What's Cookin' at Core Startups?
That's the "question behind the question" raised by recent news, which shows well established players struggling to find their own long-haul niches. On one end of the spectrum is Nortel Networks Corp. (NYSE/Toronto: NT), which still sees plenty of opportunity in long-haul gear (see Nortel Beefs Up Long-Haul DWDM and Nortel Festoons With Raman). On the other side is Cisco Systems Inc. (Nasdaq: CSCO), which seems to be weighing the value of staying in the game(see Is Cisco Long for the Long-Haul Market?).
Bottom line? If there's no room for all the big guys, that puts companies such as Ceyba Inc., Innovance Networks, PhotonEx Corp., and Xtera Communications Inc. at a crucial juncture.
All started out richly funded (see Innovance Scores $55M, Solinet Morphs Into Ceyba, and Photonex Scores Huge 3rd Round); but now their ability to gain carrier traction, at least as standalones, could be dwindling along with their funds.
The startups have two strikes against them. First, the network core -- where they've focused their technology -- has become, for many, the poster child for the boom's excesses, an area where frenzied buildout led to overcapacity. Second, while many of these startups have technology they say can save carriers money (see Vendors Aim to Cut Costs in Core), much of it is innovative and therefore unproven. Carriers are reluctant to take a chance on it, given their constrained finances.
What's the answer? Partnerships, some say.
"I really think all the [core] startups will have trouble without a partner," says Mark Lutkowitz, VP of optical networking research at Communications Industry Researchers Inc.
According to Lutkowitz, the startups could adopt joint selling arrangements or opt to act as subsystem suppliers for one or more large equipment vendors, perhaps furnishing their capabilities on a card or add-on product. The subsystem route, he says, piggybacking on a product that's already selling well, is probably wisest for a company with cutting-edge technology that's looking for that big break.
But the subsystem route was tried by Xtera and seems to have been ditched (see Xtera's $110M Surprise). According to Paul Harrison, VP of marketing at Xtera, it was a strategy that really works only when the market is doing well. When vendors are struggling, they're not looking to take a risk on putting newfangled technology into their wares. "It's not a viable model right now," Harrison says, though he does acknowledge that Xtera's talking to several companies about various other kinds of partnered selling arrangements and joint ventures.
At least one other startup eschews being anyone's subsystem. James Frodsham, COO of Innovance, says his company is certainly pursuing partnerships, but probably not on the subsystem level: "There's clear logic for a partnering agenda... It's clear today that financial stability is at least as important as innovative technology in carrier selection criteria," he says. But he seems to envision a play in which Innovance's gear would be sold as an enhancement to another vendor's, not as a card in someone's slot.
Frodsham's not saying anything about who may be on the list of prospective partners.
One analyst, though, thinks partnering may not be an easy answer for any core startup. "Partnerships usually don't work well, unless one partner is offering a solution that is totally missing, totally unrelated to the other's product line," says Brian Van Steen, principal analyst at PointEast Research LLC.
Of course, if some of the big players drop out of long-haul networking, that may open the way to a profitable partnership for one or more core startups. But Van Steen feels there may not be room for all. "I think one could have a good chance," he says.
Meanwhile, time ticks away, and with it a lot of the startups' funding. For some, there will be more coming in. Harrison says Xtera is just "a few weeks" away from announcing a new round. Frodsham says Innovance has enough to sustain it through 2004, and while he's reticent on specifics, he admits to being at work seeking more dough ("We're always working on it").
The other startups are less forthcoming. CEO Scott Marshall of Ceyba allows only that the market will remain slow this year, though carriers will start some next-generation deployments. PhotonEx did not respond to repeated phone and email queries for update information. Interestingly, of the four, only PhotonEx will be exhibiting at the upcoming OFC Conference tradeshow.
All eyes seem to be on next year as the decisive timeframe. Frodsham for one has confidence: "We see a noticeable and positive shift toward agile photonic networks emerging as a clear architectural choice."
— Mary Jander, Senior Editor, Light Reading
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