& cplSiteName &

Zephion: Anatomy of a Debacle

Light Reading
News Analysis
Light Reading
6/4/2001
50%
50%

Zephion Networks (formerly Domino Networks), a six-month-old data services carrier that employed more than 350 people, had ambitions to function as a high-end Internet backbone. Last week Zephion closed down and layed off the bulk of its employees, Light Reading has learned.

Zephion had the backing of the influential Kleiner Perkins Caufield & Byers venture capitalists Vinod Khosla and Kevin Compton, who several months ago tried to figure out a way to salvage their firm's investment in BroadBand Office Inc. (BBO), a BLEC (building local exchange carrier), by spinning out parts of that company into Zephion (see Kleiner Readies BBO's Rebirth). Their efforts appear to have failed on both fronts. Broadband Office filed for Chapter 11 bankruptcy protection on May 9, according to people close to both companies. And Zephion now appears to be headed for bankruptcy court, though it had yet to file as of Friday.

Both companies met quick and sudden ends that blindsided many of their employees. Like their colleagues at BBO, Zephion employees were told last week during a company-wide meeting that they would be losing their jobs and they would not be getting any severance pay, sick pay, or vacation pay, as the company was experiencing "severe financial constraints." Adding insult to injury, Zephion didn't even pay its employees for the work they did on Thursday, May 31, their final day, according to several former employees at the company.

On one small single street in southern Frederick County, Md., Zephion's closure affected five families, including one where a husband and wife both worked for the company. "I'm sure I'll get another job soon," said one employee who asked not to be identified. "But if it takes too long I might go back to bartending for a while."

Several Zephion employees told Light Reading that around 11 a.m. on Thursday, May 31, Zephion's managers emailed a note requesting that all employees meet in the company's warehouse at 1 p.m. They say some employees kept working as normal while others began emailing their goodbyes and contact information to friends, "just in case this is it."

At the meeting, Zephion CEO Heidi Heiden, president Johnson Agogbua, and human resources manager Leslee Booth somberly relayed the news that the firm's largest investor -- presumably Kleiner Perkins -- had backed out and the company would have to close. The following morning, employees lined up outside the company's warehouse so they could collect their final paychecks at 9 a.m. They received a list of all the Bank of America branches within five miles of the company's headquarters and were instructed to cash their checks at the recommended branches.

Though Zephion hasn't yet filed for bankruptcy, the detailed paycheck cashing instructions are a telling sign. According to several sources close to the company, when BBO closed its doors last month and let some 400 employees go, it had filed for bankruptcy protection just prior to handing its employees their final check.

It's possible that BBO's bank froze the company's assets after the bankruptcy filing, which is why some of the employees never got paid for their final days of work, let alone any vacation, sick, or severance pay. "It's as if those who had their whole heart in either BBO or Zephion just got punished for their loyalty," one former BBO employee says (see BBO Says BBye to 69 Employees, BBO Files for Bankruptcy Protection, and BBO's Bankruptcy and Bounced Checks).

The managers directly responsible for both firms and the venture capitalists who supported them were unreachable during Light Reading's investigation.

Zephion's founder and president, Johnson Agogbua, didn't return phone calls to his office on Thursday or Friday. Backers of both Zephion and BBO -- including KP's Khosla and Compton and James M. Smith of Pilgrim Baxter & Associates -- were unavailable for comment. (Khosla is away on sabbatical and Compton, through an assistant, declined to talk on the record.) Dan Chu, BBO's founder and president, was reached by phone, but he declined to comment.

Of course, Zephion's workers aren't the only ones stung by its demise. The investors are likely to have lost most, if not all, of their money. And Zephion's network has more than 30 hubs across the continental U.S. Those sites are full of networking gear that the company may not have finished paying for.

The equipment used most in Zephion's network included
Juniper Networks Inc. (Nasdaq: JNPR) M10 and M20 routers and some voice-over-IP (VOIP) gear from Sonus Networks Inc. (Nasdaq: SONS). There were also some Cisco Systems Inc. (Nasdaq: CSCO) 7513 routers and Redback Networks Inc. (Nasdaq: RBAK) subscriber management service devices for DSL aggregation. Also, gear from Advanced Switching Communications Inc. (ASC) and Extreme Networks Inc. (Nasdaq: EXTR) was used to hook Zephion's network to BBO's network.

The company has several peering points, where it exchanges traffic with other carriers, including Qwest Communications International Corp. (NYSE: Q), UUNet, and Level 3 Communications Inc. (Nasdaq: LVLT), say those familiar with Zephion's network.

Former employees at BBO say BBO's network contained gear from Juniper, Redback, ASC, and CoSine Communications Inc. (Nasdaq: COSN). In May 2000, BBO and ASC announced that BBO would spend $15 million on ASC's equipment over the next two years.

Several company sources say that Kleiner Perkins heavily influenced the purchase of gear from Zaffire Inc., another Kleiner Perkins company, but that gear was never used to carry live traffic.

A recurring theme with former BBO engineers contacted for this article is that often the firm's equipment choices went against their technical recommendations and would give preference to Kleiner-funded companies. "They forced engineers to go against their instincts; then we were left to manage a network that we would not have built in the first place," grouses one former BBO engineer, who hasn't been paid for his final weeks of work.

After Zephion was formed, BBO's network trucked traffic from corporate office buildings to outside, where circuits were handed off to the Internet. BBO had a $250 million contract with Zephion so it could connect its building customers to Zephion's MPLS (multiprotocol label switching) backbone. BBO, which owned more than 50 percent of Zephion, never paid any of its bills, say those familiar with both companies.

Zephion's network was technically impressive, say observers. Its mission was to build a "private" Internet backbone, which wouldn't carry public Internet traffic. This arrangement allowed for more easily controlled, high-speed connections. Indeed, Zephion would have been able to charge top dollar for advanced IP services, such as VOIP, if it had ever achieved its goal of providing specific levels of quality of service (QOS).

It must have come close. One employee recounts a test done for some video conferencing customers where endpoints in Washington D.C. and San Francisco were connected. "The quality was even better than broadcast television," he says.

But ultimately, Zephion's lack of funds kept it from switching on paying customers. Even though the company had some 150 orders in its sales system, its network had only 10 paying customers. The bottleneck was financial, observers say. Zephion's circuit providers, such as Qwest and WorldCom Inc. (Nasdaq: WCOM), put credit holds on its network, preventing it from turning on new customers.

Zephion was started with $50 million in funding, according to records from Venture Economics (see Kleiner Perkins Builds Backbone Carrier ). It had come close to securing a crucial second round of around $100 million, observers say. It was so close, in fact, that employees were told during the firm's final days not to worry about the state of its finances.

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

(9)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
wimchatta
50%
50%
wimchatta,
User Rank: Light Beer
12/4/2012 | 8:19:13 PM
re: Zephion: Anatomy of a Debacle
It appears from Phil's article that Zephion was close to delivering on what it promised to its customers, especially with respect to QoS for videoconferencing. If so, that would have been a first for the industry.

Why would Qwest and Worldcom pull the credit plug when their IP services groups are fully aware of the uniqueness of what the ex-Zephion folks have demonstrated?

Unless there were serious technology issues, wouldn't Qwest or UUNet have been better off acquiring Zephion?

Is there something else such as price of services, or demand for QoS (though there seem to have been more customers waiting to sign up)that tripped such an acquisition or was it just because of a financial environment that does not discriminate between good and bad tech companies?

-wim
switch02
50%
50%
switch02,
User Rank: Light Beer
12/4/2012 | 8:19:13 PM
re: Zephion: Anatomy of a Debacle
if you were qwest or uunet, wouldnt you rather buy zephion's assets in bankruptcy, rather than pay a mark-up for some perceived enterprise value?
cfaller
50%
50%
cfaller,
User Rank: Light Beer
12/4/2012 | 8:19:11 PM
re: Zephion: Anatomy of a Debacle
Providers like Qwest or UUNet will only buy deadbeat companies when either the bills are so huge that the writeoff would show up on an earnings call, or the assets of the company are too good to walk away from (e.g. lots of paying customers, as was the case with WorldCom buying ICI).

Neither applied to Zephion. Credit holds are for small time players, and 150 or so customers aren't anything for UUNet or Qwest to get excited about. 150 customers divided by its 30 POPs equals 5 per city. Whoop de friggin doo!

There's almost nothing to scavenge there, because there was almost nothing there in the first place.
lo_mein_noodles
50%
50%
lo_mein_noodles,
User Rank: Light Beer
12/4/2012 | 8:19:10 PM
re: Zephion: Anatomy of a Debacle
Let's look at this for what it really is. A house of cards....the wind is ripping through our sector and the weak are dropping like flies. The KP pyramid is only as strong as it's weakest link. You crumble a few of the supports and BOOM..they all come crumbling down. KP was in the right place at the right time...and now it seems like the right place to be is on sabaticle....zaffire has got to be next. Whoever was thinking about buying zaff can now just wait and pick up the pieces at the fire sale...penny on the dollar. ( With BBO, Zephion and Fiber whatever all gone...does that leave anyone who bought Zaffire gear alive??) I wish all the out of work employees well..the same could happen to me overnight. Good luck.
flanker
50%
50%
flanker,
User Rank: Light Beer
12/4/2012 | 8:19:10 PM
re: Zephion: Anatomy of a Debacle
There seems to be a fundamental misunderstanding of the value proposition. Anyone [repeat: anyone] with a dedicated circuit can attempt to offer "broadcast quality" video.

There are dozens of backbone carriers, most notably Global Crossing, offering high quality video conferencing.

The issue is that

1) purchasing enough bandwidth to offer broadcast quality video is expensive, because it includes not only a backbone but also high speed local loop, which is MOST CERTAINLY not owned by these two companies.

2) Troubleshooting/setup/maintenance are incredibly labor intensive and expensive.

Just because these two fine firms had a kickass video conferencing set up does not mean they had a cost effective business model. In fact, precisely because their network was over-engineered, it was too expensive to sustain.

I import no disrespect to the excellent engineers at these firms, I only refer to the cost-effectiveness of the solution.





bear
50%
50%
bear,
User Rank: Light Beer
12/4/2012 | 8:18:58 PM
re: Zephion: Anatomy of a Debacle
Think of the comedy of errors Kleiner committed in the lives of BBO and Zephion. First, who would ever place a 20-something associate with zero operational or telecom experience in charge of a $500M (money raised) operationally intensive business? And then keep him in that role? My God! Zephion must have been Vinod Khosla's last-ditch effort to save face for the BBO debacle. He was crowing about Zephion's team and network but he hadn't a clue how to run a service provider.

Oh, mighty Kleiner. It must be high noon KPCB corral. Vinod Khosla has made so many poor personnel and business judgments in the past year you would have to think his peers are finally reveling in his demise.
flanker
50%
50%
flanker,
User Rank: Light Beer
12/4/2012 | 8:18:55 PM
re: Zephion: Anatomy of a Debacle
Which brings us back to the eternal question as to whether the bigger used-car salesmen-fakirs-charlatans were the operators or the VCs themselves.

Ahem.
Half-Inch Stud
50%
50%
Half-Inch Stud,
User Rank: Light Beer
12/4/2012 | 8:18:42 PM
re: Zephion: Anatomy of a Debacle
You got it flanker.

I think it is called "10% Beneficialy Director" I've seen how VCs have funded "companies" with their insertion of such advisory Officers...to get the liquidity out. Somehow, I believe the SEC can/will catch-up to the ones that are public.
flanker
50%
50%
flanker,
User Rank: Light Beer
12/4/2012 | 8:18:37 PM
re: Zephion: Anatomy of a Debacle
Five years ago VCs were saying the Wall Street investment bankers were idiots (ok, maybe that's half true) because they didn't know how to run a company.

It looks like the VCs - the ones without Wall St. experience (er, the ones with OPERATING - "har-har"- experience) - are the idiots now. These were the same people touting new paradigms , a new economy and the end to - duh - the business cycle.

Either that or the silicon valley VCs knowingly peddled shit to the Wall street investment community during the market run up in 1998 and 1999.

The problem here is now the optical industry is tarred with the same rep as "dotbombs" thanks to west coast VCs with no knowledge of the TDM world where QOS still exists.

Who are the geniuses now? GTE, Genuity, Verizon, SBC...



Light Reading’s Upskill U is a FREE, interactive, online educational resource that delivers must-have education on themes that relate to the overall business transformation taking place in the communications industry.
NEXT COURSE
Wednesday, July 27, 1:00PM EDT
The Changing Face of the Data Center World
Rodney M. Elder, Senior Solutions Architect, Equinix
UPCOMING COURSE SCHEDULE
Wednesday, August 3, 1:00PM EDT
The Central Office Re-Architected as a Data Center
Guru Parulkar, Executive Director, Open Networking Research Center, Open Networking Lab
Wednesday, August 10, 1:00PM EDT
Telcos & Open Source 101
Phil Robb, Senior Technical Director, OpenDaylight
Friday, August 12, 1:00PM EDT
The Role of Open Source in NFV
Jim Fagan, Director, Cloud Practice, Telstra
in association with:
From The Founder
The more things change, the more they stay the same for Juniper's next-gen comms solutions, and that's a good thing.
Flash Poll
Live Streaming Video
Charting the CSP's Future
Six different communications service providers join to debate their visions of the future CSP, following a landmark presentation from AT&T on its massive virtualization efforts and a look back on where the telecom industry has been and where it's going from two industry veterans.
LRTV Custom TV
NetScout: Maximizing Enterprise Cloud for Digital Transformation

7|20|16   |   04:53   |   (0) comments


Light Reading Editor Mitch Wagner talks to NetScout CMO Jim McNiel about maximizing the benefits of enterprise cloud and digital transformation while minimizing potential pitfalls with a proper monitoring and instrumentation strategy.
Women in Comms Introduction Videos
Ciena's VP Offers a Career Crash Course

7|20|16   |   4:14   |   (0) comments


How did Ciena's Vice President of Sales, Angela Finn, carve out her career path? Simple, she tells WiC. She stayed true to her company, customers and principles. She shares her advice for women on how to be authentic and credible, as well as for companies that want to make a real change to their culture and practices.
LRTV Custom TV
NFV in 2016: Part 2 – Climbing the Virtualization Maturity Curve

7|19|16   |   06:56   |   (0) comments


Many of the initial use case implementations are single-vendor and self-contained. The industry is still climbing the virtualization maturity curve, needing further clarity and stability in the NFV infrastructure (NFVi) and greater availability and choice of virtualized network functions (VNFs). Interoperability between NFVis and VNFs from different vendors ...
Telecom Innovators Video Showcase
Versa Networks' Kumar Mehta on SD-WAN Managed Services

7|19|16   |     |   (0) comments


In Silicon Valley, Steve Saunders sits down with Versa's Kumar Mehta for an interview focused on why service providers are building SD-WAN managed services, and how Versa's telco customers are innovating.
LRTV Custom TV
Juniper Networks & The Evolution of NFV

7|19|16   |   06:01   |   (0) comments


Senior Juniper Networks executives talk to Light Reading Founder & CEO Steve Saunders about NFV developments and the recent independent evaluation by test lab EANTC of Juniper's Cloud CPE solution.
LRTV Interviews
CenturyLink Goes Beyond Managed WiFi

7|19|16   |     |   (0) comments


CenturyLink's managed WiFi allows enterprises, such as retailers and resorts, to track guest WiFi usage in order to help them better communicate with customers.
LRTV Interviews
AT&T Launches Network Functions on Demand

7|17|16   |   05:26   |   (0) comments


Roman Pacewicz, Senior Vice President, Offer Management & Service Integration, AT&T Business Solutions, discusses the operator's launch of its Network Functions on Demand service.
LRTV Interviews
Enterprise Pitch for Ciscosson

7|14|16   |   04:43   |   (0) comments


After seven months of near silence, Cisco and Ericsson executives publicly discussed details on their extensive partnership. Among the tidbits shared by Martin Zander, VP, group strategy programs, Ericsson, and Doug Webster, VP service provider marketing, Cisco: The partnership was initially launched to serve the service provider market, but is already gaining ...
Wagner’s Ring
Cisco Faces Up to Hypercloud Threat

7|13|16   |   02:42   |   (0) comments


Facebook, Amazon and Google mostly don't buy branded technology for their networks – they build their own. That's a threat to Cisco – and its competitors too – which face potentially dwindling demand for their product. Is Cisco up to the challenge? Light Reading went to the annual Cisco Live conference to find out.
LRTV Huawei Video Resource Center
Building a Better Connected Russia

7|13|16   |     |   (0) comments


At UBBS World Tour 2016, Alla Shabelnikova of Ovum shares the findings of a white paper outlining the challenges and opportunities of broadband rollout in Russia.
LRTV Huawei Video Resource Center
The Global Video Business

7|13|16   |     |   (0) comments


At UBBS World Tour 2016, Roger Feng of Huawei shares insights on the future of video business.
LRTV Huawei Video Resource Center
UBBS World Tour Moscow Highlights

7|13|16   |     |   (0) comments


At UBBS World Tour 2016 at Moscow, Huawei showcases its outstanding progress in video technology.
Upcoming Live Events
September 13-14, 2016, The Curtis Hotel, Denver, CO
September 27, 2016, Philadelphia, PA
November 3, 2016, The Montcalm Marble Arch, London
November 30, 2016, The Westin Times Square, New York City
December 6-8, 2016,
May 16-17, 2017, Austin Convention Center, Austin, TX
All Upcoming Live Events
Infographics
Five of the Top 10 most targeted countries in Check Point Software Technologies' global Malware & Threat Index for Q1 2016 are in Africa.
Hot Topics
SoftBank Muscles In on ARM in $32B Deal
Iain Morris, News Editor, 7/18/2016
Ericsson 'Doubles' Savings Goal as Sales Slump
Iain Morris, News Editor, 7/19/2016
Kevin Lo's Move to Facebook: Sign of Things to Come?
Patrick Donegan, Chief Analyst, Heavy Reading, 7/20/2016
Is Dish Going Down the Drain?
Alan Breznick, Cable/Video Practice Leader, Light Reading, 7/21/2016
Facebook Gets Its Drone On
Ray Le Maistre, Editor-in-chief, 7/22/2016
Like Us on Facebook
Twitter Feed
BETWEEN THE CEOs - Executive Interviews
There's no question that, come 2020, 5G technology will turn the world's conception of what mobile networking is on its head. Within the world of 5G development, Dr. ...
I've enjoyed interviewing many interesting people since I rejoined Light Reading, but William A. "Bill" Owens certainly takes the biscuit, as we say where I come from.
Live Digital Audio

Our world has evolved through innovation from the Industrial Revolution of the 1740s to the information age, and it is now entering the Fourth Industrial Revolution, driven by technology. Technology is driving a paradigm shift in the way digital solutions deliver a connected world, changing the way we live, communicate and provide solutions. It can have a powerful impact on how we tackle some of the world’s most pressing problems. In this radio show, Caroline Dowling, President of Communications Infrastructure & Enterprise Computing at Flex, will join Women in Comms Director Sarah Thomas to discuss the impact technology has on society and how it can be a game-changer across the globe; improving lives and creating a smarter world. Dowling, a Cork, Ireland, native and graduate of Harvard Business School's Advanced Management Program, will also discuss her experience managing an international team focused on innovation in an age of high-speed change.