Shotgun weddings for the sake of the technology
By KATHLEEN RICHARDS
If you've noticed more alliances, cooperation, and even some strange bedfellows in fiber optics lately, you're not imagining things. Reseller agreements, OEM deals, technology partnerships, and all types of collaborations are a survival strategy for many companies in today's challenging market.
With major industry consolidation still to come, "virtual consolidation" is happening now, asserts Karen Liu, program director for optoelectronic modules: global service at market researcher RHK (San Francisco). Virtual consolidation can take the form of partnerships or joint development agreements between startups or startups and established vendors as well as distribution arrangements and "arranged marriages" where a systems vendor pairs promising component startups to meet that vendor's requirements.
While strategic partnerships always have played an industry role, for startups in particular, partnering has become a survival strategy. "Companies have a lot of financial constraints right now; they are trying to become profitable, so they can't invest much in R&D and try to manage the burn rate," says Allan Armstrong, director of optical transport semiconductors at RHK. "So one of the struggles that the startups have is that the systems vendors would prefer not to buy from them, because as a supplier they can't afford to pin their program to a startup. And a problem for the startup then is that they can't get business without that. On the other hand, the larger companies don't have the resources to throw a team of designers at every possible chip definition, and they have to make some choices about what they are going to staff and what they are not going to staff."
Carriers play a large part in the behind-the-scenes courtships between potential partners. "We see that carriers will say to a system startup, 'We like your technology but please partner with this supplier of ours,' says Liu, "and down the food chain, the system supplier will say to a component supplier, 'We like your technology; we will put a word in for you with our preferred component supplier.'"
Equipé Communications (Acton, MA), developers of an ATM/MPLS multiservice core data switch, heard a similar message from service providers. The startup therefore formed a worldwide sales agent and reseller agreement with optical switching and transport company Ciena (Linthicum, MD) in June.
"The way things used to be, carriers would consider doing business with startups who had some kind of leapfrog technology, and they'd be happy to work with them and help them integrate it into the network," says Bob Sullebarger, vice president of marketing at Equipé. "Now the carriers are expecting a lot more of their vendors-both established vendors like Ciena and startups like Equipé." Service providers also want their support needs met and some assurance that any product they buy is going to be around for the next five to 10 years.
Equipé's relationship with Ciena began in March, when the incumbent vendor became an equity partner by investing in its third round of financing, which added $40 million for a total of $103 million in investment capital. Ciena believed in the technology and a relationship was forged. "The investors wanted to see this as well," states Sullebarger. "They were asking if we had any channel partners, so we, like everyone else, were actively talking to the incumbent vendors."
Under terms of the agreement, Ciena's sales organization can offer the Equipé 3200 to their global customer base. Ciena is also providing first-level round-the-clock technical support for the product through its technical assistance centers worldwide. "Carriers are telling us that they want to deal with fewer vendors, not more, and they want vendors who can come in and give them everything-a complete portfolio of products as well as supporting those products," explains Denny Bilter, a Ciena spokesman. "So that quite frankly has eliminated many of the smaller competitors."
In the current climate, many incumbent vendors may have more power, but a product or technology gap that they would have thrown internal resources at two years ago is now frequently solved by going outside the company. "The Equipé switch does clearly move us into a different layer, which we had not played in previously," says Bilter.
Ciena's partnership with Equipé is on the heels of the incumbent vendor's completed acquisition of ONI Systems in June, which gives the company a broader portfolio of metro products and increases its customer base. "The whole consolidation among the carriers and among the vendors is a common thread," says Bilter. "The market is not going to turn around until this consolidation really takes place."
Response to RFPs
"People are looking at more partnerships," says Steve Rogers, senior manager of business development at access equipment vendor Advanced Fibre Communications (AFC-Petaluma, CA). "In some cases, there isn't enough technology resources within a company, so they have to seek out partners that can do it better. Other times, it is a cautious way to enter a market or to expand your channel."
Some partnerships result directly from requests for proposal (RFPs), as vendors try to win carrier business-the case with AFC's acquisition of AccessLan Communications in May. AFC is integrating some of the technology (ATM switching, Ethernet PON, DSL and advanced IP) into its Telliant 5000 platform, which allows carriers to migrate from ATM to IP.
"We really take a look at the RFPs and the RFIs [requests for information] that are coming in, especially from an RBOC standpoint," explains Chris Heineman, a spokesman at AFC. "What are the trends? What are they looking for? Do we have that type of technology? If we don't, then we better develop it or start looking at a partnership or start looking at some M&A [mergers and acquisitions] activity." Currently, AFC is evaluating potential partners to help it address independent operating companies and incumbents' needs in the video arena.
"Nobody has a lot of money and people are looking for safe acquisitions, which will be accretive to earnings," says RHK's Armstrong. "The problem is that if the acquisition target has earnings, then their valuation is rich, which makes it hard to acquire them. I think that when the market starts to gain traction, some companies will become profitable ahead of others by three to six months, and when their valuations and currency increases relative to other companies that may have valuable technology, then they may be able to finance these purchases."
However, an increase in acquisitions is not expected immediately, according to Armstrong. "Within the next year, we should see some significant growth in this activity," he says.