Extreme Comes Clean
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