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OnFiber Takes Over Telseon

OnFiber Communications Inc. announced its purchase of Telseon Inc. last night (see OnFiber Acquires Telseon Assets). But the jury's still out on whether the deal was worth it.

For one thing, it's unclear what OnFiber spent for Telseon. The transaction closed July 31 and included a payout by OnFiber of cash, the issuance of OnFiber common stock to Telseon shareholders, as well as assumption of Telseon debt. The carrier won't reveal a purchase price, but it estimates it would have to spend $85 million for the equivalent of Telseon's assets, so the deal probably totaled considerably less. The assets include metro fiber networks in two cities (Miami and Denver), as well as 50 additional points of presence (POPs) nationwide. Telseon had agreements with Williams Communications Group Inc. for some of the POPs (see Telseon, Williams Expand Networks). The deal adds about 90 new customers to OnFiber's sales roster.

It's highly unlikely OnFiber paid anywhere near full value for all this. After all, back in May, it bought Sphera Networks for $2.3 million (see OnFiber Scoops Up Sphera for $2.3M). That deal added four new cities to OnFiber's network, plus roughly 21 new customers.

Of course, Sphera was in bankruptcy court. Telseon wasn't. Indeed, Telseon has kept its financials notoriously close to its vest, requesting that its numbers not be disclosed to public view, even during interactions with state public utilities commissions. Telseon also filed a defamation lawsuit against Gartner/Dataquest earlier this year for allegedly stating that Telseon was in bad financial shape (see Telseon Sues Gartner for Defamation). The suit's outcome is still pending.

Several things, however, are known: Telseon got $20 million in new funding in January 2002 (see Telseon: Profitable in 2003?). Telseon also bid $1.5 million for Sphera's assets back in May. And Telseon's got a reputation for being a proponent of Ethernet for metro services.

The Ethernet angle could help OnFiber add another option to its metro roster. "We didn't have extensive Ethernet. Telseon has a powerful Ethernet offering," says Michael Rees, OnFiber VP of marketing. He says Telseon's also been fairly successful in focusing efforts to sell Ethernet services for interconnecting POPs, data centers, or servers in telco hotels and colocation facilities. And interconnecting POPs, albeit not necessarily by Ethernet alone, has become OnFiber's stock in trade (see OnFiber Rolls With the Changes).

OnFiber now expects Ethernet will go from less than 5 percent of its revenue to about 15 percent. Wavelength services will continue to represent the lion's share, over 50 percent, of OnFiber's sales, with Sonet connections making up the rest.

"We still see [wavelengths] as our growth business," Rees says. It will take the extension of more fiber to the enterprise than there presently is in most metro areas, he says, to make Ethernet a signal offering.

Analysts say that ultimately, OnFiber's acquisition of Telseon is a minor move that solidifies OnFiber's chances of emerging as a survivor in the niche of independent metro optical service providers. What's unclear is how the market for its services will play out.

"OnFiber's very focused and has a good notion of how to run its business, which is rare in this space, and they have cash," says Maribel Dolinov, senior analyst at Forrester Research Inc. "So I think they'll survive. I don't talk about anyone 'leading' in this business, just surviving."

It remains to be seen how well the overall optical metro services niche fares in the coming months, particularly as RBOCs start to increase their focus on the same market.

A handful of other players appear to be struggling, fighting the odds, or going up for sale. Cogent Communications Inc. continues to claw its way along despite difficult conditions and big debt (see Cogent Hedges Fiber Bets and Cogent Conundrum Continues). Yipes Enterprise Services Inc. recently regrouped and got refunded, with a new focus (see Yipes Reborn – Amid Accusations).

OnFiber says the 40 employees still at Telseon will be added to OnFiber's census of 70, at least for the next month. But it's likely that the need to support Telseon's sites will call for most to stay on, Rees says. On the other hand, Telseon's management is taking a powder: CEO John Kane will move on.

The deal also could threaten some vendor arrangements. Right now, for wavelength services, OnFiber and Telseon both use ONI Systems' gear, now owned by Ciena Corp. (Nasdaq: CIEN). But OnFiber uses gear from Cisco Systems Inc. (Nasdaq: CSCO) and Extreme Networks Inc. (Nasdaq: EXTR) to facilitate Ethernet services, while Telseon primarily uses Riverstone Networks Inc. (Nasdaq: RSTN).

All these systems are "go" for now, Rees says. But there's always the chance that a re-evaluation could tip the scales in favor of one or the other Ethernet providers, he indicates. What's more, Nortel Networks Corp. (NYSE/Toronto: NT) has apparently been waiting in the wings for a chance to tout its wares to OnFiber. In the wake of changes, they may find a more receptive audience.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
bear 12/4/2012 | 9:59:43 PM
re: OnFiber Takes Over Telseon Only LR can make the most positive news in telecom sound like a yawn. In case you haven't noticed, this announcement is the biggest move to happen in the space since the space itself was defined. Survival and leadership, these days, are synonymous. Give these guys a break and cheer on for the underdog.
Consultant 12/4/2012 | 9:59:43 PM
re: OnFiber Takes Over Telseon Wrong. The biggest announcement in the metro space was the bankruptcy of Yipes.

And let me add that Ethernet is the most over-hyped technology on the market today. A techology that requires fiber is not going far in a world where fiber in the Last Mile is rare.
farmer2b 12/4/2012 | 9:59:42 PM
re: OnFiber Takes Over Telseon OnFiber's core business plan is delivering the Last Mile...
hitekeng 12/4/2012 | 9:59:42 PM
re: OnFiber Takes Over Telseon LR,
in such a downturn, I'll be quite surprised if OnFiber decides to bring in a new vendor (be it Nortel or anybody else for that matter).
With all service providers (iLECs & CLECs alike..)entirely focused on leveraging existing infrastructures to offer new revenue generating services with the lowest CAPEX/OPEX spending possible, adopting a new vendor will be needlessly quite costly (i.e. training, sparing, OAM&P,...).
bear 12/4/2012 | 9:59:40 PM
re: OnFiber Takes Over Telseon Consultant, with a name like consultant, I'll assume you are in fact a consultant, which means that your comment about Yipes only gives you away as clueless or very misinformed. Yipes? Everyone saw that coming. Ethernet only makes sense if the customer wants to begin at 100Mbps then scale to a full 1Gbps, in which case wavelengths - not Ethernet - makes sense. OnFiber's announcement says that over 3/4 of its revenue come from waves and only a fraction from Ethernet. OnFiber has been a sleeper for 3 years and Telseon and Yipes have been grabbing all of the headlines with hype, which people like you bought into. Telseon was the largest player in the metro market, bigger than Yipes, and then all of sudden OnFiber outlasts both of them and bags the biggest one of them all. No other announcement is bigger than this. Better get your facts straight, find out what's going on in the trenches or risk being unemployed for an even longer period of time - er, I mean, remain a "consultant.GÇ¥
slick 12/4/2012 | 9:58:53 PM
re: OnFiber Takes Over Telseon As a former employee of Sphera Optical Networks, which Onfiber purchased for pennies on the dollar, I would like to say that when they say consultant they mean consultant. I was a consultant for 30 days and was told I would be hired as a full time employee, I was then asked if I could email my drawings and diagrams regarding the networks in New York, New Jersey and Washington DC. I told them that until I receive a job offer those diagrams were Sphera or personal property. I was not offered a job along with one or two other people because the "board" decided they did not need another person in tri-state area. Lesson learned here...do not trust them! The VP herself assured us there will be positions for us when she flew to NY from Colorado, what a back stabbing! If I were not for friends that were retained by Onfiber, my one wisk would be that it join the failed Optical companies.
crimsonman 12/4/2012 | 9:57:58 PM
re: OnFiber Takes Over Telseon slick, you sound very naive. sorry to hear about the job loss, but everything you did for sphera belongs to onfiber free and clear. you can't claim ownership of anything you did on behalf of sphera. as far as onfiber's vp, he or she sounds pretty shrewd.
smilin 12/4/2012 | 9:57:43 PM
re: OnFiber Takes Over Telseon Way to go Slick!!! Refusing to help out your potential boss and provide Sphera property as requested. They ended up with fewer positions than expected and the uncooperative guy found himself on the outside.
slick 12/4/2012 | 9:57:25 PM
re: OnFiber Takes Over Telseon I may or may not have done the right thing when it came to turning over documentation, however what was stopping them from not retaining me once they recieved the information that they needed? It was a gamble and I lost...oh well no big loss.
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