Chiaro Seeks Its Footing

It's been a long wait, but core-router startup Chiaro Networks Inc. claims it's made the short list for six requests for proposal (RFPs) by major service providers. But company officials admit they won't get far without a big-name partner to sponsor them.

Any of the six RFPs would be a huge win for the Texas company, which has raised $210 million since 2000 but has mostly seen action in research networks rather than telco circles (see CERN Selects Chiaro and Chiaro Debuts a Big, Bad Router).

Five of the six RFPs deal with the migration of legacy networks to an IP/MPLS core, a theme expected to pervade service provider thinking for the next few years (see Incumbents Converge on Convergence). Three of the RFPs are in Europe and two in North America. The sixth, in Asia, also calls for an IP/MPLS network but is focused more on growth than on replacing old networks.

Yes, Chiaro shares its short-list status with others: Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR) are vying for all six RFPs. Chiaro's hope isn't to sweep all six, but to win pieces of each.

That's the most realistic goal for Chiaro and fellow core-router startups Hyperchip Inc. and Procket Networks Inc.: "To be the one the common carriers are going to use to play off Cisco" to keep prices in check, says Debra Mielke, principal analyst with Treillage Network Strategies Inc.

"Cisco and Juniper are always No. 1 and No. 2," says Carey Parker, Chiaro vice president of product marketing. "That's not our goal. The market needs a No. 3."

But with no track record at major carriers, Chiaro needs a large OEM as a partner. The partner could win some non-core piece of an RFP and suggest -- more likely, resell -- Chiaro's Enstara router for the core. "What they need is a big brother," says Frank Dzubeck, president of consulting firm Communications Network Architects.

Chiaro's problem is that each major vendor appears to be set with a core router plan. "From an OEM standpoint, there's no one left," Dzubeck says.

Cisco has its HFR, which appears to be readying for launch this year. Juniper is developing the TX, a hub for turning its T640 into a multichassis router. Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) has its BXR-48000. And Alcatel SA (NYSE: ALA; Paris: CGEP:PA) says its TiMetra Networks acquisition gives it an architecture suitable for the core. (See Cisco Sprints Ahead With HFR, Juniper Goes Terabit With the T640, and Alcatel & TiMetra Seal the Deal.)

The rest are piggybacking on others' products. Lucent Technologies Inc. (NYSE: LU), Nortel Networks Ltd. (NYSE/Toronto: NT), and Siemens AG (NYSE: SI; Frankfurt: SIE) have signed up to resell Juniper's routers, and Nortel and Huawei Technologies Co. Ltd. have agreements with Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7). As the Nortel case shows, there may be space for overlap, although Nortel officials say they haven't sold much Juniper into the core. (See Lucent Partners With Juniper, Siemens Jumps for Juniper, Avici, Nortel Get 'Strategic', and Huawei Partnership Boosts Avici .)

Procket is in a similar pickle, having landed no big reseller deal despite several rumors. Finding a partner will fall on the shoulders of CEO Roland Acra, hired from Cisco at the beginning of the year (see Procket Gets Cisco Exec and Will Nortel Pick Procket? ).

Chiaro isn't worried. Parker says the company has lined up a partner for each of the six big RFPs. These are temporary partnerships, tailored for each RFP to help both sides' chances. "It's kind of like dating. No one gets married on the first date. But [you expect] you're going to get married someday," Parker says.

So, the choice of Chiaro's formal strategic partner probably depends on which of the RFPs, if any, Chiaro can win. Chiaro's partner in that RFP will probably then be the Chosen One, and will make an equity investment in Chiaro.

Vendor selections for the six RFPs could come within months, Parker says. That's important, because Chiaro is going to need the investment from that strategic partner. Company officials say their 2002 funding leaves enough cash to last through 2004 (see Chiaro Lands an $80 Million Round). But volume revenues from the RFPs might not arrive until 2006, so Chiaro will need money by next year.

Chiaro's 2002 round -- which totaled $85 million in the end -- was far more than the $20 million or so the company had sought, and with the extra money came the cost of giving up greater share in the company. But it gave Chiaro the cash to survive the waiting period for these RFPs, Parker says.

Even with a strategic partner, survival could be tough. It's going to be difficult for any startup to recoup the costs of developing a core router, analyst Mielke says. Large companies such as Cisco can subsidize the effort with other divisions' revenues; startups can't. "That's what I think about when I look at all these little guys," she says. "Where's the money going to come from?"

— Craig Matsumoto, Senior Editor, Light Reading