Xtera switches gears (again) with metro purchase

Long-haul DWDM vendor Xtera Communications (Allen, TX) has money to spend but, thanks to a stagnant long-haul (LH) market, no revenue-generating customers. Metro vendor Metro-Optix, meanwhile, had 15 revenue-generating customers before it ran out of money and was forced to close its doors. In a move that has many industry insiders scratching their heads in bewilderment, the LH vendor has purchased the assets of the metro vendor. Will this prove a sound business decision or is it merely a last ditch effort to survive?

This isn't the first time Xtera has changed directions. Established in 1998, the company began operations as an S-band amplifier manufacturer but switched gears in 2002, when it launched the Nu-Wave DWDM system. Unfortunately, its target market, long-haul, has been in a downward spiral since 2001. According to Sterling Perrin, senior research analyst for optical networks at IDC (Framingham, MA), the LH market fell 71% in 2002, with an additional drop of 40% expected this year. It's a tough market even for incumbent vendors, he reports. The revenue generated today is by and large the result of existing accounts, with line-card purchases accounting for a sizable chunk of the total revenue.

"Anyone who is entering the long-haul market or entered it when Xtera did faces significant challenges, and it's not going to get any easier over the next couple of years," Perrin warns. "I think [Xtera's] options were [to] probably run out of money slowly or do something in the hope of getting into a market that is going somewhere."

Do something they have. Xtera's foray into the multiservice-provisioning-platform (MSPP) space through its purchase of Metro-Optix may be puzzling, but, says Perrin, if you're going to choose a segment to enter, that's the one you want to choose since it has been the only optical-networking segment to register growth throughout the downturn. The worldwide MSPP market is expected to generate $1.6 billion this year, up from $1.4 billion last year. IDC expects the market to increase at an 18% compound annual growth rate to net $3.2 billion by the end of 2007.

Of course, entering a growing market and being successful in that market are two decidedly different animals. Terms of the deal were not disclosed, so it is unknown how many Metro-Optix engineers, if any, will join the Xtera team. According to a press release issued by the company, Kris Shankar, Metro-Optix vice president of marketing and business development, will fill a similar role at Xtera to "ensure institutional and product continuity."

"The challenge is that Xtera doesn't really have anything to bring to the table in terms of established relationships to sell the [CityStream] products," muses Perrin. "I don't know that their position is going to be any better than Metro-Optix's."

For his part, Shankar remains optimistic. He believes the acquisition "appears pretty wise at this stage. What it gives Xtera is an instant revenue stream. Metro-Optix had about 15 customers at the time of the acquisition as well as about 18 lab trials that could potentially convert to new sales. The acquisition gives them a new product in a new space."

Xtera hopes that new space will lead to new customers. The Nu-Wave DWDM system targets the top 15 or 20 interexchange carriers. The Metro-Optix CityStream product is designed for a completely different customer base, which includes the RBOCs, cable multisystem operators (MSOs), competitive local-exchange carriers, and most important, the independent operating companies, of which there are about 1,500 in the United States alone. "These sales tend to be much smaller—$5–10 million as opposed to hundreds of millions," says Shankar, "but the sales cycles are much shorter."

The acquisition also gives Xtera a product that has already gone through the time and expense of the OSMINE certification process. In addition, the CityStream MSPP recently earned a place on the List of Acceptable Materials by the Rural Utilities Service (RUS) branch of the U.S. Department of Agriculture, enabling rural telephone and utility companies to use RUS funds to purchase the CityStream equipment.

According to Shankar, the CityStream MSPP or bandwidth manager stands out for two reasons. One, it features the largest wideband crossconnect on the market with a capacity of 10,752 T1s; Tellabs' MSPP has 9,400 T1s, but the rest of the products on the market feature 1,300 T1s or less, claims Shankar. Second, he contends, CityStream is the only product that integrates true ATM switching in a SONET ADM.

But can it compete with the likes of Cisco Systems' 15454, Nortel Networks' OpTera products, and Fujitsu's FlashWave family? While spending continues in the MSPP space, the revenue has gone to established vendors with existing relationships, says Perrin. Those vendors with strong legacy SONET offerings have an advantage—the notable exception being Cisco, which pioneered the MSPP market on the strength of its Cerrent acquisition. "The money in this segment is going to be made by vendors selling to incumbent carriers that have large networks," he surmises.

Which leaves a newly minted MSPP startup like Xtera with no choice but to push forward and hope that at least one of its target markets pans out. "Xtera remains committed to both areas," asserts Shankar, "which would include continuing to pursue long-haul customers as well as enhancing the roadmap for the current CityStream acquisition. There will be parallel development."

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