Hatteras Bucks Up for RBOC Campaign

Hatteras Networks has scored $45 million in a third round of funding -- cash it intends to use making the RBOCs take it seriously (see Hatteras Grabs $45M).

Hatteras last announced new funding back in March 2001 (see Hatteras Closes Second Round). The new round brings the total raised to more than $73 million. It will use the new cash for beta testing in RBOC (regional Bell operating company) networks, which should begin this fall.

And it's probably going to need every cent.

The 60-person company is developing gear that will allow carriers to run Ethernet services over both fiber and installed copper lines at data rates between 1 Mbit/s and 1 Gbit/s (see Hatteras Plans Switch-Hitting Ethernet). The idea is that incumbent providers with a large installed base of copper will be able to roll out new Ethernet services without being forced to lay new fiber in their access networks.

Unlike other companies in the Ethernet market, Hatteras is going after incumbents at home in the U.S. instead of focusing on international markets, like Asia and Europe.

“Asia is such a huge, complex market, and a lot of resources have to be dedicated to efficiently address it,” says Tom McPherson, CEO of Hatteras. “We’ll be managing our burn rate and making some investment in Asia and Europe, but we’ll be doing it very cautiously.”

Targeting the RBOCs makes sense, but it’s not easy. Long sales cycles, Telcordia Technologies Inc. certification, and the uncertainty of regulatory issues make dealing in this market very expensive.

"The reason we did such a large funding round was so the company would be able to present a solid balance sheet and a fully funded business plan to its customers,” says Joe Zell, a partner with lead investor Grotech Capital Group and a newly appointed Hatteras board member. Zell was president of US West's !NTERPRISE Networking Division before joining Grotech in January 2002.

Gear that is used in the regulated portion of an RBOC network requires Osmine management certification from Telcordia, which ensures the equipment can be managed using the databases most commonly deployed in RBOC networks. The process of Osmine certification is both time consuming and expensive, often costing a company anywhere between $10 million and $15 million -- per product line. Hatteras says it has already begun the process and expects to have it finished by the time its products are ready for deployment in 2003.

Another potential roadblock for the company is the regulatory environment. Currently, the United States Congress, the Federal Communications Commission (FCC), and the federal courts are trying to figure out how the 1996 Telecom Act should apply to broadband services. The FCC is reviewing all its rules on the subject in order to determine how these services should be defined and how the Act applies to them (see FCC Focuses on DSL Classification and FCC Stirs Up Competitive Carriers). Then there is the Tauzin-Dingell Bill, which has passed the U.S. House of Representatives and is now lingering in the Senate (see Tauzin-Dingell Takes Another Step). Finally, the courts are deciding that competitive carriers actually do have the right to sue RBOCs for antitrust violations (see Courts Coming Through for CLECs).

With these issues in limbo, RBOCs are hesitant to deploy new technologies for fear the regulatory landscape could suddenly change. How and when these issues are resolved could influence the fate of companies like Hatteras hoping to supply RBOCs with new gear.

If regulations fall in favor of the RBOCs, Hatteras and others targeting this space could make out like bandits.

“I think we’ll see a lot of these regulatory issues cleared up in December before Hatteras even goes to full deployment,” says Frank Dzubeck, president of Washington, D.C., consultancy Communications Network Architects. “I expect the RBOCs will get what they want, and there will be an acceleration in new project deployments that were waiting for regulatory relief.”

Grotech led this round, but the company’s previous investors, Bessemer Venture Partners, Columbia Capital, and ComVentures, were also involved.

Although he wouldn’t discuss specifics about the deal such as the company’s valuation, McPherson did acknowledge this to be a down round. But he says the deal was structured to maintain employee incentives.

Ultimately, though, the company thinks big money will help it win big contracts. “Will an RBOC do business with a weakly funded startup? Probably not,” Zell says. “But will it do business with one that is completely funded, with strong backers, breakthrough technology, and a good management team? I would say yes."

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com