Optical startups' silence may be competitive advantage

TRENDS

By ROBERT PEASE

Since the optical telecommunications market began its rather sharp plummet, news of technology innovation appears to have declined as well. However, what may appear to be a slowdown in development is more likely a by-product of optical vendors positioning themselves for the day the market rebounds.

This "stealth" operation may prove particularly important for startup companies. Certainly, some may be slowing development to conserve capital. But others may be taking a lesson from previous startups that could be watching their time-to-market advantage erode in an environment where a stalled economy gives their incumbent competitors a chance to catch up. For the latest wave of startups, innovation hasn't stopped-it just may not be in the manufacturers' best interests to be too vocal about it.

Dave Dunphy, an industry analyst with Current Analysis (Sterling, VA) and author of the recent report, "Risk and Forecasting: Optical Systems Vendors Need Vision Extending Be yond the Carrier," says that when a company is first to market may be as important as actually being first to market. For example, Avici Systems Inc. (Billerica, MA) and Pluris Inc. (Cupertino, CA) introduced terabit core-routing systems with scalability that exceeded current market needs. These routers emerged based on optimistic carrier projections that, in Dunphy's view, virtually ignored the lack of fundamental end-customer trends needed to drive the demands for terabit capacity.

"These vendors tipped their hand to established players like Cisco [Systems-San Jose, CA) and Juniper [Networks-Sunnyvale, CA] by jumping out on the market early with innovative, highly scalable architectures that the real level of end-customer demand could not prod most carriers to buy this soon," says Dunphy.

In his report, Dunphy makes the case that risk management for any optical-system vendor is an imprecise art. Yet, it is essential for vendors to accurately forecast optimal market timing for their product features and availability. The bottom line is that unless there are carriers to make equipment and system purchases, bigger (or smaller), faster, and even cheaper, products will sit on the vendors' shelves.

In this vein, Dunphy asserts that it's important for vendors to supplement carrier-supplied demand forecasts with an independent look at what is or isn't happening with the carrier's customers. Startups that do not optimize product timing as a result of having given too much weight to carrier forecasts face the challenge of producing something that is a better fit for the current end-user demand after they've focused their resources on a product that has overshot the market.

Cisco's vice president of marketing for its Internet routing group, Rob Redford, agrees with this scenario. "When a vendor overshoots, you're forced to retrench with a smaller product that now faces an uphill battle without any significant and compelling competitive advantage over existing products in the market," he says.

Juniper's Adam Stein, director of marketing, says close relationships to service providers and customers have helped Juniper grab considerable market share by matching technological development with current industry issues and requirements.

On the startup side, Pluris CEO Joe Kennedy, while not entirely disputing the Current Analysis findings, believes most of last year's rosy reports were understood to be problematic. In particular, most vendors and venture investors were aware that there were more competitive local-exchange carriers and other providers being funded than there were end users to support them. Even so, Kennedy contends that it is worse to be too late with a product than too early. Thus, he stands behind the idea that carriers still need to migrate to scalable platforms to achieve the kind of favorable economics necessary to survive. Kennedy says Pluris has not observed its competitors fielding compelling alternatives yet, so the company doesn't believe it is facing any danger of missing a product cycle.

It should be noted that while Avici has announced product availability and several customers, Pluris, at press time, has not announced shipment of its product to any customers. This fact makes Avici steadfast in its belief that the market will eventually come to them.

"Avici only recognizes two competitors-Cisco and Juniper-and they have legacy routers," says Esmeralda Swartz, director of strategic marketing at Avici. "They can learn all they want, but they can't build a system like ours without scrapping their current architecture. So all of those customers that have existing Juniper and Cisco systems will have to throw them out because they won't talk to the new systems that they might come up with at some point in the future. If it was easy to build, we would have seen more [vendors] in the market."

As an example of the next wave of startups, Hyperchip, a Montreal-based core-router manufacturer, prefers the "keep it simple" approach to economics. The company believes in keeping its ear to the ground to ascertain what customers are demanding in terms of cost, scalability, reliability, and flexibility. Even in today's economic environment, everything points to one indisputable fact: Carrier networks are continuing to experience traffic growth rates of at least 100% per year.

"To address this kind of growth and further increase profitability, carriers will be forced to deploy a new breed of routing architecture," says Paul Char ron, director of product-line marketing at Hyperchip. "By the end of 2002 or beginning of 2003, carriers will need to upgrade their networks to address both speed and architecture advances."

Current Analysis's Dunphy says that with all the advantages that well-targeted, highly scalable networked applications can bring to the enterprise, it's an "if you built it, they will come-eventually" scenario. "As an optical-systems vendor, however, you need to make sure your company or product line is still around when 'they' arrive," Dunphy concludes. "That means good timing, which comes from accurate forecasting, which comes from watching the end users."

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