Startups, incumbents vie for market share

TRENDS

By ROBERT PEASE

While the market lags and carrier buying sprees become nothing but a fond memory, optical equipment manufacturers, large and small, continue to wage war for market share. The incumbents defend their turf with all the vigor they can muster while dealing with other issues like downsizing, retaining customer confidence, and stressing their competitive advantage with fewer marketing dollars. The challengers-dealing with their own issues of financing, even tighter marketing budgets, and a need to convince customers of stronger value propositions-continue to apply competitive pressure through such buzzwords as "bigger, faster, smarter, and cheaper."

"I think the ball is in the startup court," says Chris Nicoll, director of infrastructure analysis at Current Analysis, a Sterling, VA-based industry-analysis firm. "They may have a slight advantage over some of the incumbent players since, in order just to get funded to get that first product out the door, they really need a pretty strong focus on a particular problem or issue."

Nicoll believes larger companies tend to focus more on a product family, rather than a single product, which might hinder their ability to single out a specific problem and address it with a particular product. Startups tend to be a bit more nimble in reacting to the marketplace. Also, incumbent players may not listen or respond to customer demands the same as a startup. The success of a particular product sometimes leads to reluctance by incumbents to obsolete it in favor of newer technology.

"This is something that made Cisco Systems [San Jose, CA] hugely successful in the 1990s, and we've seen a little bit less of it lately," says Nicoll. "They made their own products obsolete by introducing the next-generation products. So, in effect, they became their own competition by introducing new 'startup' equipment to compete with their own legacy gear. If other incumbents could go ahead and obsolete their own products and introduce the good, strong next-generation products that are superior to what's in the marketplace, then vendors will likely continue to buy from them."

Two incumbents trying to hold market share from falling into the eager hands of startup competitors are Ciena Communications Inc. (Linthicum, MD) and Tellabs (Lisle, IL). Ciena sees itself as a pioneer in the optical-switch market and enjoys a huge market share with its Multiwave CoreDirector product for the optical-network core. Likewise, Tellabs has recorded considerable success with its TITAN product line for the optical edge.

"According to the new Aberdeen Group study, based on extensive interviews with 74 carriers globally, Ciena leads the overall intelligent optical-networking market with an estimated 25% share," says Bill Rose of Ciena's core switching division. "With CoreDirector, Ciena has 52% of the intelligent optical-switch market. We now have more than 15 carriers deploying the CoreDirector."

Recognizing consistent growth in the optical-switch market, Rose expects to see other competitors enter the space to compete with Ciena. That challenge is welcome, since competition will push the overall quality of the market.

"The optical core switching market is still in its infant stages," says Rose, "but it's beginning to take off. Service providers are seeking ways to utilize bandwidth more effectively and do better grooming from the STS-1 [52-Mbit/sec] level up to OC-192 [10 Gbits/sec] and eventually OC-768 [40 Gbits/sec]. As long as we focus on what our customers need, and don't get caught up in looking in the rear-view mirror, our position as the market leader should not only be safe, we should be increasing our share-albeit at a slower rate of increase."

Tellabs is just as high on the success of the TITAN line. The company plans to continue global expansion to help sustain its competitive edge.

"We have a record of considerable success in meeting our customers' bandwidth-management needs with our TITAN product line," says Rich Tatara, vice president of global product marketing at Tellabs. "In fact, most voice and data traffic in the U.S. travels through our TITAN 5500 systems."

These two incumbents are aware that competition will eventually heat up again as the economy levels out and carriers accelerate equipment spending. They are relying heavily on their track records, experience, and well-oiled marketing machinery to maintain-and even increase-their respective market shares. But will they be able to ward off the tide of innovative new players seeking to grab a piece of the pie?

Two solid competitors for Ciena and Tellabs are Altamar Networks (Mountain View, CA) and Ocular Networks (Fairfax, VA), respectively. Altamar has introduced its Titanium optical transport system, scheduled for production early next year, to compete directly with Ciena's CoreDirector for a chunk of the core switch market. Ocular is poised to begin production of a new version of its OSX optical-switching platform to give Tellabs a run for the money at the metro edge.

Touting Titanium's scalability, flexibility, and integration, Altamar is getting feedback on designs from potential customers as well as working through network modeling exercises to prove the advantages of its product. The company touts its claims for Titanium's ability to scale more gracefully and to a much larger switch size than the CoreDirector as major competitive advantages. The switch is also nonblocking and can stand alone with existing DWDM gear or integrate with long-haul and ultra-long-haul gear.

"Ours is the only solution we are aware of that can scale with linear cost from very small to very large configurations, literally thousands of OC-192 ports, strictly nonblocking of course," says Ian Wright, senior vice president of engineering and chief technical officer at Altamar. "We offer the option of tight integration with long- and ultra-long-haul DWDM transmission to provide capital and operational savings-in the 30%-to-50% range. We feel both of these attributes provide us with a strong competitive advantage against Ciena."

Ocular believes its strategy for competing with the likes of Tellabs is simple: Provide an overwhelming business case that proves in for existing applications and doesn't require service providers to change their networks or deploy new services. "Our advantage over incumbents is radical capital and operational economics for existing services and the ability to add new applications and revenue streams under the same investment," says Doug Green, vice president of marketing at Ocular. "We see ourselves making significant inroads starting this year and even more significant impact in early 2002."

Green says that most new companies try to gain competitive advantage by just integrating the next denser ASIC or the next new off-the-shelf technology in new sheet metal. "That's great if you're already the market leader trying to hold on," he says. "But to really make a market impact as a newcomer, you have to change the rules."

Startups generally feel they are usually downplayed by the established players, but as Green points out, more than half of them were also small players fighting against incumbents, probably within the last five to 10 years. As long as there are challenging, critical technology problems to solve in optical networking, the startup trend will continue, even when the economy is struggling.

"When someone like Ocular comes on the market and really looks to take an established market-like SONET crossconnects-and turn it on end, you've got to believe that the incumbent players in that space have to be taking a keen interest," says Current Analysis's Nicoll.

"They need to be aware of what these startups are doing, either from an internal development standpoint or perhaps even entertaining thoughts about acquiring the technology that may cause them any future heartache."

Although incumbents (and even startups) are reluctant to discuss possibilities of partnerships or acquisitions, Nicoll believes the current competitive market could still favor such moves. Whether driven by new markets or current market deficiencies, acquiring rather than competing is still something the incumbents must consider.

One thing the market slowdown has not hurt is the competitive nature of optical telecommunications. If a space is hot, competition is hotter-and the gloves on both startups and incumbents will come off.

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