Ding, Ding. Lucent and Ciena square off in the bout for bandwidth
[thanks to the thread for excellent info. I've got a long-term position in CIEN (soon TLAB) at $42. Never really participated in the thread because CIEN seemed to be such a clear winner. djane]
techcapital.com
By Martin Donsky
It has yet to reach the intensity of a full-scale,
TV-battleground burger war between McDonald's and
Burger King. Nor has the rivalry taken on any of the
cutthroat marketing maneuvers characteristic of a
Coke vs. Pepsi brawl.
But you don't have to listen too closely to realize that
a serious techno-clash is well underway between two
leading telecommunications equipment
manufacturers over who can split wavelengths of light
into the most colors - and then load those
"channels" with voice and data messages and ship
them as fast as possible between two points.
Nor do you have to ponder too long to conclude that
the recently announced $7.1 billion merger of the far
smaller and much younger company with a larger
partner will surely intensify the competition.
In one corner is Murray Hill, N.J.-based Lucent
Technologies, a diversified manufacturer of
sophisticated communications gear - everything
from telephones to switches to wireless networks.
Lucent's roots date back to 1856, when Western
Union was still making telegraphs and Alexander
Graham Bell was still fiddling with his telephone
contraption.
Once the equipment manufacturing and research arm
of AT&T, Lucent, which includes the famed Bell
Labs, was spun off in 1996, creating a $26
billion-in-revenues giant with 135,000 employees that
ranks 37th among the Fortune 500 companies.
Lucent currently has a market capitalization of just
under $100 billion (even higher than AT&T). Wall
Street loves Lucent - from the beginning of the year
through the end of May, its stock price has beat the
S&P 500 by more than 100 percent.
Lucent is on everybody's list of "killer companies"
likely to play a critical role in driving the
telecommunications industry in the decades ahead.
In the other corner is Ciena Corp., the six-year-old,
Linthicum, Md.-based start-up that didn't even begin
generating revenue until midway through 1996. But
growth has come rapidly: Ciena now has nearly
1,000 employees, may generate as much as $600
million in revenue by the time its fiscal year ends
Oct. 31, and in early June agreed to merge with
Tellabs, a $1.3 billion-in-revenues telecom equipment
maker whose products Ciena's line neatly
complements. Wall Street fell in love with the stock
when it went public about 18 months ago, but since
then investors have had somewhat of a roller-coaster
ride. Twice in the past four months, earnings
announcements prompted "hits" to Ciena's stock
price, although the Tellabs deal pushed Ciena's
shares up again and has kept them up.
Until the merger announcement on June 7 you might
have called this a David and Goliath struggle - but
the Tellabs deal gives Ciena a double dose of
steroids in the duel with Lucent.
The Battlefield Overview
Lucent - or at least its optical networking division -
competes against Ciena for business among 40 to 50
major telecommunications providers, companies
such as AT&T, the not-so-baby Bells, Sprint,
WorldCom, Nippon Telephone, British Telecom and a
slew of other foreign carriers.
Both companies are equipped with some of the best
and brightest minds in the business of optical
networking - using wavelengths of light to send
voice, data and images from one point to another.
And both companies claim leadership in one of the
fastest-growing niches in the telecommunications
industry. Lucent and Ciena design, manufacture and
sell equipment that dramatically expands the
capacity of fiber optic telecommunications lines
already in the ground. The process is known as
dense wave division multiplexing - or DWDM for
short - because it involves the transmission of very
closely spaced bands of colors. In DWDM systems,
the proverbial "black box" takes a band of light and
splits it into two or more colors, or "channels." Each
channel is then capable of carrying the same amount
of traffic.
Ciena's first product, launched in 1996, turned one
band of light into 16 channels, thus increasing
capacity by a factor of 16. While the technology is
pretty complicated - using a prism to split light into
colors is only the first step - the bottom line is this:
an optical fiber enhanced with a 16-channel DWDM
system can carry just over 500,000 voice and data
transmissions simultaneously. Without DWDM, the
best the line can do is about 32,000 transmissions.
Ciena and Lucent aren't the only manufacturers
competing for a piece of the market. Pirelli, Nortel,
Alcatel and NEC all are either designing or already
selling DWDM systems. Pirelli was, according to
some sources, an early leader in first-generation
DWDM systems, and recently settled a patent
dispute with Ciena. But most analysts say Ciena and
Lucent have emerged as the two leading competitors,
largely because of their ability to get their products to
market ahead of everyone else, and their ability to
keep generating new products. Tellabs, in fact,
considered developing its own DWDM system but
decided against it.
Ciena, for example, added a 40-channel DWDM
system to its stable of products earlier this year.
Lucent, meanwhile, drew a lot of attention back in
January when it "unveiled" what it described as a
"global optical networking system" that would offer
telecommunications providers up to 80 channels of
incredibly high-speed bandwidth - double the power
of Ciena's competing system. Lucent said its system
could deliver five times the bandwidth of today's
commercial fiber optic lines and said its new product
would provide up to 400 gigabit-per-second capacity
over one strand of fiber. That's the equivalent, Lucent
said, to carrying the per-second traffic of the Internet
- the entire, worldwide Internet - over one fiber.
Lucent named its new product the WaveStar OLS
400G - Ciena's first-generation product was called
the MultiWave 1600.
So how did Ciena react?
Patrick Nettles, a burly, hard-charging sort who is
Ciena's CEO and president, openly criticizes
Lucent's talk vs. its action.
"I think that the most aggressive [competitor] in
terms of the noise they are making, which is the
primary measure at this point, clearly is Lucent," he
says.
Lucent's spin doctors also aren't averse to taking a
few shots at the competition. "In the industry, you
typically announce a product like this (the WaveStar
OLS) a year in advance. Ciena announced its
40-channel wavelength product two years in
advance," says Kathy Szelag, vice president of
marketing for Lucent's optical networking group.
Do we detect some snippiness here?
Wait, it gets even better.
Discussing the growing rivalry between Ciena and her
company, Szelag says that normally, Lucent doesn't
break out revenue figures for a particular division. But,
since we've asked, she says Lucent did about $500
million in multiplexing products last year, and points
out that Ciena, "if you look at their annual report," did
about $320 million last year. (Actually, it was $373.8
million.)
Nettles, though, says that Lucent's numbers are
misleading because they include other products
based on an older technology called time-division
multiplexing, or TDM, that divides bandwidth by time
slots, rather than wavelengths of light. TDM is used
in sending electrical signals, not light.
"They sell a combination of TDM equipment with
eight-channel DWDM systems. But the bulk of the
cost is not the DWDM. It can make their revenue
look large and impressive."
If you want to measure market leadership, Nettles
suggests, look at the number of customers claimed
by each company.
"We had three at the beginning of the year; we have
10 to 12 today," he says. "Lucent keeps talking
about 10 to 20 customers. I don't see any field trials."
Actually, Lucent does have customers - in fact,
Lucent and Ciena share certain key accounts,
including AT&T and Bell Atlantic.
Of course, you don't hear much about that aspect of
the competition - or "co-opetition," as Denny Bilter,
a Ciena marketing executive, puts it. Read Lucent's
announcement that it won a deal with Bell Atlantic
and you'd never know that Bell Atlantic awarded half
its DWDM business to Lucent and the other half to
Ciena.
That's not surprising, given the fact that, according to
most analysts, Lucent and Ciena are developing
state-of-the-art products that match up quite well.
Further, and perhaps most important, the
requirements are such that no long distance provider
would commit to either company unless the systems
met certain technical specifications.
A spokesman for Bell Atlantic, for example, says
Lucent and Ciena "are on an equal footing" and adds,
"We consider both of them to be very viable suppliers
for this technology." As far as Bell Atlantic is
concerned, neither Lucent nor Ciena has the upper
hand. As long as both suppliers maintain their quality
and performance levels, Bell Atlantic intends to
continue splitting its DWDM orders equally between
Lucent and Ciena.
The fact is, says analyst Rabin, that most
telecommunications providers will want two, equally
qualified suppliers of DWDM equipment. The
technology is too important to rely on just one
supplier. "My guess is that Lucent and Ciena, at the
end of the day, will be in there duking it out, given the
fact that none of the telecommunications providers
wants to put all of their eggs in one basket," says
Rabin. "It's not mutually exclusive to say that Lucent
could be very successful and Ciena could be very
successful."
Which makes it easy to understand why, in many
respects, the battle is more about mind share than
anything else right now.
The Scorecard So Far
Even Lucent acknowledges that Ciena has won some
early skirmishes.
Formed in 1992 by David Huber, a research scientist
who licensed technology from his former employer,
General Instrument, Ciena focused on the cable TV
industry and pretty much went nowhere until 1995.
That's when Dallas-based Sevin Rosen Funds
invested $5.2 million and brought in Nettles, who had
worked for several technology start-ups in the early
1990s, as CEO. With Huber gone, the company
shifted its focus to telecommunications.
In 1995, Nettles and his technical and sales people
convinced Sprint to test Ciena's 16-channel system.
It didn't take much convincing. Sprint was running out
of capacity, and quickly saw the benefits of Ciena's
technology. Deliver what you say you can, Sprint told
Ciena, and you've got a deal.
Ciena delivered. Sprint began testing a 16-channel
system in May 1996 and made it operational that
October. WorldCom signed on soon after.
Ciena's product launch was so successful that the
company actually made a profit - nearly $15 million
on revenue of $55 million - in the first year that it
began generating revenue.
Wall Street loved the story. Ciena went public in
February 1997 in an initial public offering that pegged
its initial market capitalization at $3.7 billion,
surpassing such successful IPOs as Netscape and
Apple Computer. (At the IPO, Sevin Rosen's shares
were worth $275 million - more than 50 times the
original investment two years before.) Shares in
Ciena, initially priced at $23, eventually reached as
high as $63.63 before dropping back earlier this year
after WorldCom scaled back planned orders from
Ciena as part of a shift to just-in-time delivery of
equipment. The WorldCom disclosure knocked
nearly 20 percent off the stock price last February.
Investors later bid the shares back up to the
mid-$50s, but in late May Ciena used its
second-quarter earnings report to sound another note
of caution about the timing of expected orders from
WorldCom and AT&T. Wall Street reacted again,
although not as strongly, knocking about 3 percent
off the stock price.
Then came the Tellabs deal, which pushed Ciena up
to $61.75 on the day of the announcement. As
TechCapital went to press in mid-June, Ciena was
trading right around that same level.
A year ago, DWDM and Ciena were virtually
synonymous. Of course, Ciena had just one product
and two customers, but that didn't seem to matter.
Lucent had just been spun off from AT&T, and its
marketing apparatus had yet to be cranked up.
Forbes magazine, in a profile, noted that Ciena was
the first to bring the 40-channel DWDM system to
market, thus putting the company "a step ahead of
gorilla-size competitors like Lucent Technologies and
Pirelli."
Nevertheless, Ciena knew what was coming. In its
IPO prospectus, the company noted, "Lucent has an
especially prominent role in the market because of
its historical affiliation with AT&T." What's more,
Ciena warned, "Although Lucent's prior affiliation with
AT&T may have inhibited its relationship as a
supplier to other carriers, the spinoff of Lucent into a
separate company may make it more attractive to
potential customers as a supplier."
That's precisely what has happened - at least to
some degree. Prior to the spinoff, says Lucent's
Szelag, "we primarily sold to long distance carriers
and not too many long distance carriers were
interested in buying from us." Further, she says
Ciena had deployed a 16-channel system, while
Lucent could offer customers only eight channels.
"The combination of the two kept us quiet for a period
of a year," she says.
All that changed about a year ago, when Lucent
launched an aggressive marketing campaign that
ultimately would include the announcement of the
80-channel system. Lucent also introduced a
network bandwidth management system that
incorporates DWDM features and, in March,
proclaimed that its researchers at Bell Labs
successfully tested a long distance transmission that
used 100 bands of light to move a trillion bits of data
per second.
Ciena has not stood still. In fact, last August it
signed a contract to supply AT&T with DWDM
equipment over a five-year period. The AT&T contract
was widely viewed as Ciena's coming of age. It was
an important victory for Ciena partly because AT&T
was already using Lucent systems.
And Ciena had its own response to Lucent's
80-channel system, which is supposed to start
shipping by the end of this year. Last March, not too
long after the Lucent announcement, Ciena
announced that it would begin shipping a new
40-channel DWDM system that ultimately could be
scaled to as many as 96 channels. Further, Ciena
said that its first customer, Sprint, would begin using
the 40-channel system the following month.
Sprint has been unfailing in its support for Ciena's
products. The company's chief technology officer
says the supplier has "consistently delivered
high-capacity" DWDM systems. Other Sprint
executives say they've stuck with Ciena because it
has products that are shipping. In fact, Ciena's
equipment is a critical element in Sprint's recently
announced plans to overhaul its entire
telecommunications network and "bundle" all
services through one, high-speed fiber line running
almost door-to-door.
The one big project that Ciena appears to have
missed out on was a recent award by British
Telecom involving network upgrades of fiber optic
lines that connect Belfast, Northern Ireland, to the
United Kingdom and the UK to Edinburgh, Scotland.
Lucent won one project and Ericsson the other.
Nettles looks at it this way: "Now it's not a question
of whether it's the right technology. It's a matter of
which flavor is right for my network."
The Campaign Ahead
The Tellabs deal notwithstanding, some critics still
say Ciena is a one-horse company, and sooner or
later the big boys will catch up.
Nettles shrugs off such talk. In fact, Ciena has taken
steps to expand its product line and shore up its
service offerings. In the past year, Ciena has made
three acquisitions. It bought a small service company
in Atlanta that installs telecom equipment, a
California manufacturer of optical components used
in DWDM systems, and another Atlanta company
doing research and development work. Ciena merged
that company - AstraComm - into an R&D center
it had opened in Atlanta last year.
"We've not gone on a binge of buying companies,"
says Nettles. "We're just trying to augment our
technology resources, our ability to deliver to our
customers, and our ability to build the enterprise to
meet a larger set of demands."
And then there's the coming merger with Tellabs,
which makes digital cross-connects and other
components that telecom operators use to provide
access to their networks. The two companies offer
complementary products, and indeed together can
offer a much wider line of products. "If you're going to
be a major participant in the telecom equipment area,
you have to be pretty broadly based," says Nettles,
who will become president and COO in the merged
company, No. 2 behind Tellabs Chairman Michael J.
Birck. "What we have here now are the bricks and
mortar of a major player," Nettles emphasizes.
Lucent has made some acquisitions of its own,
including the high-profile purchase this spring of Yurie
Systems, a maker of asynchronous transfer mode
gear.
Lucent is also positioning itself as a leader in a
growing push within the telecommunications industry
to create what is being billed as the "all-optical
network." The goal: use wavelengths of light, rather
than electrical streams, to move voice, data and
video signals throughout the network - from door to
door.
While optical networking is confined mainly to long
distance routes right now, telecommunications
experts see it moving into local markets in the next
couple of years as new fiber optic lines are installed.
Next year, in fact, supercomputers in government
agencies in Washington will be linked with a very
high-speed fiber optic network in what is being
described as the most ambitious use yet of
multiwave-length technology.
Nettles and Cisco Systems, the leading
manufacturer of routers and other data networking
gear, recently teamed up to form the Optical
Networking Forum. The alliance was described as an
"open forum" that will promote ways to accelerate the
deployment of optical internetworks. Other forum
members include AT&T, Bellcore, Hewlett-Packard,
Qwest, Sprint and WorldCom. (Lucent was
noticeably missing from the list of sponsors.).
Ciena and its forum partners would like to avoid the
time it often takes to develop standards for
communications networks that are designed to let
equipment made by various manufacturers work
together. This is called "interoperability," and it is a
major issue in the industry. Developing standards the
old-fashioned way - through a body like the
International Telecommunications Union can take
years and require almost unanimous agreement by
member companies, many of whom compete with
each other and use the standards process to
promote their respective products.
"We recognized the need for something that is more
agile for the standards process for dealing with really
thorny problems involving drastic changes in
technology," says Nettles. "In the standards
process, one dissenting voice with a particular
interest can hold things up for years. In a forum,
decisions are made on a majority basis and then you
move on."
And Cisco and Ciena both know the direction they'd
like to move. Besides creating an industry forum,
they've agreed to work together to develop
"carrier-class" solutions to overlay switching and
routing technologies directly onto optical networks. In
other words, Internet service providers would be able
to deliver traffic over IP backbones using Cisco
routers that work directly with Ciena's DWDM
systems.
"There's a clear convergence of interest, between
what Cisco would like to see happen and what we
believe will happen," Nettles says. He envisions
communications systems in which optical networks
using DWDM technology will replace or substitute for
so-called legacy transmission architectures that use
ATM, SONET and similar circuit-based switching
technologies.
This has made Ciena all the more valuable - and an
obvious ingredient in the merger with Tellabs.
"Before, we were all looking at Ciena as a DWDM
company," says analyst Rabin. "Now,
most people are looking at DWDM as step one in a
movement
to optical networking, the beginning of something
even more important." |
