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Ericsson Cast-Off Starts to Shine

Light Reading
News Analysis
Light Reading
7/21/2000

Last year, while Cisco Systems Inc. and Redback Networks Inc. dished out billions for two metropolitan area optical companies, Ericsson Inc. was busy spinning its metro optical product out into a startup.

Six months after officially departing from Ericsson, Metro-Optix seems to be doing well for itself. Next week it plans to announce $63 million in second round financing, bringing the total venture funding for the company up to $83 million.

"Leaving Ericsson really was a blessing in disguise," says Arun Bellary the company's CEO. "Now, with this funding, we have enough muscle to build out our sales and marketing teams and work toward an IPO."

According to Bellary the decision to spin the broadband access division out of Ericsson happened in July 1999 right after Sven-Christer Nilsson resigned as president and CEO of Ericsson and was replaced by Kurt Hellström as president.

"They were making their big 3G wireless push, and they wanted to focus on wireless," he says. "They didn't care much about what happened to the wireline products." While Ericsson has no advisory role or management control of the company, it did provide seed financing and took a small stake in the second round.

New investors include J&W Seligman, BlueStream Ventures, Essex Investment Management, Wasatch Advisors, Deutsche Banc Alex. Brown, Weiss Peck & Greer Venture Partners, Chase H&Q, Star Ventures Management, Roger Engemann & Associates, and Dain Rauscher Wessels. And all of the existing venture capital investors -- Chase Capital Partners, InterWest Partners, Sevin Rosen Funds, Centerpoint Ventures, and Ericsson -- invested in the second round as well.

So what exactly is causing investors to pour so much cash into the company? Essentially, Metro-Optix has developed a next-generation Sonet add-drop multiplexer that integrates ATM and IP into the platform. Sound familiar? It should; Metro-Optix is far from being alone in this market. Cisco has already begun shipping a very similar sounding product that it developed from the Cerent acquisition. Cyras Systems Inc., another startup, also has a similar schtick, as does Redback with its product from Siara (see Cyras: The Next Cerent? ).

So what's the big deal? According to the vendor, its platform offers two key elements that the others can't match: flexibility and scalability.

Instead of fixed modules that offer specific types of interfaces, customers can mix and match the interfaces to carry channelized TDM, ATM or IP over Sonet. The vendor claims that some of its competitors include the switching on the same module as the interfaces. Metro-Optix says it has them as separate modules so that, as capacity needs increase, customers can simply purchase additional fabric instead of paying for a whole new interface.

But analysts question how different Metro-Optix could be from its competitors. "I just don't know how much more flexible it could be than the Cisco or Cyras products," says Mark Lutkowitz, president of Trans-Formation Inc. "It's hard to believe that they will have something that beats Cisco's prices; and if they do will it be enough to make a difference?"

Metro-Optix isn't only going up against startups and newer entrants into this market, like Cisco, but it also faces tough competition from old-school Sonet add-drop multiplexer vendors like Nortel Networks , Lucent Technologies, and Fujitsu Network Communications, which have a huge presence in RBOC networks.

Still, with $83 million in backing, investors must be confident that Metro-Optix is hot. "That's a lot of money," says Lutkowitz. "They either have something or they don't; it's hard to tell. It could all just be optical fever."

by Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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