Sonus Networks rolling the dice on softswitches

Nestled in the woody hills of Westford, Massachusetts, 4-year-old Sonus Networks Inc. is emerging as a survivor in the battle for carriers' capital expenditures. Sonus builds softswitches and media gateways, new technology equipment upon which modern networks will be built.

Traditional circuit-switched network gear combines the physical process of sending a signal with the switching intelligence to send the signal where it's supposed to go. Softswitches separate the intelligence from the hardware. Softswitch software, which can run on an off-the-shelf server, tells phone calls where to go, and can incorporate additional services like call forwarding or call waiting with programming changes. Media gateways are hardware, changing a circuit signal to IP (Internet Protocol), frame relay, ATM (Asynchronous Transfer Mode) or back again, allowing circuit-switched phone calls to run on an IP network.

Sonus bets carriers will need a package of gateways and softswitches for the edge of the network, rather than separate items from separate vendors. Sonus acquired softswitch maker Telecom Technologies Inc. (TTI) last November, because TTI's softswitch worked better than Sonus' at the edge of the network -- in phone companies' central offices where the backbone connects to local phone lines, said Hassan Ahmed, Sonus' president and chief executive officer.

Carriers first began using packet technology on network backbones -- right where Sonus positioned its earlier technology. The edge of the network is next, Ahmed said. "We've been making the right bets," Ahmed noted. "We bet that the core of the network would packetize first, and we won."

Winning, in the current telecom market, means survival. Sonus, from the Latin for sound, has a financial history on Wall Street with peaks and valleys like a sound wave. Sonus (SONS) traded near historic lows at around US$14.50 a share at the end of August, in part from a late-month hammering on news that WorldCom Inc. would cut its capital expenditures on new network equipment. The stock traded as high as $72 in August 2000, three months after its initial public offering, just as the market's bubble popped.

Sonus' gateway-and-softswitch strategy differs from others in the field. Some companies try to make every kind of network component, while others concentrate narrowly on a single piece. Independent media gateway and softswitch companies have struggled, while others have proven to be mediocre acquisitions, analysts say.

Sonus' successes validated the market, said Tom Valovic, director of IP telephony at the International Data Corp. technology market research firm. "They're a leading carrier gateway switch vendor, if not the leading," he said. "There are other companies that do nothing but softswitches. (Sonus') softswitches are secondary. Their success is based on the media gateway."

Gateways are silicon technology, subject to Moore's Law, and so they get predictably less expensive to build. Competition drives profit margins close to zero as silicon-based hardware becomes a commodity, borne out in server and personal computing markets. While margins for media gateways shrink, softswitch companies rely on thick margins to recoup research and development costs, if they can survive at all. Sonus plans to combine both business elements into a successful company.

"Carriers don't put pieces together," Ahmed said. "They're lousy integrators. It's too difficult to build a piecemeal solution."

BellSouth Corp. uses a Sonus softswitch/media gateway package to off-load on to their IP network the dial-up Internet sessions that can last three or four hours, chewing up circuit-switched network resources.

"We felt that their solution would be able to off-load some of our traffic on to a new platform," said Steve Turner, director of network transformation for BellSouth. "The publicly switched telephone network is not designed to handle this kind of traffic." Sonus equipment met BellSouth's standards for reliability and compatibility -- it's carrier-class, Turner said. "They've also been a good supplier ... Sonus had a more mature solution ... it met all of our needs for the application."

Carriers look to packet-based technology like Sonus' softswitches and media gateways because it is more flexible and less expensive to deploy than traditional circuit-switched gear. Developers can reprogram a softswitch with relative ease, then test deploy it in one or two markets without buying a production run of million-dollar circuit switches. With the costs lower, carriers can experiment.

"Today, when you want to make a change in your service, you have to call someone … and if you want something a little bit different you get transferred around a lot,"said Mike Hluchyj, Sonus' chief technology officer and founder. "That's expensive for carriers. It would be nice if I could do it with (an Internet) browser."

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