Like many a Christmas toy, Tellabs took recent acquisition Advanced Fibre Communications Inc. (AFC) home, unwrapped it, and only then did it realize that the package didn't contain all the pieces it needed.
The part Tellabs was lacking was a cost-effective ONT, the device deployed at a residence as a network-interface device used to connect fiber to the home. Here are a few snapshots of AFC's ONT, as deployed at a residence in Keller, Texas:
AFC has been making its own ONT, but it was unprepared for just how quickly Verizon was going to move ahead with its fiber deployments, sources close to Tellabs say. This fact came up for discussion several times during Light Reading's recent Telecom Investment Conference (see Letter From TIC and From MeBay to Quadruple Play).
In AFC's recent SEC filings, the company revealed it had to find a way to make a cheaper ONT or else things were going to get hairy:
One component of the FTTP systems, the Single Family ONT, or ONT, will be sold at a negative gross profit margin until volume increases and unit costs decline… We anticipate an operating loss during the fourth quarter of 2004 as a result of the ONT negative margins, coupled with increasing operating expenses, primarily due to research and development initiatives and planned year end employee hiring, and Tellabs merger-related transaction costs… Failure to achieve adequate positive gross profit margins on the ONT component will have an adverse affect on overall gross profit margins, operating in come and net income.
Vinci Systems, a 30-person startup in Vienna, Va., was founded in 2002 and has demonstrated interoperability with several of Tellabs' competitors in the fiber access market, including Calix and Entrisphere. In fact, Vinci "has existing contracts with [fiber equipment vendor] customers and, at this point, we're unsure what those customers will do as a result of the acquisition," says a Tellabs spokeswoman.
AFC had a lower-cost ONT in the works, but it was expecting Verizon to move much more slowly than it has. "Vinci was about six months ahead of AFC in building this cost reduced ONT," a source familiar with the matter says. "In many ways it was cheaper to buy them than to do our cost reduction."
"AFC's ONT was a first-generation product and the Vinci product is a next-generation ONT," says a Tellabs spokeswoman. The difference? Obviously the newer ones are cheaper to make. But the spokeswoman adds that the Vinci models also "provide enhanced capabilities for VOIP and streaming video."
Tellabs says it can't provide specific numbers on what the cost savings are between Vinci's and AFCs ONTs.
— Phil Harvey, News Editor, Light Reading