A Copper and Cable Revival?
Despite the gloomy telecom climate, venture money is apparently still flowing to technologies for voice over DSL and cable networks. TollBridge Technologies has announced a $25 million round of venture money, and CopperCom is expected to announce it’s just closed a round of more than $70 million.
Both of these companies sell modems and gateways to competitive local exchange carriers (CLECs) and other service providers looking to provide voice services over broadband connections using DSL or cable networks. The good news? They got the money. The bad news? Like most startups these days, they were forced to accept a lower valuation on the investments than in previous rounds -- a situation known in financial parlance as the “down-round.”
The voice gateways translate IP or ATM protocols to TDM. Most are still in trial stages of providing the lines through existing copper phone lines to homes and small businesses. TollBridge is working with cable companies to provide the same service to homes using IP over coaxial cable.
But these companies face stiff competition in a market that is taking much longer to boom than originally projected. Industry insiders say TollBridge struggled to assemble its latest round, as venture capitalists grabbed a bigger stake for less money. This is becoming a common story in the startup market.
After TollBridge’s third round in January 2000, the company had a post-money valuation of $295 million, says CEO Gary Tauss. Now, with the new $25 million round, the company has raised a total of $92 million, but he acknowledged the post-money valuation has plunged to $60 million. Investors in the latest round were Matrix Partners, Meritech Capital Partners, Sutter Hill Ventures, TeleSoft Partners, and WorldView Technology Partners.
A study released last month by telecommunications market research firm RHK Inc. shows that TollBridge’s $10 million in revenues last year accounted for 19 percent of the $53 million North American market for voice-over-broadband gateway equipment, making it the fourth largest vendor in this niche. Market leader Jetstream Communications commanded a 29 percent share; CopperCom had 28 percent; and Accelerated Networks had 21 percent. A player not included in the study, Tdsoft Ltd. of Israel, peddles its products in Europe.
The good news for companies like TollBridge is that the market may already be consolidating. TollBridge should wind up this year no lower than third place, thanks to the woes of Accelerated, which floundered after key customer WinStar Communications Inc. slipped into bankruptcy protection and WorldCom Inc. (Nasdaq: WCOM) backed off from using Accelerated’s technology.
The only public company in the group, Accelerated had first-quarter sales of only $1.6 million, a 78 percent drop from the quarter a year earlier. Accelerated’s stock has sunk to 67 cents a share after hitting a 52-week high of $67 last summer on the heels of its hot initial public offering.
But Accelerated’s deceleration is not much consolation for the remaining contenders. Although TollBridge claims revenues will double this year to $20 million, RHK analyst Keith Mayberry expects 2001 sales for the niche will be “flat to increasing minimally.” The forecast for 2002, he says, is still rather cloudy and depends on whether any of the largest carriers like AT&T Broadband and Sprint Corp. (NYSE: FON) commit to using the technology on a large scale. So far, they haven’t.
There are still major technical and cost considerations. Some DSL access multiplexers can’t support the variable bit rate of voice over DSL, says Mayberry. He also notes customer premises equipment still averages about $100 a port, a figure that will have to come down considerably before widespread deployment is likely.
Another roadblock is the downturn in capital spending as carriers attempt to quell Wall Street’s short-term anxieties. “Everyone expected AT&T would put it all together, and the other telcos had to respond,” says Dave Burstein, editor of DSL Prime. “AT&T slowed down its plans for voice over cable and is trying to maintain earnings for Wall Street by cutting back on everything.”
Now the hope hinges on some big deployments from cable providers. Last year, only 10 percent of TollBridge’s revenues were from the cable portion of the business. This year, Burstein expects that portion to jump to 50 percent and says all the major cable companies plan to begin trials with voice over cable.
Meanwhile, CopperCom CEO Cynthia Ringo says 75 companies are at least experimenting with her technology. She claims several high-profile carriers are in the latter stages of testing CopperCom’s products under non-disclosure agreements, and she expects some will be commercially deploying the technology before the end of this year.
But in light of recent news, one has to wonder about voice-over-DSL prospects. Sprint last week publicly said it is considering backtracking plans for its rollout of similar in-house technologies, which it has dubbed integrated-on-demand network (ION). The company had spent $1.3 billion to develop the network over the last three years and planned for a broad rollout during the second half of 2001.
Sprint’s technology is designed to let consumers and small businesses use a single copper connection for multiple voice, data, and fax lines. It currently offers the services only to large businesses. But in a filing with the Securities and Exchange Commission, Sprint says it will not deploy the service to residential and small business markets until the “voice stability” of the technology improves.
If a mega-telco like Sprint has such trouble internally developing such technologies, how can a startup like CopperCom pull it off?
“Focus,” says Ringo.
- Tom Davey, special to Light Reading