Kalkhoven: 'It's the End User, Stupid!'

SAN JOSE, Calif. -- Optical networking won't exit the doldrums until companies start to consider what technology consumers really want, says Kevin Kalkhoven, the former CEO of JDS Uniphase Corp.

Kalkhoven, speaking today at Opticon 2002, drew some historical parallels to the mainframe computer industry and concluded that the optical networking market, as it is now, is set for about four to five more years of flat revenues.

Just as mainframe computers were large, expensive, manually assembled, and only available to a small base of customers, so too are today's optical networking systems, says Kalkhoven, who resigned from JDSU in May 2000 and has since founded his own venture firm, Kalkhoven, Pettit & Levin Ventures LLC.

In the mainframe business, computing performance increased and prices dropped, which offered more to the large companies that bought mainframes, but left that industry with a stagnant revenue base that remained flat for about 20 years, Kalkhoven says.

In telecom, a similar thing is happening. North American carrier capital spending reached about $90 billion in 2000, Kalkhoven maintains, but has fallen to about $30 billion this year, and most market forecasts project that spending will remain flat for at least four to five more years.

"Why? Because Wall Street will never allow capital expenditures to grow faster than [service provider] revenues again," Kalkhoven says. Within a smaller capital base, the demand for fiber optic components and products is "unlikely" to exceed 10 percent of what carriers will spend on new equipment overall, he maintains.

The solution, of course, is to stimulate new sources of revenue. And that, Kalkhoven suggests, requires a new, hard look at what consumers want from their carriers. While he's not suggesting that anyone go lumbering off with a core router strapped to their back, he is advocating that companies find consumer-oriented uses for optical components in cellular and access technologies.

Kalkhoven suggests users crave high bandwidth connections and would want to connect to some kind of high speed network using cell phones and other devices in the home. He envisions wireless mesh networks linking whole neighborhoods to an optical backbone. In cellular base stations and on digital devices, optical technology could bring more bandwidth and crisper digital displays, he says.

"What I believe very strongly that we will see is a much greater use of the integration of semiconductors and opto-electronics," he says. This will make for lower cost, higher powered computing devices that can use more bandwidth.

Kalkhoven adds that the future will be bright for companies that change, deciding to build what end users want. Those that don't figure it out will die. He cites Digital Equipment Corp. (DEC), a mainframe computer maker as a textbook example. It once employed about 130,000 people and brought in billions in revenues and today it doesn't exist.

"The probability is that there will be a lot more DECs [in the telecom business] than Dells," he says, referring to Dell Computer Corp. (Nasdaq: DELL).

Some in today's audience aren't sure that consumers want a proliferation of more bandwidth-sucking gadgets thrust upon them. "Not everyone wants to be a network node that's always connected," says Michael Genovese, a senior industry analyst at Ciena Corp. (Nasdaq: CIEN). "Is fiber-to-the-navel going to be enough?"

But Kalkhoven says the need for more powerful access and consumer-related technologies is evidenced in the devices people buy today, such as digital cameras and video game consoles. "They want to be able to use them, but they can't without being connected to something," he says.

Overall, a few found Kalkhoven's gaze into computing history and his conclusions were as quenching as a drink from the finger bowl. "This is just further evidence that no one knows what's going to happen next," says Scott Clavenna, president of PointEast Research LLC and director of research at Light Reading. "To say there's growth in cellular and access isn't specific enough."

— Phil Harvey, Senior Editor, Light Reading

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