Brian Protiva, CEO of ADVA AG Optical Networking (Frankfurt: ADV) is a young guy -- not the guy you'd expect to already be the CEO of a $90 million per year operation. But at age 38, Protiva is indeed the boss. Even more impressively, he's been running the company for over a decade, having bootstrapped it out of his father's German four-person computer equipment distributor.

After graduating from Stanford in the late 80s, Protiva went back to his native Germany to inject his father’s distributorship with a little Silicon Valley élan. So far, it’s worked quite well. In a little more than ten years, the place went from four employees to nearly 400, is financially stable (it was profitable in 2002), and now trades as a public company on the Frankfurt Stock Exchange (see ADVA Sets the 'Prime Standard'. The company completed its IPO on the German Neuer Markt in 1999.

At the same time, ADVA is one of the pioneers of metro DWDM and now, arguably, leads the market, along with Nortel Networks Corp. (NYSE/Toronto: NT). That’s remarkable, considering it has weathered an onslaught of startups and Silicon Valley venture money being thrown at the market. When Protiva reminisces about the days when there were only three or so players in the market – way back in 1997 – you realize how far and how fast this market has moved.

ADVA has pinned much of its success on a "big brother" reseller strategy. Though some of these OEM agreements have not panned out – including one with Alcatel SA (NYSE: ALA; Paris: CGEP:PA) – more recent deals with the likes of Siemens AG (NYSE: SI; Frankfurt: SIE) and Fujitsu Network Communications Inc. (FNC) have earned ADVA its bread and butter (see ADVA Holds Its Own and ADVA Earns Reseller Returns). Now a raft of North American startups have been mimicking this strategy to survive the lean times.

Protiva the Stanford Son preaches a seemingly anti-Silicon Valley mantra: It's a steady growth strategy that aims at keeping costs low and focusing on simple and effective products that can be run by the customers. After an era in which Silicon Valley set out spending gargantuan sums of cash to develop optical networking equipment with complex architectures and proprietary management software that would "revolutionize," this message seems truer by the day.

Protiva maintains that his customers can buy, set up, and operate a metro DWDM box in an hour. Is that the key to ADVA’s success? We should have taken him up on the challenge, but he didn’t bring any DWDM gear to Light Reading’s office (and we’re willing to bet that a Light Reading editor's provisioning skill might not be the best test of management simplicity).

Read up as Protiva proselytizes:

— R. Scott Raynovich, US Editor, and Stephen Saunders, Founding Editor, Light Reading

Light Reading: You’re from Europe, so who’s your football team?

Protiva: FC Bayern Munich Light Reading: Sorry to hear that.

Protiva: We were doing pretty well in international competition until this year.

Light Reading: So how did an American end up running a German company?

Protiva: I am an American that grew up in Germany. I went to a private high school in Silicon Valley, and then I went to Stanford. After graduating, I went back to Germany because my dad ran a small distributor with four people. So I went back to brush up on my German skills. We started to grow the business by taking innovative American products and selling them in Germany. We had passive components, heat management, fiber optics, and computers.

We grew like crazy, but then we started running into a problem where every time we built a business to a point where we should be making lots of money, the American suppliers said, ‘Okay, we know best and we’ve decided you shouldn’t make 20 percent margins, you should take 5 percent.’ So we took that for a couple years.

Light Reading: So ADVA started as a sort-of spinoff of that distributor?

Protiva: Yes. It was kind of an American concept, we hired a bunch of young engineers and gave them a piece of the company. It wasn’t option based, because in Germany the company structures are set up differently and they don’t really have options. So we gave them real parts of the company.

Light Reading: Where does the name ADVA come from?

Protiva: It’s short for “Add Value.”

Light Reading: Oh dear...Protiva: I know [laughs]. It’s a name for which I still get grief to this day.

Light Reading: You didn't really go the standard venture capital route. How’d you keep growing the business?

Protiva: We funded it out of working capital of the distribution company. In fact, at first, we sold the product through our distribution company. But we grew incredibly fast and eventually we became profitable. Then in about 1994 we had an opportunity with Westfalische Landesbank.

Light Reading: I won't try to spell that.

Protiva: You can just call it WLB. At the time, the Deutsche Bundesposte, the German post office, was becoming a telecom operator. It had a lot of dark fiber, so they gave it to customers like WLB. Companies used Escon to set up fiber networks between sites. The Bundesposte then realized that fiber was a huge asset so they weren’t going to give it away anymore. The bank came to us and asked if we could help them develop a product to build their fiber network. We said sure, we can do it. We said we could develop a product in about three months but it took us about six months to develop a simple three-channel WDM system.

We also did a deal in the early years with E-Tek. [Editor's note: E-Tek, an optical components manufacturer, was acquired by JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) in 2000.] We also met up with Inrange, and they wanted to sell the product.

Light Reading: E-Tek, really? How did that get started?

Protiva: We resold their stuff. But then Alcatel went to E-Tek and signed an agreement with them and said, "Cut them out" [meaning ADVA]. E-Tek then said to us, "Oh, we signed a contract with Alcatel, we can’t pay you any money." We were irate.

Light Reading: So E-Tek cut you out as the middleman.

Protiva: Yes, we were originally the distributor and we landed the Alcatel deal for them. But Alcatel was hardcore with distribution. They used distributors to get product on board but then they said they wouldn’t pay third parties. So E-Tek couldn’t pay us for the work rendered.

Light Reading: So, you're saying you may not be that fond of Alcatel.

Protiva: But we’re a nice organization [smiling]. We’re not aggressive.

Light Reading: Okay, then, so how should we put this... You may have some difficulties with your French friends?

Protiva: We had a second experience with Alcatel. They were an OEM. We worked with them. We started in the United States and they wanted to expand to Europe. After talking to us about the product and the market, understanding what they did about our product, they decided to move on their own. They’ve now become a competitor.

Light Reading: So what ended up happening with E-Tek?

Protiva: E-Tek said, "We can’t give you any money because we have a contract with Alcatel. What can we do?" So we asked them to make a strategic investment in ADVA. They got 40 percent of the company for $200,000, which they had owed us for the Alcatel stuff. That was the best investment E-Tek ever made. It wasn’t a good strategic move for us, looking back, but it was the thing to do at the time.

Light Reading: Hindsight is 20/20, eh?

Protiva: They had no idea how much money there was in the market at the time. So we got the money into ADVA, and that helped. But the reason we took them on is we thought they might be strategic for us. We learned about WDM through E-Tek. The problem was they were growing so fast they didn’t have any time for us.

Light Reading: Who else did you compete with in the early days?

Protiva: At the time it was only us, Ciena Corp., and Lucent Technologies Inc. that had real WDM systems. And IBM Corp. was coming out with the MuxMaster.

Light Reading: The MuxMaster!

Protiva: It wasn’t a very stable product. They had to tune the lasers a lot to keep them in the grating.

Light Reading: You mean like guys coming by every week, with screwdrivers?

Protiva:Almost – every month they sent in the service guys to tune the lasers.

We also moved into the enterprise space working with Inrange. By 1997, we were profitable and grew slowly. The main competitor was the IBM MuxMaster.

Light Reading: It's amazing to think that IBM was in the optical networking market.

Protiva: We competed with them really well and we split the market. We probably had 30 to 40 percent of the market. But they weren’t investing in the area, didn’t have the engineering expertise, and didn’t have a good product platform. So they ended up pulling out. At the same time a little company, Cambrian, came on the scene developing a product for service providers. [Editor's note: Nortel bought Cambrian in 1998.] We moved in, started working with telecom operators like Colt Telecom. We realized that long term, the market was in service providers, but short term the enterprise business was a nice business.

Light Reading: So how do you balance your enterprise and service provider focuses?

Protiva: At one time we were 100 percent enterprise, and we’ve slowly grown into the service provider market. A number of enterprises build their own networks versus buying the managed service. But we still feel that 60 to 70 percent of the opportunity is in the service provider market.

Light Reading: But hasn’t that changed? Some people look at the disaster in the service provider space and say, "Why can’t we just do it ourselves?"

Protiva: No, I think there is still a slow migration toward the service providers. A lot of people do not want to have the expertise in house. If you talk to a lot of financial institutions in New York City, there are a number for them that are not only outsourcing their optical layer transport, they are outsourcing Layer 2 and Layer 3. It’s a philosophical issue within the company.

Light Reading: So you have seen the market go from a handful of optical companies to a gazillion.

Protiva: Of which many are bankrupt.

Light Reading: So who do you worry about?Protiva: We believe there will be four or five survivors. They will include Cisco, Nortel, Alcatel, and Ciena Corp. The people who will succeed will have a good footprint, like ADVA and Nortel. Alcatel has incumbency in Europe. And Cisco will do well because of its enterprise business.

Light Reading: What do you think of Ciena? They seem to be hurting right now, and they’ve made some mistakes with acquisitions. I guess you compete with them in metro DWDM?

Protiva: We’re probably twice their size in that market.

Light Reading: So what’s the story on the ONI acquisition.

Protiva: I think [ONI products] were designed for a market place that never evolved. That comes from designing very complex features. It’s over-engineered. You need to be more flexible and simple. You can roll out our products in an hour. Customers love that – they don’t have to call our engineers to get a product up and running.

Light Reading: How do you make a margin in this environment?Protiva: We have long-term customers that aren’t just buying the product at the cheapest price. The price in terms of capex is 10-15 percent. The rest of the cost is in opex. Also, we have volume, which allows us to get competitive pricing on components. We do our own manufacturing on fiber handling, which lowers manufacturing cost.

Another thing is that doing business in Silicon Valley gives you an average cost per person that’s in excess of $150,000. Being located in Europe, we’re a medium-sized company that manages our costs very well, and our costs are much lower than in the United States. You need to combine strength with cost management.

Light Reading: But there must be some weird things about doing business in Germany, though. For example, do you have any David Hasselhoff albums?

Protiva: Um... [blank stare]Light Reading: Is he still big over there?

Protiva:

Light Reading: I guess that's exactly the right answer to that question. So what sort of beer do you drink?

Protiva: I drink beer and I like both Spaten and Lowenbrau non-alcoholic.Light Reading: Non-alcoholic! Well, on that note, I think it’s time for a beer.