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Optical/IP

Extreme Comes Clean

When Extreme Networks Inc. (Nasdaq: EXTR) announced that it was acquiring Optranet Inc., a stealth-mode startup, on January 2, the company’s share price plunged by 27 percent.

Investors didn’t like what Extreme told them about the deal – or rather, what it didn’t tell them. The company declined to explain itself, and very little was known about Optranet (see Extreme Spins In Optranet).

All that changed earlier this week when Extreme came clean about why it had bought Optranet (see Extreme Offers First-Mile Ethernet).

In essence, Optranet’s developments will strengthen Extreme’s pitch in the service provider market by adding traditional telecom-type interfaces to its Ethernet switches.

Specifically, the purchase will give Extreme T1 (1.5 Mbit/s) and DS3 (45 Mbit/s) interfaces. It will also add software enhancements that will allow metro service providers to use Ethernet in the first mile over VDSL (very high-speed digital subscriber line). This will allow Extreme’s switches to be hooked up to regular telephone cable that will then carry Ethernet.

This “strategy announcement” is part of Extreme’s ongoing campaign to remarket itself as a service provider company. Last April it introduced the Alpine switch, which it claims is specially engineered to throttle traffic and provide circuit-like connectivity in metropolitan area networks using Ethernet (see Extreme Launches A Sonet Killer). The company has also included the same functionality in its Black Diamond chassis for deployment in larger service provider data centers.

But some analysts aren’t buying into Extreme’s new identity. “Ethernet everywhere is a great concept,” says Scott Clavenna, president of PointEast Research LLC and director of research for Light Reading. “But how do you manage the fiber plant if the Ethernet flows that you’re carrying aren't in Sonet?”

Indeed, Extreme’s lack of Sonet support is a limiting factor. But the company says that it’s working on packet-over-Sonet interfaces and should be able to ship something in Q1 2001.

Despite Extreme’s year-long marketing campaign the company still derives only about 30 percent of its business from service providers. By contrast, Foundry Networks Inc. (Nasdaq: FDRY), often viewed as Extreme’s closest competitor, has managed to generate 65 percent of its revenue from the service provider market, according to its latest conference call.

But the carrier market has proven to be a double-edged sword. Foundry’s stock plunged more than 50 percent after the company pre-announced that a slowdown in service provider spending had affected its revenues for the quarter (see Foundry Slammed After Warning).

And Alex Henderson, an analyst from Salomon Smith Barney, published a report last week praising Extreme for its lack of exposure to the service provider market:

“Given the problems surrounding the service provider industry, we believe that more attention is likely to be shown to equipment vendors servicing enterprise customers. While we acknowledge that a slowing economy has the potential to negatively effect all customer purchasing patterns, we believe that the effect would probably be more noticeable on the carrier side. Given these factors, as well as the secular growth trends found in the enterprise markets, we still like vendors such as Extreme and Cisco.”

But the issue here is not only how much of the business is exposed to the service provider market. It’s more about which service providers one is selling to. Riverstone Networks, a subsidiary of Cabletron Systems Inc. (Nasdaq: CS) and a competitor to both Extreme and Foundry, sells exclusively to service providers. The company recently reported a very healthy quarter, its revenue growing from $21 million to about $27 million, with a positive outlook going forward.

Why? Riverstone’s customers are all well funded service providers, including incumbents like Verizon Communications (NYSE: VZ), Time Warner Inc. (NYSE: TWX), and WorldCom Inc. (Nasdaq: WCOM), as well as newer players like Telseon and IntelliSpace. This combination of new and old service providers has a lot to do with the fact that Riverstone’s gear supports legacy interfaces along with Ethernet interfaces.

The addition of new interfaces and VDSL support, should help to make Extreme more attractive to a broader range of carriers.

“The metropolitan area network as a packetized network is still emerging,” says Sam Halabi, VP of IP carrier marketing and business strategy for Extreme. “The metro has been Sonet and TDM and we’re moving toward Ethernet. Extreme has been a pioneer in taking Ethernet switches and deploying them in that environment. Optranet helps complete the picture.”

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

Marguerite Reardon 12/4/2012 | 9:01:45 PM
re: Extreme Comes Clean Is Extreme really making headway in the service provider market? Many people seem to still think of it as a souped up LAN switch company. What do you think?
WJLRS1 12/4/2012 | 9:01:40 PM
re: Extreme Comes Clean If you call throwing Summit-48s in the basements of BLEC buildings "headway into the service provider space" than the answer is yes. I would like to know how many high-end routers they are selling to real service providers.

bgp-junkie 12/4/2012 | 9:01:38 PM
re: Extreme Comes Clean Since Extreme does not manufacture high-end routers, I suspect they are not selling any presently. Extreme does manufacture a robust layer-3 Ethernet switch, which can provide routing functionality. This product is not meant to replace a high-end router (today), although one could imagine the next-generation layer-3 switches possibly replacing the typical high-end router. Especially considering the price advantage of high-speed (>= 1Gbps) Ethernet interfaces compared to POS OC-48 or OC-192 interfaces.
Hanover_Fist 12/4/2012 | 9:01:27 PM
re: Extreme Comes Clean I think that Extreme has been suffering from a very LARGE identity crisis:

1) They tell the market that they are in the Layer 4-7 business but then back away from L4-7 questions on their conference calls (and in actuallity, they OEM the F5 products) when it is demonstrated that they have no market share.

2) They tell the market that they are in the Service Provider business until the service provider business starts tanking (I guess they are only in the market when it is convenient to be in that market) and when push comes to shove, cannot provide reference accounts using their routing code.

3) They tell people that they are selling 10 Gigabit Ethernet with their WDMi module but then quickly back off that position when pressed (in actuality, this is an OEM product from MRV that can only push 8 Gigabits and not 10 as what they want the market to believe).

4) They tell people that they lead in the Layer 3 market space but don't tell people that most of what is installed in the markert is Layer 2 ports (that have the ability to be upgraded to Layer 3 - let's ask them how many upgrade licenses they have sold - that would be a true measure of L3 ports in the market).

5) The Optera product sits outside their product - when excatly will it be integrated in to their box?

6) Extreme touts that a 'passive' backplane is far superior to the competitions' 'active' technology but when pressed, will admit that their newest chassis (Alpine) implements an 'active' backplane.

7) Rumor has it that George Prodan will be announcing his retirement on their upcoming conference call and will be replaced by someone from 3Com/Cisco. I'd say that his departure will cause an extremely large identity crisis.
gea 12/4/2012 | 9:01:19 PM
re: Extreme Comes Clean This gets a little annoying sometimes...Gigabit ethernet is only cheaper in the LAN. In the WAN or MAN, the lasers used for GbE are the same as those used for SONET, so the price difference comes down to the cost of a few thousand gates.

As for 10GbE, note that 2 of the three standards utilize SONET framing, so this gives some indication that those deeply involved in the standards know that there's nothing inherently cheaper about GbE.

In other words, GbE will never proliferate into the WAN, and probably never the MAN in large quantities (unless a SONET-framed GbE becomes available).
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