Photon profits
Remember easy money?
Remember back when any optical player that had a new twist or small variation on a switch, router, chip or marketing scheme could get funded, go public and watch its stock soar?
Not today. Not with tech stocks taking a beating, carriers slowing their build-out plans and venture capitalists tightening their hold on money.
The optical market is overcrowded with players. Companies late to the market, those with shoddy business plans and those with untested technology will be the first to succumb. But even those with good ideas are in trouble if they placed their bets on wrong solutions, says Scott Clavenna, a principal analyst at optical research firm Pioneer Consulting.
Be a little late developing 10-gigabit-per-second optical switches, and see your stock fall 85 percent, as Lucent Technologies' shares did. Deal with too many customers that can't pay you, such as many of the struggling competitive local exchange carriers, and you're deep in the red. Have a great product but no way to ramp up manufacturing volume, and you're ripe for being acquired.
"Everything can't win, even if it is good," Clavenna says. "Carriers can't be asked to pick from 20 vendors for a single product. That's just too many."
A company might have a good technology and a workable system, but carriers still won't buy it if they've moved on to something new.
Ciena found that out when it made a run at the metro market. Ciena acquired Omnia Communications and its Asynchronous Transfer Mode-based platform for US$429 million in stock in 1999. Omnia had first-rate engineers, but Ciena ultimately abandoned the project because the industry was turning away from ATM.
Ciena was smart enough to do two things: It put Omnia's engineers to work on projects that were more marketable, and it jumped right back into the metro market late last year when it acquired Cyras and its K2 platform, pegged to the venerable Synchronous Optical Network (SONET) technology.
"The first thing we learned was that when you find yourself in a hole, stop digging," Ciena Chief Executive Patrick Nettles says. The Omnia engineering team went on to design Ciena's hot Core Director optical switch. "The second thing we learned was that when you're looking at an acquisition, you should focus on the customer contacts and traction that the company has," he says.
Ciena slipped only once, so it is counted among the winners as 2001 moves into its second quarter. Last month, the company sparked a spike in the stock market when it announced revenue of $352 million for the quarter, up 130 percent from the same quarter a year earlier. Nettles projected that Ciena's 2001 revenue would be 95 percent to 105 percent higher than last year's.
Nettles believes that optical technology stands at the crossroads this year. "It's a datacentric world, and data behaves in a different way than voice," he says. With fat pipes and fast switches speeding bandwidth at 10 Gbps, the Time Division Multiplexing solutions of SONET and ATM are increasingly irrelevant, he says.
The newer, faster Internet Protocol (IP) network will cost less to build and will have operational efficiencies. "The sea change will fundamentally differentiate the carriers that use that solution from those that don't," Nettles says.
The North American optical transport market is expected to double by 2004 to $45 billion per year, according to telecom research firm RHK. By then, 60 percent of vendor equipment revenue will be in IP systems, while the shares for the older frame relay and ATM offerings will shrink, analysts predict.
