Optical Ethernet firms brave stormy industry seas

Despite reduced capital spending from their customers, metropolitan optical Ethernet companies exhibiting at this week's NetWorld+Interop 2001 show say they will not stray from their original business plans in an effort to create or stimulate demand for their products.

The companies say their initial business objective - making and selling equipment that lets service providers deliver Ethernet services to companies - is still compelling enough to investors and customers that they can generate enough capital and revenue to ride out the current economic slump. The consensus among metropolitan Ethernet vendors is that companies targeting long-haul networks will suffer most from the industry downturn.

Some have been hit harder than others. Astral Point Communications Inc. has had to lay off 20 percent of its staff and halt development of one of its two product lines to conserve venture funding.

And ADVA AG has had to lower its revenue guidance for 2001 by about 10 percent, which is still nearly double the US$60.6 million realized in 2000.

"There was a lot of money spent in 2000 on scaling for future capabilities," says Brian McCann, ADVA's chief sales and marketing officer. "Now that's only going to be done out of necessity."

"The rules of the game have changed," adds Agnes Imregh, vice president of marketing at LuxN.

Vendors are hopeful the industry will start to turn around in the fourth quarter of this year, or the first half of 2002. Some reputable and influential Wall Street firms, however, say the industry is just closing the first year of what could be a three-year slump.

McCann admits that visibility is murky.

"No one really knows when this will be over," he says. "It's going to take cash to get through this storm because what's been projected in sales is already softer. Real companies with real products to deliver are the ones that are going to survive."

"Real" is not in the vocabulary of some analysts when they consider the business case for Ethernet metropolitan-area network services. They say these companies haven't seen the worst of it yet.

"I don't see any way the telecom industry in the U.S. is going to evolve in such a way that the result is going to be a large-scale purchase of Ethernet," says Tom Nolle, president of consultancy CIMI Corp. in Voorhees, NJ. "I give Ethernet six months before the whole thing is gone. You can't map [time-division multiplexing] infrastructures to Ethernet. You can't sell leased lines over Ethernet. This just is not going to work. ATM is going to dominate."

Undaunted, vendors press on.

Between 10 percent and 20 percent of ADVA's metropolitan optical business is Ethernet. ADVA is also negatively affected by a slowdown in spending on storage-area networking, according to a recent credit report.

"Enterprise customers in both the U.S. and Europe appear to be delaying the deployment of large storage projects that would require the use of [dense wave division multiplexing] Fibre Channel, a key focus of ADVA's enterprise business," the report stated.

Service providers are also cutting back deployments because of tight capital markets that contributed to widespread failures in the competitive local exchange carrier ranks. This has prompted LuxN to concentrate development on lower-cost optical devices that generate a quick return on investment (ROI), according to Imregh.

"The customer always has the option to just do nothing," Imregh says. "Two years ago the industry chased the hottest start-up carrier. That's not as meaningful as it used to be anymore. Wall Street is now rewarding good ROI on specific markets."

Imregh says LuxN is insulated a little better than some of its competitors from the rough economy because the company focuses sales on service providers that have and are making money. Conversely, service providers also want to deal with established suppliers, says Nan Chen, director of product marketing at Atrica.

"The slowdown in the market means [service providers] are choosing to invest in only those companies that they believe are implementing the right technologies and who have the right team in place to be successful," Chen says. "When times are good, there is not as much incentive to look for ways to reduce costs. Because optical Ethernet technology offers a compelling cost advantage, we are seeing many of the pro-viders actually accelerate their [spending and buildout] efforts, particularly the incumbents."

CIMI's Nolle says this air of optimism is "crap" and warns that metropolitan Ethernet vendors are only fooling themselves.

"It's going to get much worse for these companies," he says. "Major service providers know that ATM works, and it goes back to the issue of what kind of equipment is on the customer premises. I bet that if you took a sample of say, the Fortune 500 companies, you wouldn't find a single buyer of Ethernet metro service."

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