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Optical/IP

2003 Top Ten: Startup Flameouts

In 2003, everything old was new again, and new things had become old. This wasn't good for startups, especially flashy, pie-in-the-sky startups promising "revolutionary" products.

Elaborate new technologies that required ripping out and replacing old equipment were rejected outright. Carriers' interest was limited to anything that would enable them to sweat the old network for another 12 months.

As if that weren't bad enough, venture capitalists continued to hide in caves, so even those startups that had promising developments had trouble finding the cash to continue.

Combine hesitant operators with coy VCs, and you get a miserable environment for startups. It's easy to see why network equipment startups selling flashy new kit in 2003 had such a tough year.

Here's a rundown of some of the startup burnouts we reported this year:

No. 10 Crescent Networks Three months after it declared that it absolutely wasn't closing its doors, this edge router company did indeed cease operations (see Crescent is Waning).

Crescent's routers fared well in tests with BTexact Technologies, the testing arm of BT plc (London: BGC), but it was unable to turn these early trials into revenue-generating sales and shut its doors in January.

After raising $66 million, the assets of the company were sold to British network equipment manufacturer Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) for "tens of thousands of pounds," according to a source familiar with the deal. Did somebody say FIRE SALE?

No. 9 Silicon Access Networks This network processor company's chips were up sometime in October, but it was hard to tell exactly when Silicon Access shut its doors, as it disconnected the phone lines before Light Reading had the chance to report a proper postmortem (see For the Masses).

Nevertheless, our stories leading up to its disappearance shed some light on what happened.

Silicon Access made a big fuss about a deal it claimed to have signed with Huawei Technologies Co. Ltd. in February. The Chinese router company was said to be using its network processor, address processor, classifier, and accounting device for 10-Gbit/s port speeds (see Silicon Access Nabs Huawei).

But for months after this announcement, Silicon Access's competitors insisted the deal never materialized (see Huawei Chip Deal: Who's Got It?).

Silicon Access officials stood by their story. Chief operating officer Rex Naden wouldn't elaborate much, citing Huawei's reluctance to publicly disclose its plans, but at the time he said Silicon Access "absolutely" did sign a contract with Huawei, claiming revenues were on the way.

These revenues never amounted to much, clearly, as Silicon Access has not been heard from since. The company had raised a total of $124 million in funding.

No. 8 Corona Networks IP edge router startup Corona was in business for six years before it eventually kicked the bucket in August (see Corona Networks Disappears).

Corona's end came as a bit of a surprise, as just a few months earlier it had squeezed $8 million in extra funding out of its VCs and clinched a deal with Alcatel SA (NYSE: ALA; Paris: CGEP:PA). The French equipment maker signed a contract with Corona to produce a broadband remote access server (B-RAS) for its 7301 DSLAM (see Corona Gets a Boost).

Then, mysteriously, Corona was spotted in talks with Zhone Technologies Inc. (Nasdaq: ZHNE) around the same time, but this conversation cooled, and Zhone went off looking at other IP edge router/subscriber management services companies.

Did Corona blow it by hedging its bets on both of these deals? Whatever happened, it's time was up. It had raised a total of $78 million in funding.

No. 7 Tenor Networks Tenor Networks raised $120 million to build a giant IP/MPLS switch for service provider core networks. The problem? Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR) had already started building MPLS functionality into their existing routers – thus rendering Tenor's box obsolete before it even hit the shelves. Bummer!

In addition, carriers were looking for equipment that could help them gradually migrate existing ATM services onto an MPLS backbone. The Tenor box required carriers to rip out old kit, which really doesn't go over well in hard times when no one has two beans to rub together.

Tenor tried to change with the times, but it ended up being behind the market with its next product and eventually pulled the plug in February (see Tenor Goes Silent).

No. 6 Metro-Optix Metro-Optix, one of a bunch of startups targeting the next-gen metro-optical networking sector, built and sold its multiservice provisioning system to 15 customers but still failed to keep its head above water (see More Cuts Coming).

As the need for capacity continued to wane, so did many of the startups that were the heroes of optical networking a couple of years ago.

Metro-Optix, which raised a whopping $136 million, ended up auctioning off its assets to Xtera Communications Inc. in a fire sale deal in August, the details of which were never disclosed. One Light Reading reader had this to say about the achievement:

    "I just don't get how the shareholders (ie: VCs) and board could have approved this deal. This is akin to Xtera going out and buying a MacDonald's franchise until the market for its core products (re-)appears. It is inconceivable that the board has allowed the company to continue despite a lack of market for its products, and/or a lack of competitive differentiation." -- Zettabit.

Oddly enough, Xtera, flush with $30 million in funding in August, is still hanging in there (see Xtera Scores Surprise $30M).

No. 5 CeyYa! Ceyba Alas, the same fate did not await Ceyba (formally Solinet Systems Inc.), another optical long-haul startup like Xtera (see Ceyba Shuts Down).

In August Ceyba was abandoned by one of its VCs, which pulled out of a round that was expected to happen later this year. The move set the cat among the pigeons as the rest of board also bailed on the plan, deciding that it was too risky to keep Ceyba going. [Ed. note: And a thousand lemmings can't be wrong!].

Ceyba had at least two U.S. carrier customers and a war chest of $93 million in funding, but this still wasn't enough (see Ceyba Rattling in Ottawa).

Startups like Ceyba were hit hardest by the downturn, because they specialized in products for core network capacity, where the most extravagant excesses of the boom era were focused. What's more, most next-gen equipment for core deployment calls for carriers to commit to a new network architecture that's different from their current, Sonet-based gear. For the majority of 2003, carriers balked at any such changes, as they drop all but the most urgently needed network upgrades.

No. 4 Innovance Networks Another long-haul letdown, Innovance shut its doors in December after failing to secure additional funding, according to several Canadian news reports (see Innovance CEO: Layoff a 'Rebalance', Company Makeover).

Innovance's plan was to provide end-to-end optical transport for carriers, incorporating a kind of "wavelength-on-demand" style of provisioning. With capex spending still frozen and excess capacity still a major problem, Innovance went in-a-trance and never came out again.

The company employed more than 310 employees in February 2002 and had raised more than $130 million in funding since it opened for business in May 2000.

No. 3 Network Photonics Fancy all-optical switching gear featuring tilting mirrors and prisms that split light were all the rage in 2000 when Network Photonics raised a staggering $106.5 million to build some.

Unfortunately, these prisms are now tripping the light fantastic on eBay for $10.99 a pop, as such experimental technology got dropped like a lead balloon during the downturn.

Seriously, though, if you're talking about splitting the atom, or whatever Network Photonics was doing, when everyone else is talking about maintaining the tin cans and string, what do you expect?

The company did attempt to regroup and do something else, but it failed abysmally and eventually shut its doors in April (see Network Photonics Scales Back, Network Photonics Shuts Down).

No. 2 OMM OMM, once the leader of the pack in the all-optical switching game, faced the same gloomy fate as Network Photonics – only its demise dragged on even longer, as most folk expected the company to pull through (see OMM: The End Is Near). The all-optical subsystem vendor had been trying to land more funding since mid 2002, and given that it was shipping product and had paying customers, this didn't seem impossible.

OMM counted Ciena Corp. (Nasdaq: CIEN) and Siemens AG (NYSE: SI; Frankfurt: SIE) among its customers, but it turned out that most of its work was still going into lab trials rather than live networks, which doesn't pay the bills (see OMM-inous News).

OMM decided to take a stab at 3-D MEMS (more light-splitting prisms and tilting mirrors), which no doubt gave the VCs the willies and contributed to their eventual decision to pull out. OMM closed its doors in March, laying off 85 employees. It had raised close to $100 million (see OMM Closes Its Doors).

OMM's demise spelled the end of all-optical switching in 2003. The question now is: Will this sector ever come back?

No. 1 PhotonEx At the top of the pile of companies that hit bottom in 2003 is PhotonEx, which filed for Chapter 11 bankruptcy protection in November (see PhotonEx Falls Into 40Gig Hole).

PhotonEx, founded in 1999, claimed to be selling "the world's only commercially-available, field-proven," 40-Gbit/s, long-haul DWDM systems. To do so, it raised an astounding $178 million in three financing rounds.

"It was a classic case of a company with technology too advanced for what carriers wanted," says Scott Clavenna, chief analyst at Heavy Reading.

Unfortunately for PhotonEx, carrier budgets didn't allow for 40-Gbit/s systems nearly as quickly as the company had hoped. Sources say shortly after the company failed to get any part of the U.S. government's Global Information Grid Bandwidth Expansion (GIG-BE) business, its managers decided to wind down operations.

For anyone who's counting, the total amount of funding raised by these 10 companies was $1.13 billion. Which would almost cover the Light Reading staff's Christmas bonus!

— The Staff, Light Reading

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cyber_techy 12/4/2012 | 11:07:21 PM
re: 2003 Top Ten: Startup Flameouts http://www.networkmagazine.com...
Abby 12/4/2012 | 11:07:24 PM
re: 2003 Top Ten: Startup Flameouts nbwaite,

You say,

"You may be suggesting that the UBS $156 billion capex figure I gave does not contradict the melt-down theme of the article because nearly all of that spending might be just in the categories merely for keeping the existing business going. But, we cannot believe this because of the UBS $74 billion telecommunications equipment sales figure -- tough to believe that all of this $74 billion was just to keep existing operations going. Similarly for the "roughly" $4 billion the service providers appear to have spent with Cisco."

Wanna bet? Since there are, at the least, 500 telecommunications providers worldwide. Therefore, UBS's number ($74 Billion) would equate to about $150 million in telecommunications equipment purchases per provider. Sounds about right in order to maintain their voice, data, wireless, video, back office, and management system infrastructures.

nbwaite 12/4/2012 | 11:07:28 PM
re: 2003 Top Ten: Startup Flameouts Abby:

For planning a good future for telecommunications, we do need more good information. If you have some such information, terrific.

You are angry about something. I will set that aside and address your other remarks.

You have a reference. Okay. References are important but not sufficient.

The reference lists some categories of capex. Okay. Due to the last category, this list of categories can cover anything. So, this list of categories cannot be wrong.

But what you gave provides no information on fractions of capex in each category. Further, a text on business will likely not be able to provide such fractions for parts of the communications industry.

From this reference and from these categories, for spending in the communications industry, we are supposed to conclude what?

The main question in this thread has been the financial health of parts of the communications industry. Your quote contributes to this question how?

You may be suggesting that the UBS $156 billion capex figure I gave does not contradict the melt-down  theme of the article because nearly all of that spending might be just in the categories merely for keeping the existing business going. But, we cannot believe this because of the UBS $74 billion telecommunications equipment sales figure -- tough to believe that all of this $74 billion was just to keep existing operations going. Similarly for the "roughly" $4 billion the service providers appear to have spent with Cisco.
Abby 12/4/2012 | 11:07:33 PM
re: 2003 Top Ten: Startup Flameouts nbwaite,

You need to understand CAPEX spending first, before you'll ever figure anything out!

Firms generally classify capital expenditure projects into 6 different categories: 1) Replacement: costs reduction, 2) Replacement: maintenance of business, 3) Expansion into new products or markets, 4) Expansion of existing products or markets, 5) Safety and/or environmental projects, 6) other.

Source: Essentials of Managerial Finance 10th Edition J. Fred Weston and Eugene F. Brigham

Start there and give us all a break!
nbwaite 12/4/2012 | 11:07:35 PM
re: 2003 Top Ten: Startup Flameouts tera:


There are some Enron stockholders who might disagree with you.

(I do not mean to imply anything about Cisco!)

There are also a large number of unemployed telecom engineers who might be a bit upset with your conclusions. I don't see how you can make a general conclusion about an entire industry by looking at one company's financial statements. Take a look at Lucent, Nortel, Alcatel, and just about every other telecom company's financial data and tell me that there has not been a major downturn in spending. That Cisco has been able to make money in this downturn says more about Cisco than it does about the industry in general.


Your remark about accounting reminds me of the remark about eating goat:

Goat is better than nothing; just ask anyone that has tried both.


On your other remarks, it should be clear that I would agree with you. The claims you are objecting to are not mine; you are misreading my claims.

I started with the article and its several remarks in the theme of down, down, down melt-down  for the whole industry. Then I claimed that the whole industry is more complicated than any one such simple characterization. For support, I gave data from Cisco and UBS Warburg. And I included a reference to an article from Light Reading  on some remarks of Cisco's CEO Chambers. With these references I was able to claim that, in 2003, "service providers" should be giving Cisco about $4 billion in revenue, that telecom equipment sales should be about $74 billion, and that telecom capex should be about $156 billion. My purpose with this data was to contradict some of the remarks in the article and the uniform theme of down, down, down melt-down  for the whole industry.

No way am I claiming that the entire industry is healthy. Instead, in effect the article was claiming that the whole industry was sick, and I was claiming that there is some significant activity in parts of the industry.

So, the industry is neither up, up, up forever up to infinity and beyond  nor down, down, down melt-down, and we can agree on that. So, the whole situation is not uniform, not simply one thing or another and, instead, is mixed. We are agreeing on this point.

routethus:

You continue to completely miss the point. You state that all you did was innocently repeat a quoted 20%. But you have done much more. You have treated it like fact, and you have treated as if it is credible despite the fact that there is **NO HARD DATA RELEASED TO SUPPORT THE CLAIM**. You have criticized LR for a lack of hard data, while at the same time taking the most flimzy data possible and built a case on it.

FYI, at the height of the boom, Cisco was selling over $8B / year to SPs. Even if we are to accept the now $4B you claim, to not consider that a significant decrease would be incredulous to me.

Are router sales going to pick up? Sure they are, the Internet continues to grow and eventually equipment capacity becomes exhausted; and eventually other equipment categories become exhausted and begin to grow as well. But for you to critcize LR and then do what you (place so much emphasis on one flimsy, unreliable, and unsubstantiated data point) is wholly without merit.


My main claim is that the article's uniform theme of down, down, down melt-down  for the whole communications industry is not correct and that, instead, there are some areas with significant activity.

For evidence of significant activity, I quoted Cisco's revenue and some UBS Warburg figures. To connect Cisco's revenue partly with service providers, I gave the reference to the "roughly 20 percent" figure.

So, from what I gave, I don't believe that the article's theme of down, down, down melt-down  is correct.

I made my point with references, primarily numeric ones, and I was pushing LR also to follow this recommendation from high school term paper writing.

That's about all I was claiming or doing, an it's not much to object to.

Is the figure of 20 percent really precise? Likely not. Maybe the real amount would be 10% or 5%, but even at 5% that would represent about $1 billion from SPs to Cisco in 2003, which still contradicts the theme of the article.

You are objecting to claims I didn't make and don't believe: For my main claim, I doubt that you disagree.

For your $8 billion from SPs to Cisco during one of the bubble years, maybe that is what happened. There was a blip of $22,293 million of Cisco revenue in their fiscal year that ended in 2001. But, a difference of $4 billion? The blip was not quite large enough for that; this point is not very persuasive because Cisco has many lines of business, at times does a lot of M&A, etc.

You are saying that Cisco suffered when the bubble burst. Okay. I didn't claim or believe otherwise.

Or, LR was claiming that the glass is empty. I was saying that it's not, there there is some water in there. I'm not claiming that the glass is full. And I agree that there is less in the glass now than in 2000. Not difficult concepts.

As an industry, we have to do better: That bubble stuff was nonsense, harmful wasteful nonsense.

We can begin to see part of the cause of bubbles rising and bursting: It's too easy for too many people to go for a simple uniform characterization of everything, either up, up, up forever up to infinity and beyond  or down, down, down melt-down, and there is little hope that either extreme will be correct. People that want to see charging herds of dumb animals can work together to encourage statements with such extremes. Some people did make money when the bubble rose and may have made more short selling when the bubble burst.

Your point with "Are router sales going to pick up?" I do believe is correct. Indeed, in some other contexts, I have used that same data from Cisco and UBS along with some data from A. Odlyzko to argue just that point; that is why I happened to have the data at hand and, in particular, just copied the data to LR.

But if there is to be a good future, then enough of us will have to get rid of these views of believing only simplistic characterizations.

In particular, just now, the bubble bursting and the down, down, down melt-down  characterization are hurting, are severely blocking progress.
opticalwatcher 12/4/2012 | 11:07:45 PM
re: 2003 Top Ten: Startup Flameouts "the numbers in audited financial statements
are much better than no numbers at all"

There are some Enron stockholders who might disagree with you.

(I do not mean to imply anything about Cisco!)

There are also a large number of unemployed telecom engineers who might be a bit upset with your conclusions. I don't see how you can make a general conclusion about an entire industry by looking at one company's financial statements. Take a look at Lucent, Nortel, Alcatel, and just about every other telecom company's financial data and tell me that there has not been a major downturn in spending. That Cisco has been able to make money in this downturn says more about Cisco than it does about the industry in general.
jim_smith 12/4/2012 | 11:07:45 PM
re: 2003 Top Ten: Startup Flameouts nbwaite:

We can go on like this forever. I'm going to try and close this one out...

More specifically, the article, like much of Light Reading, ...

I guess you are not satisfied with the current state of LR articles: you want LR to back their statements with references to hard data. I, on the other hand, am quite happy with the gossip, the general monkey business, and the stuff below my uvula - or whatever the heck it was that you were referring to :-)

We can regard the prices on Wall Street as stochastic processes...

I haven't figured out how to make money on Wall Street by using purely mathematical techniques. If you can figure it out, more power to you.

More specifically, the article, like much of Light Reading, in its several remarks I quoted, had a big theme of down, down, down, melt-down for the whole industry. This theme was not supported by references to primary sources.

There are layoff going on across the industry. People like me - who are in the midst of these things - don't really need references to primary sources to figure out the state of the industry. I don't know what your background is, but it obviously it doesn't involve working at a service provider or an equipment vendor.

But, you are making my main point: Some parts of the telecommunications industry are doing well, and the article's theme of down, down, down, melt-down does not apply to the whole industry.

I was not making that point at all. The theme of "down, down, down, melt-down" does apply to the whole service provider industry.

To be more sure, I'd like to see some solid numeric data.

And I don't want to see any more data. It is pretty obvious to me that the market is in a pretty bad shape and it will stay like that unless service providers figure out a way to increase their revenues and profits.

Case closed. OK?
routethus 12/4/2012 | 11:07:45 PM
re: 2003 Top Ten: Startup Flameouts nbwaite,

You continue to completely miss the point. You state that all you did was innocently repeat a quoted 20%. But you have done much more. You have treated it like fact, and you have treated as if it is credible despite the fact that there is **NO HARD DATA RELEASED TO SUPPORT THE CLAIM**. You have criticized LR for a lack of hard data, while at the same time taking the most flimzy data possible and built a case on it.

FYI, at the height of the boom, Cisco was selling over $8B / year to SPs. Even if we are to accept the now $4B you claim, to not consider that a significant decrease would be incredulous to me.

Are router sales going to pick up? Sure they are, the Internet continues to grow and eventually equipment capacity becomes exhausted; and eventually other equipment categories become exhausted and begin to grow as well. But for you to critcize LR and then do what you (place so much emphasis on one flimsy, unreliable, and unsubstantiated data point) is wholly without merit.
nbwaite 12/4/2012 | 11:07:47 PM
re: 2003 Top Ten: Startup Flameouts routethus:


The 20% number is a rounded up number that was worked out a long time and is repeatedly thrown out with out being updated on a quarter by quarter basis. Further more, it includes both equipment sold to serviced providers and equipment sold through to enterprises by service providers.

These numbers are not helpful for the following reasons:

1) Cisco does not provide the split between equipment sold to SPs for a) their own IT infrastructure, b) installation in a public network, c) resell to enterprises. Without the split, it is not possible to understand whether sales **TO** SPs is going up or down. So your assertion that Cisco numbers can be used to assert that Cisco revenue to SPs is going up, is simply wrong. They may be, but these numbers can not be used as the basis for that assertion.


I gave the quote and the reference. The quote I gave is that "roughly" 20% of Cisco's revenue was from "service providers" (SP). The reference didn't say "rounded up". If you have some references on "rounded up", then trot them out.

You are claiming that the SPs do not keep the equipment. Okay. If the SPs use the equipment, resell it, give it away, store it, burn it, junk it, toss it in the Pacific Ocean does not change this 20%.

To Cisco the 20% would be about $4 billion; if the SPs were reselling most of that, and putting on a mark-up, that would be a big chunk of money. Maybe there are some references on such resales by the SPs. For some of what is in the article, such references would be relevant; is you have some references, let's learn about them.

That the SPs are mostly just reselling the Cisco equipment they buy is curious. If you have some references and data on the fraction, then trot it out.

Else, it does appear that the SPs are mostly from their own operations finding "roughly" $4 billion a year (20% of $20 billion) to spend on growing their networks. This point, then, contradicts some of the remarks in the article.

I'm drawing conclusions from the references I gave. Tough just to throw out the conclusions in favor of other conclusions without other references and data.

2) If there is a major shift from enterprises building their own networks to managed services, then what looks like Cisco doing better with SPs could be quite misleading, so as the number goes from 20% to 30% or 40% then how are we to know why and in what product categories. For the same reason, if service providers became a bigger channel to SPs the overall % as reported by Cisco might go up, but that would be grossly misleading.


SPs shipping routers through worm holes to distant parts of the universe would be misleading also. If you have some references and data on the possibilities you mention, then trot them out. Without such data, tough to assume that the data available is misleading.

3) It is impossible to add up individual product break downs given by Cisco and come to the same rounded up number as them. Please try and do it your self if you think it is.


Haven't tried; didn't suggest that I did; would believe that accurate detailed data on breakdowns would be tough to get. accurate detailed data on breakdowns would be tough to get.
whyiswhy 12/4/2012 | 11:07:48 PM
re: 2003 Top Ten: Startup Flameouts Waite:

Does the PhD stand for piled higher and deeper?

Sophist.

-Why
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