Tellium Triumphs

Tellium Triumphs -- Scott Clavenna

September 26, 2000

5 Min Read
Tellium Triumphs

Scott Clavenna imageIt looks as if optical switch vendor Tellium Inc. is finally getting somerespect, courtesy of two first-class contracts and Friday's IPO filing (seeTellium Bids for $250 Million IPO).

Where does that leave the competition? In a position to celebrate, notmope, I would submit. Tellium's step up in stature puts a major stamp ofapproval on this entire market space.

Tellium hasn't had an easy time of it. Early on, it was switching lambdas aspart of MONET (Multiwavelength Optical Networking Technology), thegovernment-sponsored testbed. Other participants included AT&T Corp. (NYSE: T), BellAtlantic (now Verizon Communications [NYSE: VZ]), BellSouth Corp. (NYSE: BLS), Lucent Technologies Inc. (NYSE: LU), Pacific Telesis, and SBC/TRI (NYSE: SBC).

Actually, Tellium, per se, didn't exist during this project, since it was partof Telcordia Technologies Inc. (Bellcore, at the time). Still, it was able to develop the technologies forline-rate optical circuit switching and showcase the first optical switchrunning in a live network. It followed with a small contract with theDepartment of Defense, the industry's first optical switch contract.

This should have placed Tellium well ahead of their emerging competition,but startups tell better stories, and Tellium often betrayed its roots inthe decidedly undynamic Bellcore. In 1998 Lightera caught everyone'sattention, particularly that of Ciena Corp. (Nasdaq: CIEN), who bought it in early 1999 for $463million. Monterey followed, and was quickly brought into the Cisco fold for$500 million in stock. Sycamore Networks Inc. (Nasdaq: SCMR) started its own optical switch skunk worksin 1999, and I began wondering what would become of Tellium. Speculationmost often centered on a Lucent buyout, but an OEM agreement was announced,nothing more.

That helps explain why Tellium's contact with Extant (now part of Dynegy Inc. [NYSE: DYN]) wasn't considered big time, though $250 million is an orderof magnitude larger than most startup contracts these days. Everyone waswaiting to see what Lightera and Sycamore had to offer.

When Tellium recently inked a contract with Cable and Wireless (NYSE: CWP), though, it wasbig news indeed. Working with a top-tier ISP gives vendors substantial(instant) credibility. And Tellium's deliverables should definitely boostits reputation: An optical system scalable to 512 ports that synchronouslyswitches OC48 and OC192 circuits in a mesh architecture has been trialedand approved. Sometime in early 2001 it will be deployed on one of thebiggest IP networks in the world.

A week later Tellium signed with Qwest Communications International Corp. (NYSE:Q): another deal worth hundreds ofmillions with another first-class customer. And another reputation boost:Optical networking vendors covet Qwest contracts because the company is seenas both an emerging carrier and a tested stalwart with an outstandingengineering staff.

To wrap up the hat trick, Tellium filed for an IPO on Friday, September 22,proving that it's as ready to take its story public as any other opticalnetworking vendor in the past year. (Note that like all the other opticalstartups that have already had IPOs, Tellium has issued its service providercustomers with shares).

As I said, Tellium's triumph helps validate the entire optical switchingindustry. Big contracts with big ISPs and carriers will be immenselyimportant this year, setting the stage for significant growth in 2001.

How much growth? My first forecasts for Pioneer Consulting, published inFebruary 2000, were very high. I predicted the combined market opportunityfor North America and Europe was worth $31 billion over a five-year period,$15 billion in 2004 alone.

At the time, it was important to demonstrate the impact optical switchescould have on core optical networks, effectively displacing well-establishedmarkets for Sonet OC192 ADMs, large broadband digital crossconnects, andeven terabit routers. The market opportunity was thus much greater than theexpected uptake of optical switches in the 64x64-port to 256x256-portrange alone.

In June I revised my optical switch forecasts sharply downward. I didn'tfeel any differently about the viability of the market, but six months oflistening to carriers convinced me reliability would be an overwhelmingfactor in purchase decisions, even though they remained overwhelminglyfavorable toward optical switches. Combine that with the fact that vendorsare taking a bit more time than anticipated to bring products to market, andforecasts shift noticeably to the right.

My new forecasts, shown in the figure below, also accounted for carrierpurchases of large matrix switches with a smaller number of port cards.Since much of the cost of these switches (typically $25,000 perbidirectional OC48 port) is in the cards, this led to a much lower cost perswitch. A box with 64 OC48 ports would run roughly $1.9 million (64 times $25,000 plus $300,000 for the switching system).

Optical Switching Systems, North America and  Europe 2000-2004The outcome is a lowered near-term forecast but a more dramatic curve upwardafter 2001. By 2004, the market is forecast to reach a robust $7.5 billion,creating ample room for numerous successful vendors. This curve is in linewith many emerging optical networking markets, which tend to be smaller inthe near term than many hoped but larger over the long term, as theinexorable migration continues.

In the end, the optical switch market remains very strong, with extremelyaggressive growth predicted for 2002 and 2003, when shipments will reachinto the billions. Right now, the OEO (optical-electrical-optical) switchvendors are doing quite well and should continue to expand their marketpresence. Some will offer STS1-level grooming (Brightlink Networks Inc., Ciena,Sycamore); others will stick to the high road, switching only OC48s andabove (Cisco, Tellium).

What remains to be seen is how well the all-optical switch vendors fare inthe coming five years. Alcatel SA (NYSE: ALA), Calient Networks, Cinta, Lucent, Nortel Networks Corp.’s Xros,Siemens AG (Frankfurt: SIE), and others yet to come all face a challenge from thenow-established OEO players. They're going to have to prove both theeconomics and the reliability of their photonic systems to the same smallcustomer group. As carriers like Qwest, C&W, Dynegy, Williams Communications Group (NYSE: WCG), and Enron Corp. (NYSE: ENR)deploy OEO over the coming three years, it's critical to watch how theyscale their core nodes. Will they supplement their OEO switches with newcores or add an all-optical "superlayer" on top, relying on new signalingschemes like MPLambdaS to manage lightpaths with the same dexterity asvirtual circuits?

In recent conversations, silicon vendors have assured me that electricalswitching fabrics are far from topped out. That's convinced me that today'sOEO switch is not an interim measure on the way to all-optical networking.It's a solution with more lasting power than Sonet ADM or even the telephoneswitch. Who knows? It may even outlast the terabit router.

Scott Clavenna is president of PointEast Research, and director of research at Light Reading

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