Suing for Revenue?

Enforcing intellectual property rights is turning out to be big business for telecom equipment companies battered by the economic downturn.

From 1991 to 2000, patent infringement lawsuits increased 111 percent, according to Patent Enforcement and Royalties Ltd. (PEARL), a consultancy that helps patent owners enforce rights given to them under patent laws. Even though the total number of patents granted has gone up 64 percent in this time period, this is still a major leap.

Nortel Networks Corp. (NYSE/Toronto: NT) is the latest company to head back to the courtroom in the hopes of winning some cash. The telecommunications equipment provider filed a patent infringement lawsuit against optical networking rival Ciena Corp. (Nasdaq: CIEN) last week in United States District Court in Texas.

In its complaint, Nortel has asked the court to require Ciena to either stop selling the gear that infringes the patents or license the technology in question.

It’s no surprise that companies would be looking to cash in on the action. Royalties from patent licensing in the U.S. have increased from $3 billion in 1980 to $110 billion in 1999. But all this litigation hasn’t come cheap. In 2000 companies spent a total of $4.2 billion on patent infringement cases, says PEARL.

Simon Leopold, an analyst with Merrill Lynch & Co. Inc. says he wouldn’t be surprised if Nortel is looking to generate some extra cash through enforcing its patents.

“Chasing down patent infringements could be a useful resource, if they have a solid case,” he says. “If they don’t, then it could be a distraction and an annoyance that wastes a lot of valuable cash.”

Specifically, the suit asserts that Ciena's CoreDirector, CoreDirector CI, MetroDirector K2, and CoreStream products infringe various Nortel Networks' patents relating to wave banding, virtual private optical networks, remote reconfiguration of optical networks, and patents essential to the Sonet standard.

In total, Nortel says that Ciena is violating eight of its patents. Two of these patents were awarded to Nortel back in 1987, while the remaining six were awarded in the past five years.

Nortel has filed lawsuits against several other companies for patent infringement in the past. In September, it settled a case out of court with Ethernet switch provider Extreme Networks Inc. (Nasdaq: EXTR) (see Nortel: No Mercy ). The two companies agreed to cross-license their technology.

Ciena has already gotten a taste of Nortel’s legal strategy as it battles a patent infringement case it inherited from its acquisition of ONI Systems Inc. In the original suit filed in District Court in California in March 2000 against ONI, Nortel alleged that the company had violated five of its patents (see Nortel Sues ONI). In April of this year, Nortel dropped four of those complaints. The remaining complaint, which also deals with wave banding, is set for trial in January. David Chamberlin, a Nortel spokesperson, emphasizes that these two suits are completely different and have nothing to do with each other.

It’s interesting that Nortel has decided to launch its lawsuit against Ciena now, considering that the CoreDirector, the most significant of all the products named in the suit, has been shipping to service providers throughout the world for the past two years. Nortel would not give any information as to the timing of the lawsuit.

"When our patents are being violated, we take legal action in order to protect our research and development investment and our shareholder value," says Chamberlin. "Based on our analysis, we believe that CoreDirector, CoreDirector CI, MetroDirector K2, and CoreStream products are within the scope of these patent claims."

Ciena declined to comment on this story, stating that the company does not discuss litigation.

Nortel introduced its optical switch, the Optera Connect HDX, last year (see
Nortel's HDX is Here). But the switch has struggled to gain traction in what has become a crowded market.

Still, Merrill Lynch's Leopold says it’s too early to tell what the outcome will be.

“The experienced investor has learned to take these lawsuits with a grain of salt,” he says. “It’s definitely something you put on your list of potential risks. But these things usually drag on for some time, and they’re usually settled out of court anyway.”

— Marguerite Reardon, Senior Editor, Light Reading
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JoeBagadonuts 12/4/2012 | 9:14:26 PM
re: Suing for Revenue? Got this in my email today..... seems to be consistant with thinking that if you can't build it yourself, you should steal it from someone else. Will my stock ever make it back to the $35 I bought it for on the advice of Kevin Slocumb, Ciena's Financial PR guy?????

Rudderless Ciena: The Equipment Builder Lacks Discipline and Focus

Although several of the points regarding Ciena in this Optical Networking
Watch have been made by CIR in previous issues, given the judgment calls
that Ciena continues to make, we felt it necessary to expand on our opinions
of the manufacturer in this special double issue. This examination of Ciena
follows other similar reports that CIR has recently produced that have
analyzed the prospects of major equipment suppliers operating within the US.

After beating the extraordinary odds as a start-up to become a leading,
established, optical-networking player in the U.S. long-haul space, Ciena is
being led astray by haphazard and unfocused marketing decisions. While CIR
does not expect the supplier to disappear from the telecom landscape, unless
the vendor makes major adjustments rather soon, it is our view that the
undeniable harm to the vendor, resulting from its current approach to
running its overall business, might be irreparable.

CienaGăÍs Undisciplined Course of Actions: CIRGăÍs Evaluation

CIR believes that Ciena has been getting too far away from its key
strengthsGă÷providing DWDM and optical switches to the long-haul space. Ciena
is ignoring the lesson of the last 20-or-more years in telecom, that the
newer manufacturers that are most likely to remain successful are the ones
that focus on key, niche areas and avoid the temptation to overextend
themselves. Past examples include Tellabs, DSC, and ADVA, all of which did
not drift too far from their core competencies

The main drawbacks and major problem areas for Ciena are:

-+ Lack of focus on core advantages: At a time when even the egocentric
leaders of Sycamore are moving toward a very targeted product strategy,
Ciena has become the old SycamoreGă÷looking to sell gear everywhere from the
enterprise/access all the way to ULH. Ciena apparently fails to see the
irony of its current spin away from long haul. There was at least a slight
increase in CienaGăÍs LH business in its third quarter compared to the
lastGă÷the only product sector where a rise occurred, and which still
represents 30 percent of the firmGăÍs revenue. It is also highly likely that
since the TelMex deal did not come to fruition until the fourth quarter,
this sector will again look the best once its revenues are released.

-+ Too much of a salespersonGăÍs mentality: Instead of relaxing a little bit
and riding out these hard times, comfortable in the knowledge that
entrenched vendors in telecom networks do not disappear, Ciena illogically
acts more like a start-up. In fact, the vendor is behaving like a chicken
with its head cut offGă÷desperately and feverishly looking for sales
opportunities almost regardless of how far astray they take it from its
traditional business.

-+ Outsourcing development: CIR has learned that Ciena is farming out 100
percent of its development of the K2. It may not be the only product that
will go that route. Other products such as CoreDirector and CoreStream are
also being looked at for farming out R&D. Sources internal to Ciena have
told us that, having eliminated so many people that understood its products,
it is being forced to go outside to perform the development work. Moreover,
Ciena obviously felt it had to reduce its burn rate. It spent $54 million
in the third quarter on R&D (not including the Equipe investment)Gă÷more than
CienaGăÍs revenue over the same period. Most firms spend 15 to 25 percent of
their total expenditure on R&D. Tellabs spent $96 million on it, but had
seven times more sales than Ciena. CIR cannot see how Ciena can justify
more than about $25 million of quarterly expense in development.

CienaGăÍs R&D costs are high because productivity is exceptionally low. A
telecom equipment manufacturer typically needs $300k of annualized revenue
per employee to break-even. With a $200m run rate and 2200 employees, Ciena
is doing about $90k per employee. As a point of comparison, Juniper has
three times the sales level with two-thirds the headcount.

When a vendor outsources manufacturing, it may be looked upon as wise, but
doing it with development is a whole other matter. The potential buyer
loses confidence in that supplierGăÍs ability to produce new features and
functionality because of its apparent lack of know-how and resources. In
short, it is an indication that the supplier might be in pretty bad shape.
The only rational solution for Ciena is to retreat to a more focused product
strategy, so that it can keep its development spending to a reasonable level
and use a higher percentage of expenditure on its key products such as its
optical switch, the CoreDirector.

-+ Micro-management at the top: There is rigid control by a very small
group of individuals at the top of the Ciena management chain. It is CIRGăÍs
perception that delegation of responsibility is kept to a minimum and that
if you are a GăúyesGăą person, you will get along fine. Hypersensitivity to
criticism at the top makes for a walking on pins-and-needles environment.
This tight grip on power at Ciena was best illustrated when the companyGăÍs
attorney, with no evident sales experience (who it could be deduced would
act more like a puppet) was appointed Worldwide Vice President of Sales, and
then, when he supposedly did not work out, the job was taken over by the CEO

The real technical executives at Ciena seem to be the ones on the outside
looking inGă÷again, partially a manifestation of the heavy emphasis on sales
mentioned earlier. It could also be assumed that the low retention rate of
people coming from its acquisitions shows that the micro-management at the
vendor has made it a place where new talent is not welcome.

-+ Company morale at an all-time low: In CIRGăÍs estimation, morale at Ciena
is approaching Corvis levels, with lots of internal turmoil and hardly any
humor. It is an environment that appears to be run mostly by fear and the
threat of being destroyedGă÷almost as if the company is being run by J.R.
Ewing. Widespread discontent was also created by the handsome bonuses that
were given to two of the principals at a time of layoffs, while there were
no raises or incentives for others. Many at Ciena will continue to walk on
eggshells because they feel they cannot afford to lose their jobs at this
time, and a lot of them believe they will be out of work anyway because they
perceive the companyGăÍs prospects to be so dim.

-+ Not necessarily viewed as a technology leader on the system side by
carriers: A BellSouth source says: GăúThey have gotten involved with some
other companies and are trying to convince everyone that they are the
optical company of the future. I am not sure that they have the expertise.
The only product that they can point to as Ciena is the [long-haul] DWDM.
It was a pure and simple solution for the LH carriers to get from point A to
point Z. CoreDirectorGă÷bought. K2Gă÷bought. RDWDMGă÷bought. It sort of
indicates that they have little or no R&D of their own. Now, look at who is
still at Ciena from those dealsGă÷very few if any of the originals. If you
look at many of the start-up companies, they have numerous employees that
list Ciena, Lightera, Omnia, etc. as former companies that they worked at.
I am not sure that Ciena has the expertise to develop beyond mergers and

-+ Too much of a preoccupation with institutional investorsGă÷not enough
with customer requirements: Ciena seems to be excessively concerned with
developing strategies and spinning messages that conform to the herd
mentality of the institutional investors, such as the erroneous notion that
the long-haul market is going to be dead for a very long time. As a result,
the vendor feels compelled to state that the metro space will recover more
quickly than the long haul (which is hardly clear, especially given its own
current weaknesses in the sector). Rather than agree with the conventional
wisdom of the financial analysts, that the metro or SAN spaces are
necessarily going to save the day, Ciena would have been no worse off using
its leadership position in the optical space to educate them about the
realities of the marketplace and its own strengths there. What does Ciena
have to lose anyway when its stock price is in the neighborhood of
$5-a-share anyway?

A more compelling message to the financial community would have been to make
these points: 1) that its competitive strength is demonstrated by being the
last major optical networking supplier to take a substantial hit in the
optical networking market, 2) that it has successfully beaten the
overwhelming odds of a start-up becoming an entrenched player in carriersGăÍ
networks (including some of the largest customers in the world) and that it
is not going to disappear for that reason alone, 3) that it is going to
patiently ride out these bad times with its cash in the bank and not get
away from its bread and butterGă÷optical switching and the long-haul space,
and 4) that its metro play (given its limited advantages here) is going to
be mainly an off-shoot of its long haul installed base.

Ironically, despite the obsession of CienaGăÍs leadership with being one of
the boys on Wall Street, the kind of feedback that CIR is receiving from
these analysts is that the supplier is not being taking seriously because it
lacks a solid grip on its overall direction. Ciena really has to spend more
time in responding to the needs of the customers, especially with more
involvement by its higher-level executives (other than the core sales team),
and particularly in the market segments in which it has established an
installed base. For example, Verizon has put a lot of pressure on Ciena to
upgrade the considerable number of 16-channel (1600) products that it has in
its network and certainly does not want to abandon. The RBOC wants to take
it up to 32 channels and needs some additional functionality including
monitoring capability. No help is coming from Ciena in these areas.
Belzebutt 12/4/2012 | 9:14:21 PM
re: Suing for Revenue? I'm shocked that Ciena is outsourcing development of its staple products. Nortel does it for very old products that are basically in sustaining mode. Ciena's actually doing this with the CoreDirector??? Incredible. I used to be very impressed with Ciena but it seems like they have totally disintegrated.
firepig 12/4/2012 | 9:14:21 PM
re: Suing for Revenue? JoeBagadonuts,
Your post let me feel chilly. Do you have more, or even similar article about whatever company in this industry?


JoeBagadonuts 12/4/2012 | 9:14:20 PM
re: Suing for Revenue? The article said the K2 (maybe fair to call it the "KY" at this point given that the Cryas crew stuck a really big ornament up Ciena's A_S). The CD is speculation at this point but if it is true, then Ciena is going down the crapper pretty fast.
JoeBagadonuts 12/4/2012 | 9:14:20 PM
re: Suing for Revenue? Come again? I posted it given the lawsuit against Ciena. Now NT might be FOS for suing but then again, maybe not. If what the article says is true about them outsourcng R&D then maybe they would cut corners in infringing upon patents.

But, with respect to suing people, you can get 60% of whatever damages you are awarded which is a much better margin than the 2% that NT gets for selling its gear.
puddnhead_wilson 12/4/2012 | 9:14:19 PM
re: Suing for Revenue? Someone forwarded me this CIR piece early this morning, so I had all day to kick it around and have ongoing discussion with some knowledgable people. While some of it may be true, and indeed some of it mirrors my own concerns about Ciena (though I would have stated them in a much less absolute and dramatic way), some of it could not be substantiated in our experience. For example, this supposed widespread "fear and the
threat of being destroyed" at CIENA, where "morale at an all-time low" -- now I (& others) don't have THAT many contacts at Ciena, and none are close, but still, this is news to us.

And the bit going on about revenue per head: duh. I bet it's even lower at the majority of CIENA's competitors. Heck, what did it amount to at Corvis in the recent quarter, something like $5K per head???

Then there's the weird contradiction of criticizing them for not having any real salesmen in managment, and then accusing most of the management of having "salesman mentality." Huh?

In some ways the semi-preachy, this-is-the-gospel-and-I-know-the-best-way tone of this piece reminds me of the way Gilder & his sidekick Charlie xxxx (forget his name) trashed CIENA 2-3 years ago. Now it turned out that CIENA had lots of problems looming in its future then, but ironically despite the many MANY problems awaiting it, Gilder & co somehow managed to bash CIENA relentlessly for most of the things that it turned out they were doing the most RIGHT (e.g. focusing on OEO and all but ignoring all-optical, a la their pet Corvis).

I dunno. I'm not going to say that reading this didn't worry me. But on the other hand, there are certain sections that sound like someone has a personal axe to grind with Smith (e.g. the yes men bit). The title and langauge is more inflamatory than informative; it kind of reminds me of that piece LR did a while ago on LU, they were invited to view some new cutting edge development, but LR in the end only wrote one vague sentence on the technology and spent the other 99% of the piece going on about how some lightbulbs were removed, people emptied their own trash, and books in the library were sold off (capped by the infamous interjection by the editor "What? No Curious George?" It just makes it hard to take these pieces very seriously when they are written unprofessionally.

BTW on that note, I tired to find out the analyst at CIRE that wrote this, but curiously no one takes credit for it in the "recent reports" section of the analyst page.

In the end, much of this is only one guy's opinion. And in some ways it differs from other so-called experts. E.g. the criticism taht Ciena is "distracting" itself from its core competencies and should focus more on long haul. It would not take long to search this site and find a handful of analyst opinions that companies that do this -- focus too much on long haul transmission -- are DOOMED.
Elvis Doesn't Live 12/4/2012 | 9:14:19 PM
re: Suing for Revenue? Man, I laughed the whole way through that post, Mr. Doughnuts. This echoes some of the smack I have heard coming from the company about the CEO being a bit of a schmuk. I suppose that they will probably make their numbers this Q. from the Mexican deal but who the hell knows what the next few quarters looks like?

As an aside, did you bring any coffee with those donuts?


Elvis Doesn't Live 12/4/2012 | 9:14:18 PM
re: Suing for Revenue? A few thoughts on your comments, Mr. Wilson and I thought that they were quite good:

Bringing Corvis into this is not relevant. that company is a turkey. What does NT, TLAB, LU and Fujitsu do? That would be a more reasonable comparison. If LU is doing $9 billion then that comes out to about $250K per employee (diluted even then given Scott R.'s article on LU that depicts BellLabs as a big cash drain.) NT is roughly the same so Ciena is WAY overstaffed.

Putting a lawyer in charge of sales was a mystery. Why do that? If you want to screw your customers then maybe that's a good choice but I don't think that is what they were intending. A salesman's mentality is not generally a good one in my experience. Sales guys are good at promising stuff but good luck getting what you were told you would get which is a problem that Ciena has demonstrated in their dealings with Verizon and Sprint.

Gilder I don't take seriously so I can't comment on him. Ciena was right to go after OEO when Corvis was talking all optical. I didn't see any criticisms of them for going in that direction.

With respect to the CEO looking for Yes Men, I have heard this criticism from other people who have left. Nettles on the other hand seemed to do a better job of taking different opinions and doing what he felt was best. Maybe some comments from other ex-Ciena people would be good to hear?

Ciena has been chasing after revenue opportunities but failing miserably. Without a doubt, the K2 has proven to be an enormous failure. Should they be focusing on switching and LH? To the extent that they should be protecting their core strength, I would agree. The metro has turned out to be a dud. Look at Fujitsu and NT's sales in that regard. There is no reason they should expect that they are going to be player in data switching. Lucent, Cisco, Alcatel, Marconi (old FORE) and NT have larger installed bases. Equipe and Wavesmith offer them no real strength. LH is dead now but it is what they were built for.

I found the article rather humerous. You call it unprofessionally written but I will take stuff like this over the sanitized crap that RHK, Yankee and Gartner puts out.

lightmaster 12/4/2012 | 9:14:17 PM
re: Suing for Revenue? Interestingly, McCarthy is no longer listed on the web site as Senior VP of sales, but he is listed as "Senior Vice President". Senior VP of nothing. The bio says he was former legal counsel and former VP of sales and support, but lists no current resonsibilities.

How does one get that job?
lightmaster 12/4/2012 | 9:14:17 PM
re: Suing for Revenue? Actually, CIRs comments are pretty much concensus from what I hear from the dozen or so ex-Ciena people I know. Perhaps not quite as bad in some ways, but even worse in others.

IMO the revenue per employee number is only a fair measurement if you believe that $25M a quarter is where they will stay and not a temporary problem. Ciena doesn't believe this. I am waiting for proof.

McCarthy (the lawyer) was not put in because Smith thought he could run sales. He was put in because Smith wants to run sales and didn't want anyone in the way. McCarthy just ran the administrative end of it. I assume that, after a revolving door in the VP of sales position, Gary decided he had to do it himself. In fact, Smith can't seem to find anybody he likes in Sales, Marketing, or Business developent as all these positions have been revolving doors. Books could be written about the strange VP appointments.

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