GPON Merger Bets on Interoperability

By merging, TXP and Cambridge Industries Group hope to create a GPON ONT powerhouse

Craig Matsumoto, Editor-in-Chief, Light Reading

August 22, 2008

4 Min Read
GPON Merger Bets on Interoperability

Two small Gigabit PON (GPON) players are merging in hopes of launching a new phase of cheaper, commoditized customer-premises gear, repeating the history of DSL modems.

TXP Corp. (Nasdaq: TXPO) and Cambridge Industries Group Ltd. (CIG) announced their plans yesterday, after executives from both spent the week in New York City hammering out the details -- which aren't yet disclosed, by the way. The combined company will keep the TXP name. The deal is expected to close by year's end. (See TXP, CIG to Merge.)

Both companies are about the same size -- revenues in 2007 were $11 million for TXP and $10.2 million for CIG.

"We expect we'll be profitable within two quarters of this merger," says reality TV star Michael Shores, the CEO of TXP. CIG is already profitable, so that's a help.

These guys aren't going directly after Alcatel-Lucent (NYSE: ALU) or Motorola Inc. (NYSE: MOT). They're combining in hopes of being a supplier to those companies, and their competition will likely come from Taiwanese original design manufacturers (ODMs).

TXP and CIG build optical network terminals (ONTs), the boxes installed at a GPON customers' house. They're betting that future ONTs will get purchased from a variety of vendors, much the way DSL modems are.

So far, most carriers have bought the ONT and the optical line terminal (OLT) -- the box responsible for the carrier's end of a GPON connection -- from the same vendor. Sometimes they had no choice, but it's also the typical pattern for carriers.

"With any new technology, the service provider demands an end-to-end solution. We're pointing at Verizon Communications Inc. (NYSE: VZ) here," Shores says. "Historically, somone has come from the outside and become an aggregator," supplying the lower-margin customer premises gear that goes with multiple equipment vendors' wares.

Of course, TXP and CIG are also betting on GPON in general. The technology remains in its infancy, although some major carrier buildouts would seem to be on the horizon. (See Who Makes What: GPON Equipment.)

Shores takes his inspiration from the story of DSL modem company Efficient Networks, led by Mark Floyd. The way Shores tells it, the trick wasn't to get the equipment vendors' attention, but to go around them to the carriers; Southwestern Bell liked the product enough to tell Alcatel to start buying it.

"That helped me make the decision to jump off the bridge with a PON backpack on," Shores says. Hoping for similar magic, TXP has been preaching its ONT gospel to both carriers and equipment vendors.

"It makes sense to me. It's been critical that the ONT cost come down," says Heavy Reading analyst Graham Finnie. Telcos will be happy to see third-party ONTs emerge, he believes, but established vendors like Alcatel might "drag their feet a little" in adopting such products.

Third-party ONTs might become particularly important in China, where an inexpensive ONT is a critical piece for potential GPON deployments, Finnie adds, noting that CIG is based in Shanghai.

History won't repeat itself perfectly, though. DSL modems became a retail product, but Finnie expects telcos to retain control of the ONT. They'll just be able to get those ONTs from a variety of sources.

TXP started life as a spinoff of Flex (Nasdaq: FLEX), offering prototyping services. (TXP's previous name was Texas Prototypes Inc.) TXP got on the stock market through a reverse merger in 2006 with a publicly traded company called Stock Market Solutions Inc.

TXP got into GPON by acquiring (in the loosest sense of the word) the ONT business of Siemens AG (NYSE: SI; Frankfurt: SIE) in 2006. Siemens had designed those ONTs with AT&T Inc. (NYSE: T) and Verizon specifications in mind. But the vendor didn't get selected for the so-called TriBOC GPON deal (crafted by AT&T, Verizon, and BellSouth). (See Siemens Sells ONT Biz, Alcatel Joins Verizon PON Party, and RBOCs Aim for 10M GPON Subs.)

By that time, the deal creating Nokia Networks was on, and the combined company had little interest in ONTs. (See Nokia, Siemens Create Networks Giant.)

"What these guys did was bring us instant prowess in this space," Shores says. In turn, that helped TXP land customers and partners like Adtran Inc. (Nasdaq: ADTN). (See TXP, Adtran Partner.)

CIG took a quieter path. It was founded by Gerry Wong, a former Lucent executive who previously led downturn-era startup Photonic Bridges. (See Photonic Bridges Raises $23M, Photonic Bridges Boosts Multiservice, Dowslake Deploys MiniSiS in China, and Photonic Bridges Claims China First.)

TXP was focusing on outdoor ONTs. That gave Wong and CIG the opening to quickly develop indoor ONTs, beating TXP to market by 60 days. "That's where he got lucky," Shores tells Light Reading. It sounded like he was grinning when he said that.

— Craig Matsumoto, West Coast Editor, Light Reading

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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