier, is buying
voice packet switches from Convergent Networks
because it needs to make money now, and can do so
with equipment geared to ATM protocols. Frank Gangi,
president of Global NAPs, is convinced that ATM has a
lot more life left in it — and some advantages over IP. "IP
doesn't have quality of service inherent in its protocol,
but ATM was written from the outset with QOS in mind,"
Gangi says.
The fact that IP works best with the cheap-to-install,
popular and newly speedy Ethernet tech nology doesn't
daunt Gangi. "For every argument I can make about how
great ATM is, they can make an equally passionate
argument about IP," he says. "But quality of service is
just not there with IP. We couldn't migrate to any
solution, no matter how cheap or fast or sexy, if your
phone call is going to sound any different than it sounds
on the traditional circuit network. If you've ever used IP
tele phony, it drops and garbles too much."
With equipment from Convergent, Marconi and
Sycamore, Global NAPs' network "isn't a spider-web
mass of 50 lines in 50 places," Gangi says. "It's one big,
fat pipe into an ATM cloud. It's much more efficient and
you get real savings. Plus, it's about a tenth the cost of
traditional stuff. And it offers new services that Class 4
switches didn't dream of."
ONI Systems' Hugh Martin doesn't agree about ATM's
future, but that's what makes horse races. He's betting
on IP "for one simple reason: Never bet against
Ethernet," he says.
Ethernet, a protocol most commonly used with IP, is
cheap and simple to install. The rap has been that it's
slow. But with optical fiber, Ethernet has moved up from
10-megabit-per-second speeds to 100-Mbps to
gigabit-per-second speeds. "And we're less than nine
months away from 10-gig [Gbps] Ethernet," Martin says.
"It's just relentless. It's a technology that never loses.
And Ethernet is IP. Over time, ATM is going to go
away."
The dozen companies making intelligent devices for what
they believe will be an IP future are trying to put a lie to
the claim that IP and Ethernet don't allow service
providers to offer different classes of service.
Playing Well With Others
As optical fiber moves closer to the customer, the
challenges and the competition escalate. Equipment
vendors that can form partnerships with component or
fiber makers are at an advantage.
Quantum Bridge Communications makes optical
equipment for the edge, where businesses are
connected to the network core. Last month, it
announced a partnership with Corning whereby they
become each other's preferred vendors. "We help our
customers get access to Corning fiber, and Corning
helps its customers who want optical to reach their
business to get access to our equipment," says Jeff
Gwynne, vice president of marketing at Quantum Bridge.
"We look at partnerships to provide fuller solutions."
Quantum Bridge also allies with companies such as
Marconi and Nortel so it can focus on innovation and let
others worry about providing interfaces with different
technologies and protocols, Gwynne says.
Analysts point to another reason why they think the
optical market will soar — or at least outperform the
entire high-tech sector. Salomon Smith Barney expects
the shared-storage business to grow to $40 billion per
year by 2003. That's increasingly a metro-area business,
because the storage centers need to be close to large
businesses. And with the bandwidth those centers
demand, the only conduit that can deliver it is, of course,
optic fiber.
The optical space isn't as hot as it once was, but there
will be continued exploding demand for bandwidth, "and
that's not going away," says John Kane, CEO of
Telseon, which lights fiber in the metro area and sells it
to service providers. "The cheapest and easiest way to
deliver that is over optical networks."
Telseon last month won $175 million in financing from
investors sold on its business plan. Investors were just
as sold on Yipes Communications, which plays in the
same space, but sells services directly to businesses.
Investors gave Yipes $200 million last month. Both
companies completed fiber-optic rings around 20 U.S.
cities by the end of last year.
"Money is sitting on the sidelines until they understand
where the bottom of the market is," Kane says. "Money
will then start to flow back into the market, albeit
cautiously."
To survive as an equipment vendor today, "don't get
involved in religious wars," Gwynne suggests.
He urges vendors to provide solutions for big incumbent
carriers, new competitors, cable television and those
that run various protocols and technologies. "You can't
say, 'I'm going to be an IP bigot, or an ATM bigot,'" he
says. "You have to provide equipment that guarantees
their investment in any of that. Listen to your quality
customers. Most of what they want is going to be widely
commercially applicable. Give them total solutions and
love and care. That's what's going to separate winners
from losers."
And one more thing: "Run like hell," he says. "Speed is
life. We have a saying around here: 'The guys that are
quicker and most agile will win the race.'"
zdnet.com
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JDS Tries Automation To Counter
Slowdown
(03/13/01, 4:37 p.m. ET) By Ken Schachter, TechWeb Finance
NEW YORK—JDS Uniphase Corp. may be able to
learn a thing or two from chip makers.
So said chief financial officer Anthony Muller. He told
an audience of money managers at the Merrill Lynch
Global Communications Investor Conference Tuesday
that the leading maker of fiber-optic communications
components has launched an automation campaign
meant to mimic the efficiencies of the semiconductor
industry.
The automation implemented at chip foundries holds
promise as a crucial cost-cutting tool, he said. And in
those areas where the company has instituted
automation, productivity increases follow.
Muller also noted that even though the industry is in the
teeth of a broad economic slowdown, it's the right time
“for us to continue to invest in our technology.”
JDS Uniphase (stock: JDSU) has followed other
networking companies in lowering its revenue and
earnings forecasts and in February, the company said it
would cut 3,000 jobs, or 10 percent of its workers.
Muller acknowledged that the downturn offered the
company “extremely low visibility” for predicting
earnings. The company has twice lowered earnings per
share guidance for the March quarter, first to 17 cents
per share, then to 14 cents.
Still, he said that with gross margins of about 50
percent, approximately $1 billion in cash, and “virtually
no debt,” the company is well positioned to emerge in a
strong position.
“We see a very bright future with a difficult stop along
the way,” he said.
Customers of JDS Uniphase, Toronto, include Ciena
Corp. (stock: CIEN), Lucent Technologies Inc. (stock:
LU), and Nortel Networks Corp. (stock: NT).
techweb.com |
