Ciena's K2: What Problems?

Light Reading
News Analysis
Light Reading
9/17/2002



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
www.lightreading.com

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