When to walk away
by Stephen M. Hardy
Tellabs raised eyebrows in April when it announced that it had decided to surrender its status as a supplier to Verizonâ��s GPON program. While making clear that it intends to continue to service the carrierâ��s BPON requirements, the company didnâ��t provide us with many details about its GPON reasoning when we asked about it, other than â��we did not find the deal economical.â�� Apparently, the company looked at how much it would have to invest to develop and deliver a GPON system to Verizonâ��s requirements, then compared that figure to how much revenue it could expect to garner as (most likely) the carrierâ��s No. 3 GPON equipment supplier. The comparison must not have been very pretty.
I have to give Tellabs credit for having the sense to walk away from a high-profile program when the numbers just didnâ��t add up. Yes, sticking around would mean the company could still say it was a part of the next phase of the countryâ��s biggest FTTH deploymentâ��but at what cost? The situation reminds me of those stories one reads about titled families in Europe living almost like paupers in the ancestral castle; at some point, the sacrifices necessary to keep up appearances become irrational. And no one is going to pay money to tour the Tellabs facility or spend the night in the presidentâ��s office.
In an industry that is known for wrapping products in dollars just to keep them moving out the door, Tellabsâ�� ability to say, â��Enough!â�� provides an example that others ought to ponder.
This is particularly true in light of todayâ��s challenging economic environment. Weâ��ve seen this situation before, unfortunately. Itâ��s too early to say how tight carrier dollars will get, but certainly the message will be delivered to systems houses that if equipment is going to be purchased in meaningful quantities, it had better be less expensive than ever. The executives at systems houses will have to evaluate how low they can afford to bid on upcoming contracts with this message ringing in their ears. Itâ��s at this point that the temptation to offer a money-losing bid will creep in. If we can just get the contract, we can maybe turn a profit on ancillary equipment or services, the executives might think. Or maybe it will seem okay to lose a bit of money on this high-profile job, since it will put them in a better position to win other business (on which they wonâ��t underbidâ��no, no, no).
Or maybe these system house honchos will decide that they can turn an unprofitable deal around by putting the squeeze on their component and subsystem suppliers, who will likely be even more hard up than the box vendors for business, given the number of companies still trying to make a go of it at that level.
But, as executives at the component and subsystem companies can attest, trading margin for revenue has long-term ramifications. In 2007, the optical communications space enjoyed its best year since 2001â��and, as I described in this space last month, component and subsystem suppliers still couldnâ��t get out of Wall Streetâ��s doghouse.
There are several reasons why the financial community wouldnâ��t get behind the component and subsystem vendors. Mortgaging future profitability for short-term revenue undoubtedly is on the list when it comes to certain companies.
CEOs across the industry should take a hard look at new â��opportunitiesâ�� this year. Showpiece deals that look better in a press release than they do on the ledger make less sense than ever.
Tellabs made a smart move in walking away from an unprofitable situation. But the smartest move is to avoid getting involved in programs like this in the first place. .â��
Stephen M. Hardy
Editorial Director & Associate Publisher
Erratum: In the April article, â��Verizon Business trials AFOX technologyâ��, we neglected to cite the fact that Polatis took part in Verizonâ��s Florida trial of automated fiber-optic crossconnect (AFOX) technology. We regret the error.
Clarification: In the same article, we reported that Glenn Wellbrock, director of backbone network design at Verizon, characterized piezoelectric beam steering technology as â��higher loss.â�� In response to a reader query, Wellbrock subsequently e-mailed us, â��The insertion loss argument really has to be put into context to be accurate. Piezoelectric machines are higher loss than robotic machines, but less loss than MEMS machines."