Stocking the Optical Thrift Shop

What happens when the CLEC that invested in a POP-full of high-end telecom gear goes bust? If creditors don't tie up its assets in ongoing litigation, there's a chance some other carrier could score a slew of equipment on the cheap.

This scenario is the telecom analogue to organ donation, in which every carrier or supplier that goes bankrupt or is forced to halt its projects frees up essential resources for others. And according to some sources, it's the basis for a brand-new aftermarket in optical networking equipment.

There's nothing new in the concept. For years, there's been a profitable aftermarket in everything from switches to power supplies for carriers interested in savings of at least 20 percent over market prices. Now carriers may be able to get the same bargains -- or even deeper discounts -- on optical kit.

Maybe. It's still early days for the optical aftermarket -- too early, some say. "Supply is growing, yes, but there's not necessarily a market for it yet," says Michael Coady, senior equity analyst at Sidoti and Co. LLC. Others think the whole concept of buying someone else's optical equipment is flawed -- the equivalent of buying three remaining Bridgestone tires from a rollover wreck. Carriers intent on purchasing high-end broadband switch/routers, Sonet ADMs, or DWDM equipment typically undergo rigorous up-front evaluations, followed by lab tests and trials, which later get written up in publicity announcements. Are we to believe these carriers would run to Cheap Charlie's warehouse and pick 'em off the shelf?

One thing is certain: Right now, the optical aftermarket hasn't materialized in full force. It seems there's buildup in the overall supply of telecom gear, but demand is lagging. Potential buyers, themselves carriers strapped for cash, are not yet in a position to spend, even at a fire sale.

Still, Coady notes that companies whose supplies are growing will be well positioned when demand does materialize, which he anticipates will occur when carriers start to expand once more.

One of those companies is Somera Corp. (Nasdaq: SMRA), which specializes in reselling used telecom gear. "We are seeing across-the-board increases in de-installed telecom equipment," says Kelly Delany, a spokesperson for Somera. While it's still early days, she says she's confident that demand for the growing roster of telecom gear will gain momentum.

Delany's not willing to specify just what Somera's got in store, but there's plenty of everything, including optical networking gear. "We're seeing optical equipment from Fujitsu Ltd. [KLS: FUJI.KL], Nortel Networks Corp. [NYSE/Toronto: NT], Lucent Technologies Inc. [NYSE: LU], Alcatel SA [NYSE: ALA; Paris: CGEP:PA]," she says.

The used equipment comes from two sources: the remaining assets of bankrupted companies and equipment left over when carriers stop planned buildouts or consolidate existing networks.

Somera acknowledges that it gets more equipment from the second source than the first. When a company goes bankrupt, its assets are often tied up for months in litigation, as creditors battle over titular rights. In contrast, when a company simply abandons a planned buildout, it's eager to have someone like Somera take its unreturnable assets in hand. The benefit of buying this second class of equipment is obvious: A lot of it is unused and still in its bubble wrap.

What about support? Somera's Delany says the reseller typically assumes the support or warranty rights by agreement with specific vendors, or else adds its own support contract to anything it sells.

This kind of passed-along or secondary support is usually missing when gear is sold in another key secondhand venue -- online auctions. DoveBid Inc., an online business-to-business auctioneer, recently completed a three-day auction of computers and telecom gear from the now-defunct BroadBand Office. It also ran a three-day auction of assets from an unnamed "major telecommunications equipment supplier." But in all cases, sources say, the deals were for equipment only. Any support would have to come from opening new contracts with the suppliers directly or turning to integrators for help.

Optical vendors themselves reveal just how new the concept of an aftermarket in optical goods might be. When asked whether they'd extend service and support to an aftermarket supplier, Ciena Corp. (Nasdaq: CIEN) was stumped. "This question's never come up. We don't have a policy in place. If something did come up, we would deal with it on a case-by-case basis," says a spokesperson.

Other vendors, including Sycamore Networks Inc. (Nasdaq: SCMR), were also mute on the question of resales. Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks, veterans of the resale world when it comes to other kinds of gear, did not respond to queries about how they'd support their optical wares at press time.

While supplies of optical equipment are accumulating in various quarters, a market in secondhand components is picking up speed, thanks to the slowdown. Trouble is, the kinds of components available aren't necessarily the photonic ones. Instead, things like memory chips for crossconnects and TDM gear are selling cheap. Sonet chips and fiber optic components are still thin on the ground.

Still, every little bit helps. "Last year, it was difficult for small to medium-sized systems vendors to get components. Now we're benefiting from a glut of components," says Bert Whyte, CEO of Network Equipment Technologies Inc.(net.com) (NYSE: NWK).

A spokesman at net.com backs up his boss's claim: "Certain products are selling at 25 percent of what they were last year. In some cases, for used memory, for example, we see prices dropping 50 to 60 percent from now over the next six quarters." Big equipment OEMs, he says, are getting rid of their excess inventory of parts, and it's being picked up on the open market by non-franchise distributors.

Ultimately, it looks like the reality of an optical networking aftermarket remains to be seen. Since Somera won't specify its inventory, it's not clear which optical platforms are winding up in stock. Also, some analysts say the telecom downturn has mainly hit carriers without optical gear. "The bankrupt companies have been CLECs, whose equipment would be DSLAMs or class 5 switches," says Troy Jensen, VP at Dain Rauscher Wessels.

Indeed, while DoveBid's BroadBand Office auction featured some switches from Nokia Corp. (NYSE: NOK) and Extreme Networks Inc. (Nasdaq: EXTR), it looked to be heavy on the office and storage equipment side of things.

The newness of optical gear, and the aggressive upgrade strategies most DWDM companies have adopted, can militate against the secondhand market. When Sphera Optical Networks Inc. decided to replace some early gear from Sycamore with switches from ONI Systems Inc. (Nasdaq: ONIS), the old gear wound up in the company's warehouse.

According to vice chairman Peter Tierney, it would have cost more for a new buyer to upgrade the equipment than it would have to buy it new. Further, Sphera couldn't sell to a secondhand shop, since it had procured the gear from an integrator.

Partial list of resellers of used broadband equipment:

• Alpha Equipment Company
• Deschutes Communications
• North American Association of Telecommunications Dealers (Note: This organization has its own trading network)
• Somera Corp.
• SRS Industries

Online auction houses that have conducted telecom fire sales:

• Bid4Assets Inc.
• DoveBid Inc.
• FreeMarkets
• Online Asset Exchange

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com