What's Next for Kestrel?

Light Reading
News Analysis
Light Reading
2/15/2002



Kestrel Solutions Inc. made two announcements this week that typify its "give and take" approach to the market (see Kestrel Adds Features, Cuts Workers).

First, the company announced a fresh series of layoffs, which it says brings the number of total employees to about 100. The reduction is at least the company's third -- following rounds in May, July, and August of 2001 (see Kestrel Announces Layoffs, Kestrel Quietly Reconfigures, and Kestrel Takes Another Turn).

No sooner was the ink dry on the bad news, when Kestrel had good news: Yesterday, it announced the addition of gigabit Ethernet, FICON, and Fibre Channel connectivity to the TalonMX, Kestrel's transport platform that crams multiple streams of data traffic into a single optical wavelength using frequency division multiplexing (FDM). This is in contrast to DWDM (dense wavelength-division multiplexing) technology, which crams multiple wavelengths into a single optical fiber strand.

The two announcements speak to the company's ongoing efforts to forge a path for itself through the optical market. But the company appears to be struggling with internal issues. Now on its fourth CEO (see Kestrel Flocks to New CEO) and with a recently announced new senior VP of sales (see Kestrel Hires Sales Guy), Kestrel's still trying to get its personnel act together.

On the product side, things seems to be going fairly well. The addition of new capabilities aimed at the metro market signal Kestrel's awareness of the opportunities that exist there. Specifically, Kestrel touts its FDM technique as providing lower per-mile data transmission costs for carriers, particularly RBOCs.

Kestrel's already announced an RBOC customer, widely believed to be SBC Communications Inc. (NYSE: SBC), although the company refuses to confirm this or to state the amount of the deal (see Behind Kestrel's RBOC Contract). And spokespeople say other contracts with incumbent carriers have been closed, although they're not giving specifics.

Kestrel also refuses to give details of its funding, which has been estimated at anywhere from $187 million to $300 million -- at either end of the range, an amount that would pretty much guarantee it has sufficient funds to keep going, at least for the immediate future.

But analysts are skeptical about what really lies ahead for Kestrel. "I think the handwriting was on the wall for FDM in the heydey of optical fever," says Mark Lutkowitz, VP of optical networking research at Communications Industry Researchers Inc.

Despite Kestrel's assertions that its product is more attractive than ever to companies looking to save costs, Lutkowitz isn't convinced that carriers have seen its value proposition. If Kestrel and its chief rival, Centerpoint Broadband Technologies Inc., didn't take off when carriers had money to spend, there's no indication they will do so now, he says.

So where's FDM headed? It looks as though things may be reaching a turning point. Centerpoint Broadband appears to be disengaging from its FDM past and is aggressively seeking new funding (see Centerpoint 's Appeal: Sooo 1999?). Even if Kestrel was well backed to start with, its bank balance can't hold out forever.

Kestrel now denies that it's seeking inroads in the subsystem market, even though the company's director of product management, Kristin Foss, had this to say in September: "We are looking at the possibility of developing subsystem relationships with other companies that do not compete with our 10-Gbit/s product."

Barring new markets, is a merger the next step? Rumors have swirled that Ciena Corp. (Nasdaq: CIEN) and Marconi PLC (Nasdaq/London: MONI) may be snooping around, attracted by Kestrel's nascent 40-Gbit/s capabilities, which the vendor says it continues to develop. But when asked, the would-be acquirers seem stumped. "It's the first I've heard of it," says a Ciena spokesman. And, "What do they do?" deadpans Marconi's.

Kestrel's open to the suggestion, though: "[CEO] Woodrow Cannon has stated that we're open to all possibilities," a spokesperson says.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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