Reality Bites at NGN Conference

BURLINGAME, Calif. -- The once bubbly excitement of the optical-networking startup scene has rapidly shifted to a new reality.

Nowhere is that new, bleak realism more evident than at the Next-Generation Network Ventures conference that opened here today. NGN participants are currently fighting hard to define the parameters of optical technology -- while watching funding dry up as potential customers and investors keep their wallets closed (see Money Crunch Pressures Startups).

Surviving the slowdown was the mantra of Tuesday morning's discussions at the show in Burlingame, Calif. Host John McQuillan, chairman of the conference and president of McQuillan Ventures, tried to kickoff things with a positive spin, saying: "A downturn favors upstarts." But nobody at the conference could ignore the current slowdown affecting the entire telecom-focused industry, a trend highlighted by Monday's now-recurrent earnings warning from bellwether Cisco Systems Inc. (Nasdaq: CSCO) (see Cisco's Inventory Woes Mount).

Only a year ago, McQuillan's analysis of the networking startup industry was that selling your startup for $100 millon was a worst-case scenario. But in 2001, he sunnily notes, "Going out of business has returned as an option."

As service providers and other large customers buy less equipment, the trickle-down effect has hit component suppliers the hardest. Many are now scrambling for ways to stay alive.

"The trickle-down for these guys [component vendors] is quite severe," McQuillan says.

Bob Lucky, corporate vice president for applied research at Telcordia Technologies Inc., reflected a general consensus with his belief that many service providers are going to "drag their feet" on building new networks, at least for the next year or so.

"The question is: Will [component vendors] continue to be funded?" Lucky asks.

Meanwhile, optical component vendors are positioning their wares as technology that will drive the systems needed a couple years in the future. According to one venture capitalist, that kind of thinking will be needed to attract investors.

"If Cisco can tell you now that they need it, it's too late for me to make money," says Andy Rappaport, partner with Menlo Park-based August Capital. "So if Cisco has two bad quarters now, I don't care. The question is: Are you working on something that's going to be fundamental, 10 years out? The answer is, for most of the startups, that we don't know yet."

Part of the problem is the infancy of optical components technology, which Rappaport compares to the electronics of the 1940s. "Components producers are still at the stage where they don't know whether to put the pins on the bottom or the side of the vacuum tube," he says. "But it takes time to figure these things out."

Some big bets are being placed on companies basing their products on indium phosphide, which proponents say allows for the production of cheaper, smaller, and faster laser technologies. Another technology that seems to be winning greater acceptance is the VCSEL (vertical cavity surface-emitting laser), which promises greater design flexibility and simpler, less costly production.

During NGN's opening panel presentation, startups Genoa Corp., CyOptics Inc., Bandwidth9 Inc., and Agility Communications Inc. all touted their wares as products that could enable system producers to realize radical pricing and performance shifts beyond current technologies. The startups' main concern right now, however, is surviving long enough to see their predictions materialize.

Larry Coldren, chairman and CTO of Agility, said his company had originally planned to have an IPO right about now, but instead is seeking more venture funding.

"And it's nasty, with the kinds of terms people are asking for," Coldren says, carefully looking around to see who might be listening in during a coffee-break discussion. "But we're not sweating, or at least we're not letting them see us sweat."

Agility, which is building tunable lasers, transceivers, and other dense wavelength-division multiplexing (DWDM) system components, needs to get design wins for "next-generation systems, ones that will be for sale two years from now," Coldren says. "But that doesn't mean we can stop building our fab plant. The systems guys are banging on us harder than ever, telling us not to get out of phase." (See Agility Unveils Long-Haul Laser.)

Rick Gold, president and CEO of optical-amplifier developer Genoa, says he's breathing a bit easier, since his company has almost $100 million in funding (see Genoa Announces Product, Funding). But he feels that more, not less, innovation is going to be required from component vendors.

"There's no doubt that deployment [timelines] of the next-generation networks have been driven out some," Gold says.

Several speakers said the current shakeout is a good thing for the industry, since the fund-anything-optical trend of the past couple years produced more companies than the marketplace could sustain.

"I was at the OFC show, walking around looking at all the booths, wondering how all those people were going to make money," Telcordia's Lucky says (see OFC Report) .

"The funding of the last couple years has led to a stunting of figuring out how systems should be built," August Capital's Rappaport says. "A downturn in the industry could be the best thing that could happen to optical innovation."

But beauty, of course, is always in the eye of the beholder.

"It's easy to say a shakeout's good," Genoa's Gold notes. "But it all depends on whether you're the shaker, or the shakee."

-- Paul Kapustka, Editor at Large, Light Reading http://www.lightreading.com

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fatchance 12/4/2012 | 8:33:21 PM
re: Reality Bites at NGN Conference Any fool can invest in an up market, it is the smart VCs that will look beyond today's market to the 18-24 month window that will fund the next round of winners. Most, however, are lemming like in their conventional wisdom response by pulling back their investment pace. Maybe there are too many bad dot com investments in the portfolio.
When all else fails, panic.
Shareholdervalue 12/4/2012 | 8:33:19 PM
re: Reality Bites at NGN Conference Does anyone have any speculation on what will need to happen to turn our industry around?
Titanic Optics 12/4/2012 | 8:33:17 PM
re: Reality Bites at NGN Conference The madness, I'm afraid, isn't over yet. The delusions of company presidents and dumb money has to stop. I can't speak for the former, but there is still some dumb money to be had.

I'm an engineer by trade, but I learned by experience (and some graduate education) that things beyond engineering matter. Sadly, too few companies realize this and operations is an afterthought, while the financial people, too cowed by the physics, suspend knowledge of everything they ever learned about business.

I once played "radio psychologist" with a VC person, and kept asking questions like, "If I wrote you the S-1 (filing document for IPO), how would you FEEL about the management" and "How do you FEEL about how many competitors they have and the competitive landscape". Merely asking the questions was enough for him to get past the gee-whiz optics and think about real issues. (Besides, the optics weren't so gee-whiz, and anyway the optics have yet to get off the lab table.)

whineceller 12/4/2012 | 8:33:16 PM
re: Reality Bites at NGN Conference Out of all of the B2C B2B and Optical and other technology hyper investing over the last few
years some very big winners will ultimately emerge. The cool off and downdraft which has been happening now for the last year is really both the most painful and coolest time as it makes companies really focus on the important stuff like profits, revenue streams, cost controls and hopefully encourages a lot of creative thinking on the part of management and employees. After a sector hyper-hype such as Optical and networking experianced in 2000, B2B in 99 and B2C in 98 and 99 it becomes painfully obvious to many of the VCs that many of the companies they funded are blowing smoke with no revenue stream or potential revenue stream in the near term.
Witness www.fuckedcompany.com for the
roadkill of the b2c and b2b landscape.

The best VCs get in early on a market and occasionally too early.When the hype and hyperbole and stocks prices get intense they sell their investments and are on to new un-chartered waters and technologies. In their wake hundreds of lemming VCs come in pour millions of dollers into
this market in a me-too frenzy. They then get scared when things get nasty!

The best example of a get out early VC is Kliener Perkins. They funded some of the great Optical Success stories of 99 - Cerent(Cisco) Siara(Redback) and then in 2000 when the hype was full bore they were no where to be found with regards to Optical investments- but lots of other woodpin VCs were flinging cash on anyone who could spell Optical. On the hype downside which the networking industry is painfully experiencing now the me-too VCs over-react and funding dries up and all the bad companies they funded cant get any more capital but the really really sad part of this is that some very good companies that the later VCs funded that have great potential but need more cash get shut out too. I expect for the best some M&A- of course the companies who had the
xbillion dollar offers in early 2000 are crying that they didnt accept at that time. Now the best will be scrambling to make deals.

In the downdraft cycle these companies scramble to revive or re-draft business plans. Witness all the B2B companies that have moved into the consulting business.

Ultimately the best technologies but not necessarily the companies and engineers that produced them get picked up and developed by the surviving class at a later date. Your Palm PDA
can you say Apple Newton? Apple missed this market
by about 7 or 8 years.

Of course this same cycle will continue to repeat.
My predictions for Next Up- First Movers -
Broadband Last Mile Acess -Mid 2002- mega investments to figure out how the hell we fill the over-investment fiber infrastructure and core and tap into the promise of DSL, Cable, PON, Ethernet to the home and Broadband Wireless

Mergers and Aquisitions Software For Management Late 2001 and Early 2002- With the glut of M&A
this could be a huge business-how the hell do we effectively manage our new M&A companies and managers to be sure they are doing what they should be doing, getting projects in on time and closing all of loops with management and personal effectively and efficiently.

3G - 2003-Fiber to the Cell Phone- cant wait for the VC to invest in Fiber to the Cell Phone.

Any ideas for your NEXT UP

Any comments email [email protected]
Shareholdervalue 12/4/2012 | 8:33:10 PM
re: Reality Bites at NGN Conference OK, so you and whinecellar have good points about the VC world, but I'm more worried about the even bigger picture.

Service providers are not buying [enough of]ANYONE's products anymore. This is obviously because they are not able to turn a profit when they do.

What has to happen to fix this problem? Demand appears to be there, products appear to be there. What's wrong with this picture?
whineceller 12/4/2012 | 8:33:08 PM
re: Reality Bites at NGN Conference Service providers are not buying [enough of]ANYONE's products anymore. This is obviously because they are not able to turn a profit when
they do.

This is somewhat true- Service providers are
struggling to find the magic formula to really
make money with the net and their networks. They
will still invest in gear that saves them money,
helps reduce their staff equipment costs. The
winners in this will be companies that focus on
helping Carriers reduce cost, create new money making revenue streams.
lightreader 12/4/2012 | 8:33:08 PM
re: Reality Bites at NGN Conference A sustained recovery will only occur when
service provider stocks pick up....didnt
anyone notice in 2000, all the SP's were on
a slide yet vendors were rising?.....a simple
relation which many missed in the madness...
Jimi 12/4/2012 | 8:33:07 PM
re: Reality Bites at NGN Conference I agree with most of everyone's comments except for the 'demand' part of it. The demand is NOT there. Until we get enough businesses buying into GbE type bandwidth or 10M ethernet to the home, I have a hard time imagining HUGE growth in optical networking. Take DWDM, what application is actually driving the need for it? How can service providers justify the cost of implementing a new DWDM network if customers aren't pounding on the door for more bandwidth?

At home, a small percentage of us are using DSL or cable access to the internet. Those speeds seem fine for what we do. What application will spurn the desire to change what we have for a 10Mb ethernet port? Porn? Not for most of us. Real-Time video games? Live video conferencing? Will I change my internet access based on price alone? If that's the case then how will the SP's make any money?

There's money to be made out there but it will obviously come from metro businesses. But now they have the optical players where they want them. Too many optical players and not enough justification or demand. Optical will suffer for a long time to come because of this. Component players will have to find a way to drop their prices.

It's a tough industry to be in. It is the future and maybe if we can hang on long enough we'll be able to reap the rewards. Private companies will have the hardest time because of the monthly burn rates of their funding.

We need to develop a high bandwidth application that everyone will want to use. Porn is not gonna do it.

fk 12/4/2012 | 8:33:06 PM
re: Reality Bites at NGN Conference I think there's plenty of demand for bandwidth. The question is at what prices? Who is going to spring for T-1 pricing for their home for a measly 1.5 Mbs?

There's a bit of a chicken and egg issue to overcome. People won't buy big access pipes if they are too expensive. The price won't come down for big access pipes until they are ubiquitous. Killer apps that require big pipes won't be written until there is enough of a market to justify them, which means that enough people are ponying up for the fat pipes.

There are two fundamental issues to address with the network: bandwidth in the core and access to that bandwidth. The core bandwidth problem is rapidly being solved by the core network vendors who are bringing OC-192 and above and lambdas. The access portion is only beginning to be addressed. Broadband access is a market whose surface has only been scratched. There is as yet no perfect broadband access technology. Cable modems are fine and perform reasonably well, but as a shared medium it doesn't scale particularly well and in the end there is not that much bandwidth per user. xDSL is good in that you are really getting your share of the bandwidth, but it is subject to significant physical limitations and is not practical for tens of millions of users that don't have a (very) local CO. There is a real need for broadband access technology for the "distributed customers" that make up a large portion of the home market. And it had better be cost effective! A far easier egg to crack is the concentrated customer base. Large apartment buildings, campuses, businesses, etc that concentrate a need for bandwidth in a single location makes life much easier for carriers. Fewer installations means less work and cost to get to the revenue stream. Here 10/100 ethernet and above makes sense as an access technology. It's easy to wire and is pretty much the gold standard for data service. Not much reason to make it complicated.

As time goes by, I expect to see a public network that is increasingly data oriented. This will allow things such as video stream IMing and such things to be a cost effective application. The industry is going to have to adapt to changing conditions, and certain things will happen that none of us can prognosticate that will fundamentally change the equation we are all trying to solve. It's difficult to imagine such a paradigm shift, but we have seen some incredible changes in our lives and this sort of thing is bound to continue to occur. The companies that successfully adapt to the changes and or time the paradigm shifts correctly (very much a function of luck, but not entirely) will become tycoons.
lightreader 12/4/2012 | 8:33:03 PM
re: Reality Bites at NGN Conference Jimi,

that is an all time classic post..just royal...
i am still cracking up over it.....
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