BURLINGAME, Calif. -- The carrier spending downturn could very well last another five to six years, according to Dr. John McQuillan, president of McQuillan Ventures. McQuillan, cochairman of the NGN Ventures conference here, sent a few attendees scrambling for their Maalox on Tuesday when he pointed out that, historically, capital spending downturns have tended to last for seven to eight years.

Since the telecom industry is only two years into its current downturn, McQuillan told attendees that they'd better just buck up and quit living in the past: "We need to stop telling ourselves that it’s a tough market and start telling ourselves that this is the market."

The reality for components suppliers and equipment vendors, he said, is that there are only a few service providers buying gear, and those buyers have "deep pockets, but very short arms."

Not everyone, of course, is convinced that today's downturn is the new reality. While pumping up his employees last week, Redback Networks Inc.'s (Nasdaq: RBAK) CEO Kevin DeNuccio said he thinks the telecom recession is nearly over. "[Market conditions] will not get worse than this because they can't get any worse -- I really believe that," he said (see Redback Rallies Itself).

DeNuccio did, however, distinguish between the telecom industry in general and the optical networking market specifically, saying that, thanks to excess inventory and unused network capacity at carriers, optical networking companies may well see "several more quarters" of depression.

Regardless of how long the telecom spending depression lasts, the damage already done is evident here. There were 2,100 attendees here last year and only 1,500 were pre-registered this year, according to show management.

Venture capitalists, after seeing record low returns in 2001, are back to investing with heightened skepticism and tighter focus. Several VC firms have also reduced the size of their funds. "This is a remarkable admission from a group of alpha males," McQuillan quipped (see VCs & Startups Go to the Mat ).

There are, however, investment opportunities still, as illustrated by the forty networking equipment, wireless, and component startups presenting here. And, despite the skepticism hurled at speakers during the conference's Q&A sessions, many companies here are taking meetings with VCs and seeking funding for their next big ideas.

Lexra Inc., for instance, says it's here looking for between $10 million and $15 million in incremental funding as it goes from being an intellectual property licensing business to a fabless semiconductor company that designs chips for Internet switches, access concentrators, and edge routers.

During the conference opener, Burton Group research director David Passmore named several service provider technology areas that are hot in the near term: next-gen Sonet, metro Ethernet, softswitches, multiservice switches/routers, core routers, and cellular/fixed broadband wireless. Under "longer-term" or "deferred" technologies, Passmore listed pure optical metro/core switches and 40-Gbit/s or higher-density DWDM.

Indeed, in certain parts of the network, the financial devastation endured by the incumbent equipment vendors has left gaping holes in their product portfolios. Kumar Shah, president and CEO of Occam Networks Inc., says that the access equipment market positions held by Nortel Networks Corp. (NYSE/Toronto: NT), Lucent Technologies Inc. (NYSE: LU), and Marconi PLC (Nasdaq/London: MONI) -- some 40 percent of that market -- are "up for grabs."

"The key to success now is having staying power and making sure your customers feel comfortable with your capitalization strategy," Kumar says.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com