It’s a question most often asked by Light Reading editors when leaving downtown Manhattan bars in the wee hours of any given Sunday morning.
But it’s also an appropriate question to ask about the state of the optical networking industry – especially now, after the early telecom optimism of 2002 has turned into yet another Slough of Despond.
To answer it, let us start by reviewing the year to date:
- The stock prices of leading optical networking vendors have fallen further and farther than ever before.
- Major service providers are going, going, gone! – not munchy little BLECs or CLECs, mind you, but honking great carriers like Global Crossing, Level 3, and Williams.
- Layoffs continue to sweep through the optical industry like... well, a big sweepy thing.
So why am I feeling more optimistic about the optical networking industry than I have in a long time? [ed. note: new meds?] Because all these current trials and tribulations are part of a process of rationalization in our industry. And that’s “a good thing,” as Martha would say.
It’s also “an inevitable thing,” as anyone who’s been tracking the optical networking industry for the last few years should be able to tell you (anyone who's got half a brain, that is, and I know I have).
To understand why, let’s review the story so far. Here, then, for those of you who don’t know it:
- A Short History of Optical Networking, Part I
- Early 1999: Service providers realize (“blimey!”) that they don’t have enough capacity and start to buy (“buy! buy! buy!”) all things optical to bulk up the bandwidth on their networks.
- Mid-1999: Equipment vendors run short of inventory (“holy crap!”) and start super-sizing their component orders so that they can build more (“more! more! more!”).
- Late-1999: Component vendors accommodate the systems vendors by putting their production lines into sooper-dooper-overdrive (“brrrrrmmmmm!”).
- Also late 1999: VCs rumble the caper and start funding anything optical (including www.lightreading.com).
- 2000: Everyone rakes in giant, straining, oversized bags of money.
- Mid 2001: Service providers suddenly realize three things: They weren’t really that short of capacity (“oops!”); they now have too much capacity (“damn!”)); they have no way to make money from it (“bugger all!”).
- Three seconds later, the Ice Age cometh: Service providers stop spending money. The Mars Bar™ turns out to be a dog turd. The falcon cannot hear the falconer. Layoffs, bankruptcies, monsoons, tsunamis. In other words: It. All. Goes. Horribly. Wrong.
The Shape of Things to Come
So what happens next? A technology shakeout, for starters. The big-bandwidth stars of last year – such as MEMS and 40-gig – are now as much in demand as Erik Estrada and slide rules.
They’ll be replaced by some altogether new “flavors of the month” – namely, a bunch of practical new technologies that allow carriers (a.k.a. “the ones that kicked off this problem in the first place”) to actually generate some revenues from all that bandwidth.
Key amongst them will be devices designed to sit at the edge of the network, slicing and dicing services and applications. Such products can be divided into several distinct categories, including optical circuit switches (from companies such as Appian, Lightscape, and Turin), edge routers (from companies including Cisco, Juniper, Laurel, Redback, Riverstone, Unisphere), and even nouveau ATM solutions (from the likes of Équipe and Gotham). For more on all this, see: A New Optical Taxonomy.
Carriers will deploy these technologies. They will make money from them. Ergo, they will like them. Capex levels will stop falling. That money will start coming back into the market and filter down through the optical networking food chain, from service providers to systems vendors to components vendors to optical networking publications, so that I can finally buy that new Banana Republic suit I’ve had my eye on.
In other words, the pendulum will swing. The IPO market will open. The sun will come out. Flowers will bloom. Birds will sing (“tweet tweet!”).
And will we ever see the good old/bad old days of the optical networking bubble again? I bloody well hope not. Like most reasonable people, I’d be quite happy not to see a return to the time when carriers spent up to 120 percent of their revenues on capex (hard to follow the economic logic behind that one, isn’t it?) and went around trading purchase orders for startup equity; when optical entrepreneurs became overnight IPO billionaires before ever shipping a product; and when VCs could completely over-invest in the optical market and still make a mint.
How long will it take for things to get back to whatever passes for normal in our industry? It took two years for the optical networking market to get itself into this hole. This being a cyclical sort of a world, I expect it to take about that long to dig itself out of it. In other words, I’m predicting a full return to normalcy by mid-2003.
Rationalization has already begun.
Symptoms include the layoffs now taking place across the board at optical networking startups. Layoffs are always bad for the pinked, but are not necessarily a sign that a company is going out of business. A lot of startups (Chorum, and Équipe, to name but two) bulked up on staff in 2001 in expectation of getting to an IPO. But when the door to the public market slammed shut, they subsequently laid off staff – not simply to cut their burn rates, but also to become better targets for acquisition. This is a sensible thing to do.
And talking of acquisitions, there’s no clearer sign of a rationalization than the recent optical M&A activity. The numbers speak for themselves: Alcatel recently picked up Astral Point for $135 million. That’s little more than some startups – including Chiaro, Kestrel, and Pluris – garnered in a single round of funding at the height of the optical lunacy!
Then there’s the proposed acquisition of ONI by Ciena Corp. for a mere $900 million. This is an especially noteworthy deal, given that less than a year ago, in this very organ (pardon the expression), Hugh Martin, CEO of ONI, labeled Carl Russo, CEO of Cerent, a “wuss” for selling out to Cisco for the shamefully low sum of $7 billion – see Hugh Martin, ONI Systems Inc..
Taken at face value, these layoffs and low-price acquisitions all sound like more straightforward bad news for the optical industry. But when viewed as steps on the road back to Bidness as Usual, they present a less depressing picture. Painful, yes, but – as the prostitute said to the archbishop – it’s a good kind of pain.
— Stephen Saunders, Founding Editor, Light Reading