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Ciena's K2: What Problems?

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News Analysis
Light Reading

Ciena Corp. (Nasdaq: CIEN) scored quite a coup when it acquired Lightera at the beginning of the optical boom, giving it what turned out to be a market leader -- the CoreDirector grooming switch.

The opposite could be said of its $1.1 billion acquisition of Cyras in March 2001 (see Ciena Completes Cyras Purchase). Cyras’s add/drop mux -- now called the MetroDirector K2 -- came out of the same stable as Cisco Systems Inc.'s (Nasdaq: CSCO) Cerent box, the ONS 15454, and was supposed to be better (see Cyras: The Next Cerent? ). So far, however, it hasn't lived up to its early promise.

Industry sources have long said the K2 wasn't in working order when Ciena bought it and that the company has had to work long and hard to get it out the door. Others say it's still a dud. The latest rumor? Ciena may kill development of the K2 altogether. Separate speculation that Ciena may announce a layoff this week has only added grist to the K2 mill.

Ciena itself denies the rumors.

"That's definitely not true. We are not capping development on the K2," says Denny Bilter, senior director of marketing at Ciena. "We are committed to all of our product lines." As for the layoff rumor, he says that's speculation from Wall Street analysts.

Those analysts continue to bubble with K2 questions. During Ciena's last quarterly report, some asked whether the product's been able to gain any traction with the crucial U.S. RBOC market, part of Ciena's current focus on incumbents worldwide (see Ciena Follows the Incumbents).

The answer appears to be a resounding no. "We haven't seen any evidence of traction for the K2 in the RBOC market," says analyst Simon Leopold of Merrill Lynch & Co. Inc.

Since completion of the Cyras acquisition in March 2001, Ciena has publicly announced four wins for the K2. Michael Howard, principal analyst and cofounder of research firm Infonetics Research Inc., thinks Ciena's garnered "low tens of millions" in revenue for the K2 since it started shipping three quarters ago. (Ciena won't release specific shipment figures, so numbers can't be verified.)

The most recent and widely publicized K2 win was a deal with Sprint Corp. (NYSE: FON) announced this past June (see Ciena Fleshes Out Sprint Deal). At the time, Sprint sources said the carrier was using the K2 in five domestic locations linked to international data traffic.

But analysts say the Sprint win is lackluster because of the carrier's primary commitment to the ONS 15454 from Cisco. "Sprint's publicly committed itself to Cisco as its main supplier," says Michael Howard. "I don't think this was a big win for Ciena."

Ciena's only other announced K2 deployment stateside is at Oklahoma-based alternative transport provider AFN Communications LLC (see Ciena to Supply AFN). That carrier has based its network on Ciena gear and is using the K2, but at press time couldn't provide information as to the number of platforms installed.

In June 2001, Ciena announced a sale involving the K2 to a joint venture in China called CEC-IDN Telecom Limited or Beijing IDN (see Ciena Enters China). That was a primarily a distribution deal, though, as was clarified in February 2002, when Ciena struck a joint manufacturing and R&D agreement with CEC-IDN for the CoreDirector and K2 in China (see Ciena Looks to China).

Ciena's other announced K2 win is a deal with Tokyo's eAccess Ltd., announced in November 2001. That arrangement was described by Ciena as a deployment of "more than 100 units" for a Tokyo Sonet ring.

And there you have it -- four announced wins that don't include an RBOC, which some say isn't good news, despite claims of opportunities abroad. "Saying that the best opportunity for this product is international is a euphemism for saying it's not doing anything in North America," says Merrill Lynch's Leopold.

Analysts are divided over the source of the K2 problem. Ciena has fielded comments about the box's alleged technological drawbacks. "The K2 has never performed as it was advertised, the grooming ASICs haven't worked," writes one industry source, who asked not to be named, in an email last week.

Ciena says it's never heard complaints about the K2 ASICs.

Others say the timing of the product's release was problematic. "When you build a product early, you risk others becoming superior," says Frank Dzubeck, president of consultancy Communications Network Architects (no Website). The K2, developed early and delayed in its release, fits the bill.

But Dzubeck also says RBOCs aren't buying. "They're effectively starving an industry in order to gain regulatory relief," Dzubeck says.

Market conditions exacerbate the problem. Fujitsu Ltd. (KLS: FUJI.KL), Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT) have earmarked the metro space as crucial to their own survival. That's made it tougher than ever to get into any carrier's door, even ones who are buying. A product without significant differentiators is apt to be quickly passed over.

Many say they wouldn't be surprised if development on the K2 is stanched or redirected, regardless of the underlying reasons. "The K2's not stellar," says Mark Lutkowitz of Communications Industry Researchers Inc. (CIR). "It was always a 'me too' kind of product. Nothing differentiates it. Ciena needs to get its burn rate down and focus on products that will do the most for them."

It's time Ciena did some soul-searching, Lutkowitz says. "They can't afford to be in denial on this." Ciena's dominance in the long-haul space isn't guaranteed, he asserts, and the company could be better off putting its development dollars to work where it's got a solid market position, as it has with its CoreDirector core switch.

Ultimately, some have indicated that the K2 may get buried in integration with the products Ciena acquired in its merger with ONI Systems earlier this year (see Ciena to Merge, Shrink). Ciena acknowledges its commitment to that integration project.

At least one observer thinks Ciena will take the integration route out of K2 complications. "If they do close down the K2 development lab, I expect that they will announce it as a consolidation of facilities with ONI to avoid embarrassment," writes Doug Green, principal of the Bradam Group consultancy, in an email.

He says Ciena's struggling with an image problem on two counts when it comes to metro DWDM gear. First, the company's earmarked the K2 for revenue growth. Second, it would send out a "very bad message [to discontinue the K2], i.e. that they can't seem to find their way in the metro market, the only segment where anyone is spending at all," Green writes. A pre-Cyras acquisition, Omnia Communications, failed to pan out as planned, he notes; and when Ciena's own DWDM ring project was canceled, the company bought ONI Systems -- a move that is still being debated.

— Mary Jander, Senior Editor, Light Reading

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User Rank: Light Beer
12/4/2012 | 9:45:31 PM
re: Ciena's K2: What Problems?
there is a term called due diligence, look it up
its probably not in your engineering book.

Plus, every new product requires some tune-up, it helps if the tune-up is done by those who know what they are doing (i.e. the designers)
User Rank: Light Beer
12/4/2012 | 9:45:30 PM
re: Ciena's K2: What Problems?

Bunk !!!!!

SiO2 is right.

For here sits a K2 in a Carrier LAB ith a 3rd party VT X-connect attached. Guess what the 15454 did not make such a mistake

User Rank: Light Beer
12/4/2012 | 9:45:29 PM
re: Ciena's K2: What Problems?
lilgatsby writes:

> The late to market argument is poor.
> If you're not first or second, then
> you're late? Please...

this should go without saying. if you're
a startup and you arrive to market later
than cisco with a product that (powerpoint
notwithstanding) isn't at parity with cisco,
then the collection of letters scrolling
down your screen spell GAME OVER. that
ciena chose to insert another quarter to
continue play doesn't make the ending any

> And, as far as your ATT fable...well you
> can believe whatever you want, sport.

given that the sources are ATT and both
east and west coast internal to ciena, i'll
stand by the fable, thank you.


User Rank: Light Beer
12/4/2012 | 9:45:29 PM
re: Ciena's K2: What Problems?

"Of course, ONI brought its own problems
to Ciena as well"

Let us not forget the amount of cash in ONI's bank account when merging with Ciena. Cash is very important for Ciena to go thru this cold winter.
User Rank: Light Beer
12/4/2012 | 9:45:29 PM
re: Ciena's K2: What Problems?
I tend to agree on this. Also Ciena is not good at integrating acquired companies, Cyras and ONI are examples.

Of course, ONI brought its own problems
to Ciena as well: too many/redundant/overlapped management in the development teams. I would expect these problems to be rectified soon.
User Rank: Light Beer
12/4/2012 | 9:45:28 PM
re: Ciena's K2: What Problems?
He's living in multi-million dollar home, sipping exotic drinks on a side of his pool along with 3 other buddies thinking what's next for them.

The way they sold the company, sold out people working for them, took the money and ran style, who is going to fund or work for them again??? A bunch of jerks!!!
User Rank: Light Beer
12/4/2012 | 9:45:25 PM
re: Ciena's K2: What Problems?
How can you blame him. He is a great business man. I have worked with Alnoor on a number of projects and he is a great deal maker. Anyways.....back to the Cyras Acq. Cyras was intially in talks with Ciena to form a strategic partnership when Ciena tested the box in there labs and it did fantastic. Although Ciena did not have real expertise for the due dilgence process they based there report on the ASICs and lab tests. Once Ciena saw the technical capabilities of the K2....only then did they talk about an acq. So those of you who may think otherwise Ciena was calling the pitches the whole time. Cyras was just waiting for the right pitch and when they saw that fastball coming right down the middle they hit a home run. In my opinion it takes much more talent to negoitiate the sale of Cyras to Ciena than selling Cerent to Cisco.


User Rank: Light Beer
12/4/2012 | 9:45:25 PM
re: Ciena's K2: What Problems?
"sold out people working for them"?

I have to disagree, Alnoor and the other founders did the employees of Cyras a favor by giving them a chance to cash in on telecom bubble before it collapsed. Whether this was their decision or forced upon them because Steve Pearse "resigned to spend more time with his family" is not important.
User Rank: Light Beer
12/4/2012 | 9:45:21 PM
re: Ciena's K2: What Problems?
>I tend to agree on this. Also Ciena is not good at integrating acquired companies, Cyras and ONI are examples.

I am very puzzled how any conclusions about the ONI-Ciena merger can be drawn at this time -- at least by anyone who wishes to be thorough, accurate, and fair.
User Rank: Light Beer
12/4/2012 | 9:45:19 PM
re: Ciena's K2: What Problems?
Wow someone is awfully bitter.

How about Time Warner and Qwest.
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