& cplSiteName &

Is Uncle Sam an Optical Sugar Daddy?

Light Reading
News Analysis
Light Reading
6/27/2002

Struggling optical networking companies are striking out with carriers, so now they’re looking to the United States government for business.

Carriers aren’t spending, plain and simple. All these companies were once big purchasers of optical gear, but recently they have either declared bankruptcy or found themselves in deep financial trouble (see WorldCom Goes Boom).

But with a new emphasis on combating terrorism and beefing up security, the U.S. federal government has increased its budget for telecommunications. Will it be enough to turn the tide in the telecommunications equipment industry? Not likely, say experts, but it could help many optical equipment companies weather the storm until carriers start spending again.

“This is not the knight in shining armor that will save the telecommunications equipment industry,” says Dave Smith, vice president of engineering for Corvis Corp. (Nasdaq: CORV). “It won’t reverse everything that is happening, but I think it is still a significant market that can’t be ignored.”

The U.S. government has always been a large source of revenue for many technology companies. Typically, most of the money spent was in information technology (IT) and local area network (LAN) equipment. But now the government is starting to plan upgrades to its telecommunications systems. Different departments are already issuing requests for information (RFIs) and requests for proposals (RFPs) for building new telecom networks. Federal spending on telecommunications infrastructure is expected to jump to $16.1 billion in 2007 from $10.8 billion in 2002, according to a report released earlier this month by Input, a market research firm that tracks contract spending on technology in the federal government.

The four areas that are driving this increase in telecommunications spending are homeland security, e-government, Department of Defense upgrades, and telecommuting, says Payton Smith, an analyst with Input.

“Of these four market trends, homeland security will have the greatest impact on near-term telecommunications spending,” he says.

The new Homeland Security Department was officially launched on June 6, 2002, by President George W. Bush. It will combine people and collect information from 19 different agencies and will likely spend an estimated $34.7 billion on information technology and telecommunications equipment. Over $1 billion of that money is planned for the Transportation Security Administration, a nationwide IT infrastructure that will provide telecommunications, networking, and desktop services.

In addition, other government agencies are already beginning to beef up their telecommunications networks. At the end of May 2002, the Defense Information Systems Agency (DISA) issued a request for information to build a global telecommunications network based on optical networking technology, called the Grid Bandwidth Expansion (GIGBE) project. DISA is a combat support agency responsible for planning and operating command, control, communications, and information systems that serve the needs of the President, Vice President, Secretary of Defense, Joint Chiefs of Staff, field commanders, and other Department of Defense (DOD) elements under all conditions of peace and war.

While initiatives within the Homeland Security Department as well as DISA are still in their early days, many optical networking companies are gearing up to be a part of the bidding process. Large companies like Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO), Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT) have already been selling equipment to the federal government for years, and they have divisions set up internally for this purpose. Alcatel for example, has been selling wireless and radio equipment to the government for over ten years. Sources close to the company say it is working on selling optical gear to the U.S. government as well, although the company itself would not confirm this.

Smaller optical companies are also starting to recognize the federal government as a potential revenue source. Corvis recently formed a special division to handle bids on federal government contracts. John McGowan, who had sold services to the U.S. government when he worked at Qwest Communications International Inc. (NYSE: Q) and equipment to them while working at Lucent, was hired to head up the group. Tellium Inc. (Nasdaq: TELM), an optical switch maker, just announced a contract with Lockheed Martin Corp., the number one government systems integrator (see Lockheed Picks Tellium). Tellium is expected to score other government deals through its lead investor, Science Applications International Corp. (SAIC), another large government systems integrator (see Tellium's Time Warp).

“We’re not changing our focus,” says Corvis’s Smith. “But the market has changed and there is a lot of money in the government sector. The products they need are a close fit to what we already have. We’re just responding to the market demand.”

And even optical startups are looking toward Uncle Sam for sales. Calient Networks Inc., an all-optical switch company, which recently had a massive layoff, says it is working with integrator partners on government bids (see Core Optical Startups Chill Out ).

Details of the Homeland Security RFIs aren’t known yet, but the DISA RFI is available to the public on the Internet (see DITCO Contracting Opportunities). In the RFI, the agency is specifically looking for optical switches, both OOO and OEO; ultra-long-haul amplifier and regenerator gear; multiservice provisioning platforms that handle Sonet, all flavors of Ethernet, and ATM; high-performance IP routers; and network management components. All these devices must be carrier class with 99.999 percent reliability and offer hot-swappable components and non-blocking architectures.

While experts acknowledge that business from the federal government can’t be ignored, they also agree that it won’t be enough to turn the optical industry around. For one, these projects often take years to get off the ground, and vendors may not see revenue from contracts won for some time. Secondly, the bidding process on government contracts is very competitive, and profit margins can often be eaten away by bidding wars. Thirdly, winning these contracts usually requires a partnership with large government-approved systems integrators. This is typically not a problem for large companies like Nortel or Lucent, but could stand as a roadblock to smaller ones like Calient.

”Small companies really need to stick to their knitting right now, and I think chasing government contracts could be too much of a distraction,” says Rick Schafer, an analyst with CIBC World Markets. “It’s a totally different way of selling and providing customer support.”

On the flip-side, cash is king in times such as these. A large contract from the federal government may be a drop in the bucket to the big players, but for a small company like Tellium or Corvis, or for a startup, a big win could keep them in business until the market turns around, says Simon Leopold, an analyst with Merrill Lynch & Co. Inc.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

(8)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
switchrus
switchrus
12/4/2012 | 10:12:03 PM
re: Is Uncle Sam an Optical Sugar Daddy?
G«£While experts acknowledge that business from the federal government canG«÷t be ignored, they also agree that it wonG«÷t be enough to turn the optical industry around. For one, these projects often take years to get off the ground, and vendors may not see revenue from contracts won for some time.G«•

While it is true that government contracts do take a longer time to be bid and awarded, they often time have provisions which are attractive to companies working with the government.

1)Progress payments, where the government pays the vendor at fixed intervals a portion of the contract value as key milestones are completed such as design reviews, completion of engineering model tests, completion of factory acceptance tests etc.
2)Incentive fees paid above and beyond the basic contract rate when performance goals are met such as schedule performance goals. Incentive fees are usually pure profit dollars and not tied to cost of goods.
3)Limited legal exposure to liability claims. The Government is self insured, however they have special accommodations in Federal prison for contractors caught cheating.
BobbyMax
BobbyMax
12/4/2012 | 10:12:00 PM
re: Is Uncle Sam an Optical Sugar Daddy?
First of all the US government is not in the business of saving private compamies. Furthermore the government network does not have to be optical as they do not need high traffic network.

The homeland security offices would be setup on the next 10 years or so. So there is no immediate business for any optical networking company/.

Even if the optical industry come back, the investments would not be that much.
lvezz
lvezz
12/4/2012 | 10:11:59 PM
re: Is Uncle Sam an Optical Sugar Daddy?
BobbyMax wrote:
First of all the US government is not in the business of saving private compamies.

Huh?
Airline industry, Fall 2001
Amtrack, last week
Steel industry tarrifs, last month
Chrysler, 1980 (est.)

LR needs a BobbyMax the hack filter
zweisel
zweisel
12/4/2012 | 10:11:58 PM
re: Is Uncle Sam an Optical Sugar Daddy?
BobbyMax wrote - "First of all the US government is not in the business of saving private compamies."

Actually, this is incorrect since the government has saved numerous companies in the past with various vehicles such as subsidies and guaranteed loans. Chrysler is a good example.
switchrus
switchrus
12/4/2012 | 10:11:58 PM
re: Is Uncle Sam an Optical Sugar Daddy?
G«£First of all the US government is not in the business of saving private compamies.

Huh?
Airline industry, Fall 2001
Amtrack, last week
Steel industry tarrifs, last month
Chrysler, 1980 (est.)G«•

IsnG«÷t that sort of the point, the fundamental question; is the Optical Network/Telecommunications Industry worth saving? Is the intellectual capital and innovation and educational investment worth supporting ?

YES!

As a few have pointed out, weG«÷re talking about engineers and programmers who were making incomes well in excess of the national average. IG«÷m not well enough informed on the number of G«£blue collarG«• jobs provided by the industry in the US to comment on what the job losses are like in those categories, I would venture to guess that the number is small with the trend to offshore production of recent years.
zweisel
zweisel
12/4/2012 | 10:11:55 PM
re: Is Uncle Sam an Optical Sugar Daddy?
The biggest winner in this telecom industry? Microsoft of course. PowerPoint in particular since it was the only working product of most start up companies...
wilecoyote
wilecoyote
12/4/2012 | 10:11:55 PM
re: Is Uncle Sam an Optical Sugar Daddy?
No, the Feds won't save the industry. But what is your definition of "save?"

My definition of save is this:

850 of the ~ 900 equipment companies are either sold or go out of business. 50 remain worldwide serving carriers, enterprises and small/med biz, plus consumers. There is lots less noise in the system and standards start to "harden." Broadband IP via wireless, coax, fiber, copper will finally reach end users and everyone will make money in the process. There will be fewer people in the industry, less "dumb money," etc. and basic Darwinism will have won out.

That's my definition of "save." We're in this mess because of over financing, criminally minded finance executives and wall street analysts/bankers, starry eyed entrepreneurs, etc. Just too damn much noise. When the noise dies down enough for real companies with real value propositions and products that will deliver real savings while boosting performance, efficiencies, etc., the industry will recover.
willywilson
willywilson
12/4/2012 | 10:11:55 PM
re: Is Uncle Sam an Optical Sugar Daddy?
When the noise dies down enough for real companies with real value propositions and products that will deliver real savings while boosting performance, efficiencies, etc., the industry will recover.

---------

Agreed, but it will recover much faster if the government actually decided to punish the white-collat thieves instead of focusing exclusively on poor, violent criminals whose real failure is being in the wrong social class.
Featured Video
Upcoming Live Events
October 22, 2019, Los Angeles, CA
November 5, 2019, London, England
November 7, 2019, London, UK
November 14, 2019, Maritim Hotel, Berlin
December 3-5, 2019, Vienna, Austria
December 3, 2019, New York, New York
March 16-18, 2020, Embassy Suites, Denver, Colorado
May 18-20, 2020, Irving Convention Center, Dallas, TX
All Upcoming Live Events