LRTV: So Krish, could you tell me where you think some of the next big trends are in telecom?

Krish Prabhu: Yes, the next big things from our perspective – generally three opportunities that we see as telecom looks to move to the next phase of its evolution. Clearly, extending fiber to as many premises as possible is a big trend, and the economics are such today that I think they can make a sound business decision to do so. Converging all their enterprise networks on a service platform that’s centered around the Internet makes a lot of sense. And the third area is really to augment the fiber network with some sort of a broadband wireless network that gives them seamless continuity as their customers move around – a third big trend we see on the horizon.

LRTV: OK. You mentioned both wireline and wireless, and there’s a trend for the customers to converge these networks. Tell us about the impact of the convergence of fixed and mobile networks.

Krish Prabhu: Yes, the convergence of fixed and mobile networks is a tricky problem for our customers – largely because many of them are organized as separate entities for a variety of reasons, the mobile entity being separate even though there may be an ownership link with the fixed network or the company that owns the fixed network. From a customer perspective, what is absolutely important – especially the new customers, the echo boomers, so to speak – is that they don’t know the difference between a fixed network and a mobile network. What they look for and what they seek is complete seamless operation between the two.

So the operators have to figure out a way to: a) first offer that service which talks for full convergence between fixed and mobile; b) be in a position to bill accordingly so that it is a service that it costs them some money when they implement it; and c) see what kind of new applications they can tie around presence around mobility – things of that sort so that they can continue to drive their own revenue from their users.

My own sense is that it will take us a while to get there because there are not too many standards around it, but I think also those that have a leg in with the fixed network as well as the mobile network will be best positioned to be able to implement this.

LRTV: You’ve mentioned “echo boomers.” Could you explain what an echo boomer is and why it’s important to the telecom world?

Krish Prabhu: The echo boomer is the child of a baby boomer, and our assessment is that there are eighty million echo boomers; and the difference between an echo boomer and a baby boomer was that the baby boomer grew up with just a telephone line in their home. The echo boomer is growing up with music, ipods, with cell phones, with round-the-clock instant messaging, with all kinds of things that call for a whole new set of services that they’ll be looking for, especially as their buying power gets stronger.

LRTV: So the echo boomers become accustomed to being constantly connected, if you like.

Krish Prabhu: Constantly connected, demanding more, a lot of personalization, a lot of freedom, not happy with “one-color-suits-all” kind of terminals. I think the echo boomers are truly going to commoditize our industry and that they will – once they get the buying power – drive the shape of the evolution of the industry.

LRTV: Interesting. So WiMax is a big deal?

Krish Prabhu: WiMax is actually a pretty big deal. The reason for that is, in our vision, fiber penetrates as far as it can in the network, and over the next 10, 15 years virtually every home, every big building, every fixed location where people converge, live, work will be connected by fiber. But then people get attached, or fixed, to the place where they live or where they work, and they will come to expect mobility, and I think that mobility as they move around, especially if you’re looking for considerable bandwidth – the sweet spot for that is Wimax.

LRTV: Do you think WiMax will supplant wireless LAN technologies or other access technologies?

Krish Prabhu: I think WiMax will probably complement 3G cellular in some fashion, the distinction being Wimax will have limited mobility but will in return offer more bandwidth, and 3G cellular would have unlimited mobility but would have bandwidth restrictions. I view wireless LAN, or WLAN, and WiMax as a continuum, and I think once they solve the throughput issues, once they solve the availability issues of those kind of wireless technologies as well as security concerns, I think we will see it settle around the technology .that is superior: In my mind it’s probably WiMax.

LRTV: So, let’s talk a little bit about Tellabs and specifically your career there. You were most recently a venture capitalist and then you came back into the executive fold – tell us how that evolved.

Krish Prabhu: Yes, I was a VC for three years at absolutely the wrong time in the industry, because no VC ever made any money during those three years, and while it was a good experience for me – I learned a lot about discipline when you invest and I learned a lot about objectively looking at the progress you’re making against your goals – the main reason why I came back to work at Tellabs is I felt that there was a game going on and I was on the sidelines.

The networks are going through a major revolution, even though the industry was recovering from a terrible time – for the reasons I mentioned about echo boomers – and the demands that are placed by the consumers on a network today, the opportunity to participate in the evolution of that network, was something that I missed when I was outside the industry.

Coming back, I’ve been very excited – Tellabs is a great team. We are about 4,000 employees in the company, so we are about the right size; we are well capitalized with no debt; the balance sheet is very strong; and we have customers who view us as a key partner. So all in all, I felt there was a great platform for me to come back and participate in the game that’s going on.

LRTV: You mentioned it was tough to make money in the VC business. Were there any companies you had that you would consider a success during your venture capital years?

Krish Prabhu: It generally takes eight to 10 years for a VC to start from the time they invested and to play out… For liquidity scenarios now and during the bubble years that was shrunk considerably to eight to 10 months, but that was an aberration. The three years that I was there we were involved more in a triage process. We were involved in shepherding some companies to some liquidity, and we were involved in very selective investing, and I think we did a little bit of each. There were a couple of companies that we invested in that I would say, considering the hardships that some of these startups go through now in this tough market, they’re doing quite well.

LRTV: Will Tellabs buy any of these companies?

Krish Prabhu: No. We have a very disciplined approach to buying. You know, it’s more part of a make/buy equation that we assess… Our sense right now is if it does give us the opportunity to transform a business either because the company has technology that is transformational or the company has a market position that’s transformational, then we will assess it – but it’s not because I had any role with those companies. That’s the last reason why we should be looking at these companies.

LRTV: So, the AFC acquisition has been a kind of a big deal for Tellabs. At this point would you consider it a success?

Krish Prabhu: Cautiously and guardedly, I think we’re on the right path. You know, the true fruits of an acquisition – from having done a few of those in my prior job – play out in 24 to 36 months, and again I view an acquisition as something that has transformed the company. You can always digest small things like some of the big guys do. They buy a small company – to me that’s not the real issue. AFC, if you recall, was at least a third of our size. It was a big bite that we were chewing on, but early indications are very positive. We have got some customer validations – that the customers believe we are on the right track – and we do believe that 12 to 18 months on, virtually every one of our objectives would have been met.

LRTV: When you came on board, you kind of stepped into the whole thing just as it was happening, correct?

Krish Prabhu: There had been dialogues between the two camps, but when I came on board those were in the very early stages, so there wasn’t even a timesheet in hand – so I would say that I was involved fairly early on.

LRTV: And you were a major advocate of this acquisition?

Krish Prabhu: I was a supporter, for sure. I wouldn’t call it major, because the strategy that Tellabs had in place when I came in – one of the legs of the strategy was to expand in an adjacent space that was synergistic with what Tellabs did, that would move Tellabs up as a strategic supplier to some of its key customers, and AFC clearly was that opportunity for us. But I was indeed very supportive of it and still am.

LRTV: You talked a bit about transformation. Do you have any big goals and changes you would like to bring about in the culture of Tellabs since you’ve arrived?

Krish Prabhu: Tellabs is a very well grounded company. It has a great franchise …with key customers, and it has key capabilities that have been honed over 10, 15 years working with many of the large U.S operators, for example. The challenge that I face, as we look at where does Tellabs need to go, is to maintain a certain degree of competitiveness – and this competitiveness, in my opinion, is attacked on three fronts, and so is assessed on three fronts.

Firstly, you have a highly entrepreneurial environment in our industry, where startups continue to push the envelope in terms of technology, so assessing your technological competitiveness with respect to what you see outside is very important. Secondly, we have manufacturers, especially Asian manufacturers, who have really pushed the envelope in terms of pricing and margins – and maintaining a margin competitiveness vis à vis the Asian manufacturers is very important.

And the third front where competitiveness is coming out is really along the dimensions of the industry transforming itself to large system integrators, putting together big deals by which they sweep in like they’ve done in the computer industry, for example – sweep in a whole lot of technology in mega offerings – and there we have to learn to work with, not just our paying customers, but also system integrators.

LRTV: OK. You mentioned the pricing pressure – which seems to be, as you know, a permanent worry in this industry – and competing with China. How do you compete with China and improve your profitability at the same time?

Krish Prabhu: Well we’ve got to focus on what we think we do very well, and it has to do with understanding our customers’ needs, understanding the solutions from a software standpoint. We have to learn to partner with the Chinese, especially if they can be a supplier in a supply chain and get us hardware components that are priced competitively. Ah our strategy going forward is to understand where we are good and where we can have a sustainable advantage over a low-cost manufacturer – and where we need to partner with them either in an ODM or an OEM relationship, we will be very open to that.

LRTV: You recently announced what was I think probably one of your bigger deals – the BellSouth contract that was anticipated for quite a while. Tell us of the process of winning BellSouth and what it means to Tellabs right now.

Krish Prabhu: BellSouth has had an initiative for over five years, so it had been pushing fiber deeper in the neighbourhoods, especially up to the curb, and then using the copper drop from the curb to the home, and they had a deployed platform which originated with Marconi and then AFC acquired it. When we acquired AFC we had several discussions with BellSouth in trying to understand where they wanted to take that platform, what they wanted to do with it, especially – as I mentioned – what started out as a fiber platform for delivering voice needed to evolve to deliver a full sweep of services, the triple-play services, including IPTV, and so a lot of what these questions were to convince the customer that we have the solutions that they were looking for both in space and in time, because there was also a time issue – and then working with them to convince them that this was really the best platform for them. I think it got down to the customer having increased confidence in our ability to be able to deliver that. So we’re very happy that the conclusion of those discussions was an agreement with the customer at least for some years to continue to provide their technology and upgrade their technology.

LRTV: Now, a lot of these contracts in the end have come down to the pricing issue. Did you have to lower the cost below your initial expectations to lay on the final deal?

Krish Prabhu: I would say that every deal today, not just this BellSouth deal, every deal today comes down to some sort of a customer’s expectation on reduced price. Not on day one, but increasingly a price reduction that extends for several years beyond day one, and the supplier’s ability to be able to make a business case out of it. And the BellSouth situation was no different. But what we have done especially at Tellabs, is we work internationally – we have had the discipline to try and do business where we think it meets our business model.

LRTV: Let’s talk some more about FTTP. It seems to be one of your primary initiatives, and you said that you want to invest more in FTTP. Recently there was a plant closing – you closed Miramar in Florida. We’ve actually had some email to ask: If you’re investing in FTTP why are you closing the plants at the same time?

Krish Prabhu: Yes, that’s a very good question. The Miramar plant was started by AFC as an alternate design center, because they couldn’t get enough engineers in Petaluma, especially when they had a great demand for engineers. What we have done since we acquired AFC was brought on board a lot of engineers, both in Dallas and in the Chicago area – as well as we acquired a company called Vinci, which had a lot of talent for the kind of products that Miramar did. Miramar had both the optical networking terminals as well as the optical line terminals, and the ONT family now is completely consolidated under Vinci. We have offered the people in Miramar the ability to move to one of our other sites. The primary reason for closing Miramar was because we wanted to consolidate around three design centers. A fourth design center would be a little too difficult to manage.

LRTV: So the Vinci product has kind of replaced that technology?

Krish Prabhu: The Vinci product has replaced one part of Miramar.

LRTV: And where is Vinci located?

Krish Prabhu: It’s in Ashburn, Va. It’s close to Verizon’s technical group.

LRTV: So what’s the next step then in FTTP technology? Is it gigabit PON? Is it even more bandwidth? Where is do you see FTTP going?

Krish Prabhu: I think it’s all of the above and more. I mean, eventually the goal is not fiber sent to the premises – the goal is getting a customer to the Internet on fiber. I mean, you flip that around and say every person at all times would feel like he’s connected directly to the Internet with a fat pipe so he doesn’t have to worry about bandwidth. That’s a little bit of the theme from our talk tomorrow. If you set that as your vision, you can see it’s not just gigabit PON, but it’s eventually getting virtually several-gigabit capacity to each home or each terminating point.

So I think the PONs will continue to evolve. I think it will be a stepwise evolution, not unlike what we saw in the digital world, and I think what you’ll see is the BPONs evolving to GPONs, evolving to lambda PONs – and eventually, if the outside plant is all passive and the lambda layer is a thin passive layer, you will see the dream of getting several gigabits to each home become a reality fairly soon.

So we continue to explore not just device technology that would facilitate this but also electronics technology that’ll give us the price points to continue to evolve along that path.

LRTV: Tellabs is considered sort of a mid-tier company. You’re not one of the giant distributors like Lucent or Siemens, and you’re not a startup either. Can you survive as an independent company in this kind of middle-tier or are you going to have to combine with a larger player?

Krish Prabhu: It’s a very good question. Our vision is that, not only will we survive, but we will continue to be very good at what we do. When industries consolidate and a supply chain emerges, there is a spectrum of players. Some of them are very small – they play niches. And some of them are very big and – you can see this in the computer industry – they do broad service offerings.

We are very focused, even though we’re a mid-tier player. We are very focused in what we do, both in terms of markets as well as technologies, and our plan clearly is as long as we bring the value proposition that’s superior to anyone else in the supply chain, we will have a role to play and we can thrive. We may have to tweak who we deal with. We may have to deal with system integrators. We may have to deal with smaller technology companies to integrate their technology in applied forms, and we may have to deal with the end customers directly, but we’re very open to insuring that we’ll continue to evolve as the industry evolves.

LRTV: Tell us about your customers’ move into IPTV and video and what it means for the future.

Krish Prabhu: Yeah. Well, I think our customers, especially the ones on the phone side, telecoms side, are looking at video not just as an additional element of their service offering but are also looking at videos and new experience – because I think for them to really grow their video business they are to provide a new customer experience which distinguishes itself from what customers get today on cable or satellite.

As part of that IPTV middleware that goes with it, the capability to do broad-based search on sophisticated search engines, accessing your content wherever you want in a multicast or a narrowcast or even a simulcast fashion – they have many elements of moving to the Internet as a video delivery platform, and IPTV is just the first attempt. It is very consistent with our vision, which is everybody, we believe, not only should have a connection to the Internet but should have a fiber connection to the Internet. And when you play it in that role, IPTV in our opinion is just the first step. I do believe that once content moves to the Internet in a big way and they work out some thorny issues about piracy and who gets to watch and what they pay, I really believe that IPTV will identify an evolution path which will certainly drive a superior consumer experience.

LRTV: OK Krish, so you’re talking about IPTV – a lot of people see Microsoft moving in the same direction. They might get the consumer more engaged and help the market along. What do you see as Microsoft’s role in the telecom world going forward?

Krish Prabhu: I think Microsoft can play a very big role. The question really is in my mind: What business model does Microsoft want to subscribe to? If you look at Microsoft’s attempts in cable, in wireless, and now in video, it isn’t because Microsoft didn’t see it, didn’t launch an effort to try and get in. I think at the end of the day if Microsoft finds a business that’s consistent with the telecom world, with the networking world, I think Microsoft will have a role to play, because nobody understands software – especially software for the masses – as well as Microsoft does. And the whole initiative here is to come up with some sort of software that enriches the customer’s viewing experience all the way from search engines to get down to what they want to see and the ability to deliver that instantly wherever the customer happens to be – and I think that’s the challenge Microsoft faces.