Speaking to the media for the first time, executives at Nokia Siemens's soon-to-be-former optical business say they've got a shot at taking the No. 2 spot in the market

Craig Matsumoto, Editor-in-Chief, Light Reading

March 19, 2013

9 Min Read
Coriant Counts on NSN's Optical Strengths

ANAHEIM, Calif. -- OFC/NFOEC -- Coriant, the private company being built around the Nokia Siemens Networks (NSN) optical business, doesn't technically exist yet. NSN's deal to sell that business to Marlin Equity Partners has to close first, and that's due to happen by July. In the meantime, though, Coriant is using OFC/NFOEC to introduce itself to analysts and the media.The company set up shop, so to speak, in a boardroom on the fourth floor of the Anaheim Hilton on Monday. Light Reading snagged the first interview appointment and, with it, the first Coriant business card ever handed out by Herbert Merz, the NSN executive who's designated as Coriant's president and CEO.
Merz signed his historical business card, on the condition we wouldn't sell it on eBayCoriant isn't starting from scratch. It has a portfolio including WDM gear, OTN switching and software, plus more software that Marlin acquired from Sycamore Networks. And it's got some noteworthy customers, such as AT&T Inc.and, as highlighted in a Monday announcement regarding 100Gbit/s transport, TeliaSonera International Carrier (TIC).Coriant will enter a market that hasn't been so kind in terms of margins and profitability. So now what? We only had half an hour, but we got an idea of why Coriant thinks it can become the No. 2 optical vendor and, of course, a player in software-defined networking (SDN). (One note: The executives talk about Coriant's plans in the present tense, but there's a tacit "after the deal closes" in each of those statements.)
Coriant's lead team -- or, they will be, once Coriant gets going. From left: Uwe Fischer, Patrick DiPietro and Herbert Merz— Craig Matsumoto, Managing Editor, Light ReadingOptical? Really?Light Reading: Why would the business do better as Coriant than as Nokia Siemens?Herbert Merz, designated CEO: The sales engagement is different if you're making a big radio deal versus an optical deal. It's more meaningful if you get the transport, because the customer cannot easily change suppliers. If you're in the optical network, it's for the next 10 years. In a radio network, you can swap after two years. Nobody cares. Take the one, take the other. Then, if you look into the market, you see the whole competitive situation is broken. I mean, you see Ciena Corp. negative [i.e. losing money], ALU [Alcatel-Lucent] negative, Infinera Corp. negative, Tellabs Inc. negative. Most of the players, significantly negative. By the way, we are not negative. We are positive from Day 1: no debts on the balance sheet, big money to invest. We have, already a significantly different position. Light Reading: What's the goal going to be with Coriant?Merz: We are starting with the target of building a No. 2 or No. 3 pure-play vendor. Ciena is a big company. I think they will be around for some time. But the others will have significant issues. If you see who has a future-proof portfolio, which means 100Gbit/s coherent: Ciena has one. ALU has one. We have one. [Huawei Technologies Co. Ltd. too, as he'll mention later.]Whoever doesn't have a 100G will have an issue over the next years and needs to do something. Buying from Acacia Communications Inc. or somebody doesn't help, because they would mean margin stacking. You're not getting the profitability if you're giving 30 percent gross margin to these guys. We have a good technology in combination with financial strength. To become the No. 2 or No. 3 player organically would take five years. If we have the possibility to do some M&A around that, it's maybe only two years or three years. Light Reading: You don't see a need to acquire anything else?Merz: It's part of the strategic vision, but it's not needed in order to do it. Light Reading: How did the deal with Marlin come about?Merz: I went to my CEO a year ago, maybe now it was 15 months ago, and said, "Chief, if you want to do this successfully, I need to be able to invest. Are you giving me at least €50 million, maybe €250 million to invest?" He didn't say "Herbert, are you crazy?" but we came to the conclusion that the best way was looking around for somebody who could share the strategic vision of building a big player here and has the financial capability to do so. Long story short, Marlin is here. Patrick DiPietro, the Marlin partner who spearheaded the purchase from Nokia Siemens: I actually had an optical engineering background, because I did the OC48 and OC192 systems when I was at Nortel, then spent a decade doing startups. I have a good handle on how to form the company into a more startup-focused kind of company, a little more edgy. Pretty much every operator around the world will have to make the decision [about 100Gbit/s deployments] in the next couple of years. That's where I think we're moving into the wave. What we need -- in ASIC language -- we would have to have design wins. Those design wins will lock you in for five years, maybe a decade. For example, the design win for the entire AT&T network at 40Gbit/s, a sole-source design win that these guys [Coriant] have, has locked them in.Light Reading: Even so, Patrick, when you told your firm, "Hey, let's invest in optical," what kind of response did you get? Optical doesn't exactly have a lucrative reputation.DiPietro: It does not, but one of the purposes of private equity is to renovate. Look at market valuations of public companies. They do not represent the value of those companies. For crying out loud, every single bit that is generated by a smartphone ends up on the pipes. They're absolutely essential. As Herbert said, you can switch out a BTS or an RNC quite easily. You cannot do that with this stuff.We do believe in the thesis that the market's over-serviced and nobody's making any money. That has to change, because operators need strong vendors, and we're at the point where that rationalization should be taking place. So, in effect, we've thrown the pebble in the pond. This [Coriant] isn't a bad thing to start with. It's a company doing, well, a "substantial" revenue. It is very large already, over 200 customers, hundreds of thousands of nodes deployed. Light Reading: It does seem like a good foundation. I think a lot of people were hoping that two of the large players would somehow get merged, effectively eliminating one. DiPietro: But you'd have so much product duplication.Light Reading: That's why it hasn't happened ... DiPietro: Look at what Alcatel-Lucent did. I can give you a little anecdote. When I was at Nortel, I was responsible for the core network of 3G. Then I left to become a VC. Several years later, Nortel, in their infinite wisdom, sold that to Alcatel-Lucent.Then, Alcatel-Lucent had three core networks: the original Alcatel RNC -- I'll talk about them as if it's the RNC, but it's the whole core network -- the Lucent RNC and the one they bought from Nortel. They spent three years doing internal bake-offs. Light Reading: Internal bake-offs. Just internal?DiPietro: Internal. Not talking to customers. And then the rationalized it and they picked my RNC. Then they took three other years to actually change out all their RNCs in the planet to be that RNC. that was done in 2000. by the time they replaced all the RNCs, four Moore's Laws had elapsed. I mean -- you cannot have that happen, right?Merz: And you can now see the industry situation, that is to a certain extent different. These guys who don't have 100Gbit/s today -- as soon as the market fully changes to 100Gbit/s, these guys are dead. Which means there are four left. Huawei is one, but Huawei is blocked in the U.S., which leaves, then, three, which is us, Ciena and ALU. ALU are running minus 20 percent year-over-year growth and is losing 200 million to 300 million euro -- what do you think will happen? They will need to do something, sell whatever. If we take those guys out, it's Ciena and us: only two, which, from my point of view, will be sustainable. Ciena this year is only $100 million negative, and the stock is going up because [investors are] so happy they've reduced their losses. What do you think would happen if it would bring our company to the stock market, earning money, compared to Ciena? Ciena has a 0.9 [price-to-sales] valuation now and is significantly losing money. We would be profitable with a footprint maybe a bit smaller. Light Reading: Some people are hoping 100G will generate a new wave of merchant parts -- the Acacias of the world.Merz: I don't think so, because with the Acacias, you need to have a carrier-grade system. Acacia doesn't have it, so they're going everywhere and selling it -- that is fine, but still, you need to pay these guys 30 percent gross margin. In the beginning, it was higher, 40 or 50, but maybe it goes down to 30. If you are giving 30 percent gross margin away in the current situation, you cannot survive the business. The reason we have our own kind of technology ... we have even specified on ASICs , we are not going into all the silicon but we have a significant value under our control, as does Ciena, as does ALU. Light Reading: Now, we're obligated by law to talk about software-defined networking...DiPietro: They have a different word for it inside the company.Light Reading: [to Merz]: What do you call it inside the company?Merz: Intelligent Optical Control.Light Reading: What's the story with that?Uwe Fischer, designated senior VP of product management: We plan to release that full framework a bit later this year.The basic idea of IOC was to couple the management and the planning domain in a real-time fashion together, so that both of these domains could exchange intelligence. The first idea was around also building systems that could automate complete operations procedures. What this framework provides you is going beyond SDN, because it's not only looking into the service provisioning piece but into the operational piece. And with the online exchange of intelligence, you can also do other things. I'll give you one example. Currently, people only think about how to deploy SDN in the wide-area networks -- what the routing principles could be. People talk about OSNR-based routing and so forth. With our system, for instance, we have not only the engineering heritage, but also, it's an artwork to have a planning system which can utilize the full performance of switches in the system. That intelligence can then be online for the management plane and, ultimately, for the routing engines.So, we're talking about much more sophisticated routing mechanisms in the SDN framework. For more

  • Coriant's OFC Outing

  • Sycamore + NSN Optical = Coriant

  • How to Save Nokia Siemens's Optical Business

Keep up with all our OFC/NFOEC coverage at http://www.lightreading.com/ofc-nfoec.

About the Author(s)

Craig Matsumoto

Editor-in-Chief, Light Reading

Yes, THAT Craig Matsumoto – who used to be at Light Reading from 2002 until 2013 and then went away and did other stuff and now HE'S BACK! As Editor-in-Chief. Go Craig!!

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