x
Optical/IP

Optical Survivors

After a year of declines in capital spending (capex) and a lingering hangover from the inventory bubble of 2000, everyone is now worried about more capital spending declines by U.S Carriers in 2002.

As conventional wisdom has it, the dominant portion of capital spending will belong to the incumbent telecom carriers. The big question is whether capex returns to 1999 levels in 2003, 2004, or 2005. In the more optimistic scenario, players such as Global Crossing Ltd. (NYSE: GX), Level 3 Communications Inc. (Nasdaq: LVLT), Qwest Communications International Inc. (NYSE: Q), SBC Communications Inc. (NYSE: SBC), Sprint Corp. (NYSE: FON), Verizon Communications Inc. (NYSE: VZ), and WorldCom Inc. (Nasdaq: WCOM) will all open up their labs again and award every system startup contracts. But this all sounds as likely as a World Series victory by the Boston Red Sox.

Red Sox fans and others dealing in hard realities – and facing up to the massive failures of the Telecom Act – argue that the incumbents are the only game in town for the next few years.

Many players are using this new “reversion to the incumbents” trend to employ the old “FUD” (Fear, Uncertainty, Doubt) strategy. FUD, which emerged during IBM Corp. (NYSE: IBM) mainframe days, is a strategy of intimidating customers by assuring them your startup competition is going out of business. This strategy was the one initially employed to keep the minicomputer and ”toy” PCs from ever being used in the corporate world.

This occurred to me, when, recently, the CEO of Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) played the FUD card in addressing an investor group in New York. Telecom equipment would soon be supplied by only a handful of systems firms, he said. [Ed. note: Ironically enough, though bad-mouthing purchases from startups, Tellabs just forked over $355 in cash to buy one – see Tellabs Cops Ocular.]

In such a climate, next-generation technology is being pushed out in time, forecasts for demand have dropped, and Ethernet and MPLS have yet to be telecom “hardened”. In the incumbent world, Sonet, Telcordia compliance, and Osmine still rule. FUD is what they want. It’s comfortable. The fact that the wonderful world of Osmine-based equipment is difficult to manage and not delivering what customers want doesn’t matter. It keeps incumbents happy. We might as well bring back batch processing and slide rules as well.

Is this our destiny?

Well, such a dismal outlook discounts several grounds for optimism. For one, few analysts have commented on the size and role of non-U.S. carriers. While North America may be the dominant corporate location for equipment and component vendors, the end-market (those with the capital budgets) is much broader. If we want to understand the drivers of customer needs and the timing of turns in sector demand, we need to take a global perspective and look outside that handful of U.S. carriers.

A December report by J.P. Morgan & Co. includes some very interesting data. Thirty-two of the 50 largest carriers in the world are from outside North America. Seven of the top 10 are outside the U.S. If you look at the market capitalization of the top 10 carriers, 68 percent comes from outside the U.S. Economic indicators all support the view that substantial growth will come for equipment vendors outside the U.S. market. Most importantly, direction will also come from these markets: Direction in performance requirements, direction in pricing, direction in architectures, and direction in the need for meeting archaic specs and standards – all this may be very different than that to which the cozy little U.S. incumbent club has grown accustomed.

FUD is comfortable, in some circles, but fundamentally uneconomic. Just as the perceived “non-mainstream” and foreign users in computing in the 80s broke open the floodgates of low-cost, distributed computing, a similar evolution may likely be led from outside the U.S. incumbents' cabal in terms of carrier investment. After all, foreign deployments of ISDN, DSL, broadband video, and mobile services have all outpaced those in the United States. For the optical systems industry to right its direction, we need to incorporate the needs of the largest markets.

Thankfully, some U.S. organizations like the Optical Internetworking Forum (OIF) and Optoelectronics Industry Development Association (OIDA) recognize the need to change. OIDA has an initiative aimed at achieving cost reduction targets of 25 to 30 percent in carrier neworks, as suggested by the consulting firm McKinsey & Co. New design methodologies, automated manufacturing, automated testing, integration methodologies, and changes in the Telcordia processes and standards are all necessary and are being addressed to move the industry forward.

Beyond praying and hoping that 2002 is better than 2001, what’s the call to action? One is to get active in industry-wide initiatives and evolving standards. The other is to engage in change. As the mainframe computer vendors of the early 80s learned the hard way, ignoring a known big customer segment, playing the game of FUD with your existing customers, and not focusing on the supply chain is a recipe for disaster.

It’s time to look globally. Startups need to look for distribution and strategic partnerships. Mergers to gain scale and breadth may be the best option for the majority of small component players. But it’s do or die. Death is assured if you are waiting for a U.S. incumbent to wake up.

See the world and enjoy the pursuit of matchmaking in 2002!

John Dexheimer is President of Lightwave Advisors Inc. He has helped optics firms raise over $800 million of equity investments, helped found two firms, and is a limited partner in three VC funds. He is on the boards of several optics firms and acts as a consultant. In his prior life as an investment banker he led the IPO of Uniphase in 1993 and managed the equity research organization of a brokerage firm.

SiO2 12/4/2012 | 11:01:16 PM
re: Optical Survivors BlindedByLight writes:

> BTW, NTT is not deploying Calient
> although there are some lab evals,

interesting. is this to say that
calient now has trials going on
with multiple carriers in japan?
they've already announced a
"pre-deployment trial" with JT
and an OEM relationship with
OKI. what more can you tell us
about calient at NTT?

> specifically they seem to buy into
> the IP routers/OO on same GMPLS
> plane story (good wool-over-eyes
> sales job by the Calient folks)

let's not misrepresent GMPLS here.
GMPLS supports overlay, full peering,
or partial peering models. there is
no a priori network architecture
implied by GMPLS. its merely a set
of tools available to the network
architect for implementing the
network.

> and JT deploy 1-2 switches for a
> university advanced optical study
> ntwk, not in their own national
> network.

i presume that this is the pre-deployment
trial alluded to in the prior release.
it'll be interesting to see which
provider launches the first commercial
deployment of an all-optical cloud that
uses dynamic signaling for setup and
restoration, rather than the traditional
NMS-based approach.

SiO2

BlindedByLight 12/4/2012 | 11:01:17 PM
re: Optical Survivors Everyone is posting good comments.

It's obvious John D. has no clue what he is talking about in the international market. There's a reason why the Alcatels & Marconis do better in international carriers, cheap price and minimal features. No margins, especially in Asia.

When you've been in the trenches, you'll know international is not honey for startups.

And, does he think vendors like OSMINE? It's a freakin' RBOC reqmt, not vendors! If we can get rid of OSMINE, there'll be alot more interesting network opps for everyone, not only startups.

BTW, NTT is not deploying Calient although there are some lab evals, specifically they seem to buy into the IP routers/OO on same GMPLS plane story (good wool-over-eyes sales job by the Calient folks) and JT deploy 1-2 switches for a university advanced optical study ntwk, not in their own national network.

BBL
chips 12/4/2012 | 11:01:43 PM
re: Optical Survivors Well said, dietaryfiber and poster! I could not agree more whole heartedly.
It has been an article of faith that the telcom spec for quality is very different than the one for consumer electronics. Take component reliability as an example. The acceptable MTBF for telcom has been 25 years vs. 3 years for the latest high-tech toy or business product. Proving that a product has telcom class reliability takes time that the start-ups don't usually have under their belts and will be always hard pressed to get before the money runs out.
It leaves you to conclude that the VC's who want shortest time to liquidity have not realized the difference between this business and some of the others. It would be wise for them to remember that there is even bigger ROI on a start-up that becomes the next market dominator later on than on the one that gets bought up sooner by an existing market player.

my two cents,
C
poster 12/4/2012 | 11:02:43 PM
re: Optical Survivors good article. really this points out how the US (de)regulatory agencies are driving US carrier networks to be the last place of innovation in the telecom world.

and I couldn't agree more with dietaryfiber. I've said it before and I'll say it again: the VC-driven product creation process of the roaring 90's is the fundamental reason for the lingering networking systems hangover. I've always thought that very few companies truly understand what it means to build quality, 'carrier-class' products. one major reason? the entire product/company roadmap is matched to a funding model that does not allow for adequate development, testing, quality assurance, and rollout. and this is driven by the VCs. the timeline and venture funding that exists in the VCs head does not match up in reality with what is required to develop a quality product that carriers (or large enterprises - basically the big $$) will buy over time. no carrier or large enterprise is going to roll the dice with some startup - period. no amount of powerpoint slideware and flashy marketing will make this happen overnight. startups need to create substance in quality products that alone are significantly better than the product, service, support, financing, and stability they get from their lucent, nortel, or cisco now. and this takes lots of time and lots of money. and this reality has become even more harsh given the current climate.

it is laughable the number of startups and VCs that are learning this the hard way as we speak. what I question is whether they are actually learning. the idea of the quick return, the focus on the liguidity event and the easy money needs to be abandoned. in the big picture, things in telecom/networking are not bad - things are great. there are still major problems that need to be solved in networking and we are just at the beginning of years of innovation. the problem at the moment is VC expectations need to be re-set to reality. all of the marginal investments that have been made are being weeded out. once this happens, and good ideas are actually given the time, money, and resources they truly need, I think huge rewards will be had by those that are smart enough realize and execute on this.

ARBoy 12/4/2012 | 11:02:56 PM
re: Optical Survivors >>The best way to sell products to large carriers is to follow through on good products and expect to get clobbered on margin. Expect any meaningful sales ramp to take time (read years). Expect to customize your product for them. Expect the Ts&Cs of a contract to favor them and not to guarantee revenue. Then, you can expect some orders if you
help them position your product to their people who engineer it into their network.

Most startups just don't have the money or the patience.>>

Never was a more true word spoken! This was written by someone that has experienced, firsthand, what it takes to win with the real carriers - the RBOCs. The days of selling the latest and greatest wiggit router to Bob's ISP have long gone folks and many of the companies that were started to take advantage of that fad will be gone too.
dietaryfiber 12/4/2012 | 11:02:56 PM
re: Optical Survivors Business is business all the world over. Large carriers act in similar ways because generally they need the same things.

Here is one they DO NOT get from US startups. Reliable products built for the long term. VCs build companies targetted to the "liquidity event". They do not build them to last the long haul. So, why should a large carrier be interested in such products. Occasionally, there are the good ones (Ciena was an example). How many flash-in-the-pan startups have been touted here? Imagine you were a carrier that was betting your differentiated service around one of them (lets say Ironbridge). Sound like a good idea?

The best way to sell products to large carriers is to follow through on good products and expect to get clobbered on margin. Expect any meaningful sales ramp to take time (read years). Expect to customize your product for them. Expect the Ts&Cs of a contract to favor them and not to guarantee revenue. Then, you can expect some orders if you help them position your product to their people who engineer it into their network.

Most startups just don't have the money or the patience.

dietary fiber
trixie 12/4/2012 | 11:03:00 PM
re: Optical Survivors With even the US carriers cautious about buying from startups and wont buy without making them jump through hoops, why would international carriers risk buying from US startups.

_________________________________________________

I agree that might be true for the major overseas carriers, but note that NTT is putting calient switches in its networks- some carriers are willing to roll the dice a little, as it is in their nature to be on the development edge.

There are also a lot of new carrier startups in NA and abroad that also look to the new technology in network equipment, and hence go to the startup equipment companies.

Heck, I know of one MA-based starup who is almost wholly dependent on Euro carriers for its revenue right now.....
edgygirl2001 12/4/2012 | 11:03:08 PM
re: Optical Survivors With even the US carriers cautious about buying from startups and wont buy without making them jump through hoops, why would international carriers risk buying from US startups. Most startups anyway fired the extra sales/marketing guy in the last layoff who could have worked on the international opportunities.
OTOH, if any US startup fails to get any US incumbent interested, they should sure look outside.
let-there-be-light 12/4/2012 | 11:03:09 PM
re: Optical Survivors OK,

So maybe there are some carriers outside the U.S. with money to spend, and they might be potential customers for (U.S.) optical start-ups, but who are they exactly, and are they any less conservative than the much-maligned incumbents in the U.S.??

Which carriers are we talking about? Let me guess: NTT (have you done business with NTT?), Deutsche Telekom (not very different from Verizon), British Telecom, France Telecom, China Telecom, etc. etc.?

Or am I missing something here?
HOME
SIGN IN
SEARCH
CLOSE
MORE
CLOSE