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Optical Funding: Down but Not Out

Startups targeting ways to optimize existing bandwidth stand to garner the most support from venture capitalists, according to "Valuation Deflation," the latest report from the Optical Oracle, a subscription-based service from Light Reading.

The report quantifies the fall of private-sector valuations over the past several months, as the market's reacted to a "bubble" of overinvestment and inflated expectations. It also tracks the trends that are emerging as the optical networking market proceeds to the next stage of its evolution.

While valuations are a fraction of what they were a year ago (see Valuation Deflation in Startup Land), there's still investment going on. Companies getting money now are those that promise to leverage the optical facilities so many carriers built out in the first flush of optical Internet expansion. Among the hot spots: IP and MPLS edge routing, which will widen the quantity and quality of the services on existing IP networks.

Top Five Capital Draws Also on the boil are access platforms, especially those targeting optical Ethernet connectivity. Content switches, DWDM systems, and next-generation data switches also offer ways to make the best of fiber already installed.

A few other technologies are warming up, the report says, as revenues increase and demand builds -- a trend many experts see evolving over the next two years or so (see Enjoy the Summer). Included in this category are products for IP service aggregation and fiber and hybrid fiber/coax access.

A couple of once-promising technologies have been relegated to the deep freeze until carriers see the need to expand capacity and start spending on network buildouts once again. In cryogenic mode are long-haul networking, where carriers have cut back heavily in response to a lack of immediate demand. Also under the ice is optical switching gear, for which many service providers don't yet see any revenue advantage over existing facilities.

According to the report, the optical component segment is also no place to look for venture funding right now. "The sector is becoming increasingly commoditized," writes our financial analyst, Christopher Bulkey. "There are too many players in the space." As a result, near-term prospects for funded companies are bleak.

The report, available as part of the new subscription service from Light Reading, www.opticaloracle.com, scrutinizes the valuations of a Heinz-worth of private sector startup companies (57, that is), comparing valuations to actual funding in order to draw conclusions about the present state of the optical networking market and its potential for growth in the next two years.

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

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
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wdog 12/4/2012 | 8:03:58 PM
re: Optical Funding: Down but Not Out Litewave
What other choice does Tellium have. They can't compete with Ciena so now they have created a new application space they claim is complimentary "core grooming". What is "core grooming"??? They're grasping at straws.
Litewave 12/4/2012 | 8:04:09 PM
re: Optical Funding: Down but Not Out Can't we (STS1 vs OC48 grooming) all just live
together?

I found it most amuzing when Tellium pulled a rather quick tactical change (apparently post Supercomm'01) and now position themselves as complimentary to Ciena, and not competitive. Get real.

LW
jim_smith 12/4/2012 | 8:04:22 PM
re: Optical Funding: Down but Not Out "We expect Tellium to begin shipping into ..."

When was this CIBC article written? It may not
be accurate if it was older than a month or so.
I think C&W was one of the original customers
who had promised to buy stuff, so its old news
anyways. Are there any new customers? Anyways,
Tellium's stock is not doing so well...
Nasty Sanchez 12/4/2012 | 8:04:29 PM
re: Optical Funding: Down but Not Out Can anyone confirm the rumor that Tenor just got booted out of QwestG«÷s lab? If true, add Tenor to the RIP list.
wdog 12/4/2012 | 8:04:31 PM
re: Optical Funding: Down but Not Out What's the point of the Tellium box. The CoreDirector can groom both STS-1 and OC-48. Why deal with two NEs, two privisioning systems, two managements systems, etc?
Milano 12/4/2012 | 8:04:33 PM
re: Optical Funding: Down but Not Out Can't we (STS1 vs OC48 grooming) all just live together?

From CIBC: "We expect Tellium to begin shipping into C&W in 3Q01 with revenue recognition to follow in 4Q. Importantly, we believe C&W will also likely pursue a parallel STS-1 path and could announce Ciena (CoreDirector) as a complement to the Aurora 512 (much like what has occurred at Qwest)"

M.
wdog 12/4/2012 | 8:04:34 PM
re: Optical Funding: Down but Not Out Lightcycle,

Very true. STS-1 granularity allows carriers to pack wavelenghts efficiently. Without it, they would be forced to light up new wavelenghts, which in the present ecomonic climate, they do not want to be forced to do. The tighter carrier CapEx gets, the less demand for Tellium, and the greater demand for CoreDirector.
LightCycle 12/4/2012 | 8:04:38 PM
re: Optical Funding: Down but Not Out > How are service providers using CoreDirector?
> Are they using them to provision end-to-end
> STS-1

I think the granularity down to STS-1 level gives them alot of flexibility, not just for "STS-1 circuits" end-to-end.

It could be, for example, much better utilization of the fibers with stuff like "inverse muxing" of fat pipes across available gaps in the fiber.
lambdaswitching 12/4/2012 | 8:04:41 PM
re: Optical Funding: Down but Not Out There appears to be some very clued in people discussing the state of the business of startups in this industry, with quite a bit of diverse knowledge and experience. In a very funny way I get a better education about the industry by reading comments on the message boards, have to filter a bit, but overall this stuff gives you one heck of an education.

On the general state of the industry, are we seeing increasing failures as a result of a G«£too fast, too far, too quickG«• mentality, or is it something more fundamental? There seems to be two camps in this message thread, money chasing any idea no matter how weak looking for the quick buck, and the camp of good ideas flawed by personal hubris of the team executing the idea. IG«÷m not sure I know which camp to believe.

A final question/thought, has the storm passed ? Seems that there is some sort of dire news from the industry elephants every other day and an occasional bright spot. Leads me to ask, quoting the late Tricky Dickey is that a G«£Light at the End of the TunnelG«•, or is it the headlight of the Gloom and Doom express barreling towards us ? How do you tell the difference ?

@LambdaSwitching
BlueWater66 12/4/2012 | 8:04:43 PM
re: Optical Funding: Down but Not Out This article described funding levels and implied components are less attractive than certain system level start-ups. I have a serious problem with this statement. I suspect it is simply based on the number of dollars invested in a sector. System level start-ups consume huge amounts of money, so this is not a surprising statement.

BUT- It does not describe odds of success or reception by VCs. If a component company is raising a $15M Series B round in this venture market, its odds of being funded are greater than a system play seeking $60-$100M. The return on investment and ability to execute are greater at the component level. In the current market VCs recognize this. They are responding to this. For the next few months, you will see some VCs throwing "good money after bad" into their Metro-DWDM or All Optical portfolio start-ups who are burning $3M+ per month. Eventually they are going to let a large number of these flame out. Burn-rates and last years G«£money in playG«• concepts donG«÷t accurately describe the current market conditions.

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