Heralding "Execution Mode," Optical Networks Charges into Metro Optical Transport Space
By Erik Kreifeldt
Contents
Emerging market
Execution, not acquisition
Customers
Manufacturing facility
Financing and partnering
Brocade initiative
Optical transport start-up Optical Networks Inc. (San Jose, CA) is shifting into execution mode with $75 million in financing, $50 million in business, a portfolio of heavy-hitting partners, and plans for a manufacturing facility. Optical Networks president and CEO Hugh Martin lauds the accomplishments as a strong foundation for the start-up to capture metro optical network customers and become a public company, rather than an acquisition candidate. Competitors, already poised to pounce on a market that is a year late in emerging, point out that they are already prepared to ship products in volume and provide product support internationally.
Martin has a lot to brag about. He managed to recruit an accomplished Nortel Networks (Brampton, ON) executive to head up the manufacturing effort, which has started with the lease signing on a 58,000-sq.-ft. facility. A new $75 million financing round includes notable industry names Williams Communications (Tulsa, OK), E-Tek Dynamics (San Jose, CA), <%=company%> (Mountain View, CA), and Brocade Communications Systems (San Jose, CA). The corporate financial partners also lend critical support for optical component supply, interoperability with equipment that compliments the Optical Networks product, and insight into customer needs, Martin says. The customer list spans the globe, with Colt Telecom Group plc in London, KVH in Japan, Marietta FiberNet in Georgia, and MetroRED in Latin America.
"We're now sure that there's a business out there," Martin says. "That a little startup can nail $50 million out of the chute is pretty impressive," he surmises, noting that Ciena Corp. (Linthicum, MD) was launched on $40 million worth of business from Sprint (Overland Park, KS). He deems his company's $50 million in business as a strong as an endorsement as any other contender, citing Nortel's claim to $80 million worth of business for its metro DWDM platform.
Emerging market
Optical Networks' rivals are also sure that there is a metro DWDM business available. "The market is hitting us full-scale at this point," says Steffen Koehler, product marketing manager for Ciena's metro DWDM equipment. The North American market is just now starting to ramp up, about a year later than expected, he says. European deployments are also emerging this year, in line with previous forecasts, he adds.
Although an array of start-ups and most of the traditional telecom equipment manufacturers have metro DWDM systems in various stage of development, Koehler observes that, "if you are someone that has to do real carrier-class networking today, basically, you have two choices," referring to Ciena and Nortel products. He cites one request for proposal in the third quarter of last year that essentially stated that the first product available in volume gets the business. Koehler concludes that product available now in volume have a significant advantage over those in development.
In addition to having a mature product line, Koehler notes that incumbent suppliers have two other advantages over start-ups. One is established international service and support for the products, and the other is the ability to offer product lines that are complementary to metro DWDM, such as core switches and optical access products. Ciena gleaned these products through the acquisition of Lightera and Omnia.
Execution, not acquisition
Optical Networks is often viewed as an acquisition target, particularly by Cisco Systems (San Jose, CA). Cisco already holds a stake in Optical Networks, and it could use metro transport to fill out it's portfolio of acquired optical product lines, including Pirelli's long-haul DWDM and Cerent's optical access platform.
Martin remains adamant that his company is not seeking a suitor, adding that the company may go public this year, despite the conventional wisdom that it's tough to build a telecom equipment business around a single product. "You don't sign a seven-year lease and build [a manufacturing facility] to sell the company. You don't raise $75 million to sell the company. If you want to sell to Cisco, you don't take Juniper on as a board member," he proclaims. Juniper's gigabit router product competes with that of Cisco.
In lieu of being acquired and folded into a grander product line, Optical Networks is assembling manufacturing prowess and forging relationships with companies that offer complementary products, starting with Fibre Channel switch manufacturer Brocade. Martin also sees Juniper as both a financial partner and technology partner with its gigabit router products.
As Optical Networks turns to its execution strategy, it has already gleaned a portfolio of customers for its product, the dynamic transport system (DTS). DTS integrates three elements-an optical transport platform (ONLINE 9000), an optical network operating system (OPTX), and an optical link management protocol suite for internetworking (OLMP). The dense wavelength division multiplexing system handles up to 66 wavelengths, with services from 100 Mb/s to 2.5 Gb/s.
Customers
Optical Networks will log $50 million in sales over the next three years from supply contracts with four customers: Colt, KVH, Marietta FiberNet, and MetroRED. Fidelity investors and the same outfit behind Colt support both KVH and MetroRED, Martin notes. Colt conducted a trial of the Optical Networks equipment in London for six weeks, he reports. "These customers illustrate that there is a large Metro opportunity in Asia, Europe, Latin America and the U.S.," Martin says.
Colt completed lab and field trials in London with Optical Networks' DTS in the fourth quarter of 1999, and is expected to begin initial deployment in the second quarter of 2000. The initial supply contract is targeted at $30 million over a three-year period. Colt operates in 20 cities and nine countries across Europe. The carrier expects to extend its network between 30 and 32 cities by the end of 2001. Colt will use DTS to upgrade synchronous digital hierarchy (SDH) rings in its European city networks.
KVH is building out networks in Asia. It will initially deploy Optical Networks gear in Tokyo and Osaka, Martin says. MetroRED is developing networks in Latin America, initially targeting Brazil, Argentina, and Mexico, Martin says. Marrietta already runs customer traffic on the Optical Networks equipment platform. Both companies have plans to expand in the next couple years. Customers for KVH and MetroRED include enterprises and major financial institutions.
Marietta FiberNet, an Atlanta-based competitive local exchange carrier serving enterprises, schools and government offices in most of Cobb County, Georgia, has purchased and deployed the DTS as part of its network upgrade. The carrier plans to offer synchronous optical network (SONET), gigabit Ethernet, and Fibre Channel services throughout the Metro Atlanta region and statewide to customers, such as a national competitive local exchange carrier (CLEC), a worldwide Internet co-location company, service providers, content providers, and area universities.
Manufacturing facility
To supply these customers and other business, Optical Networks is ramping up a manufacturing facility. The company has signed a lease for 58,000-sq.-ft. of space for the facility on Baypointe Parkway in San Jose. The new facility will open in April 2000.
To head up the manufacturing effort, Optical Networks managed to recruit Martin Desroches away from Nortel. "He's the guy that build the OC-192 facility in Ste. Laurent," Martin notes. Desroches, Optical Networks vice president of operations, began his career at Nortel as a test engineer for 150 Mb/s asynchronous optical transmission products. Desroches later became the manager of Nortel's OC-48 (2.4 Gbps) product line and then senior manufacturing manager for Nortel's OC-192 (10 Gbps) product line. In an effort to address shortages in optical components industry, Desroches moved in 1999 to Nortel's Optoelectronics Division in England as senior manufacturing manager to help develop strategies to increase production. Desroches received his BAC degree in electrical engineering from the University of Sherbrooke in Canada.
Financing and partnering
For operating capital necessary to execute its plans, Optical Networks recently secured a $75 million round of financing, bringing the total to $125 million. Bowman Capital Management was the lead investor. Other investors include: Amerindo Investment Advisors, Integral Capital, J. & W. Seligman, and Mohr, Davidow Ventures. Corporate investors in new round include Brocade, Juniper, passive optical component stalwart E-Tek, and carrier Williams.
Williams CTO Matthew Bross has joined Optical Networks' Board of Directors. "We are very impressed with Optical Networks' management team, vision, and state-of-the-art, all-optical system, the Dynamic Transport System," he says. While the Williams relationship does not comprise a contract win, Martin says it indicates a "healthy mutual respect" between the companies that opens the door to do business together.
In addition to financing, E-Tek has also committed component supply to Optical Networks. Martin characterizes E-Tek as being in a supply-constrained environment that requires the component vendor to carefully allocate its limited resources among customers. E-Tek's allocation of both components supply and operating capital comprises a major endorsement of Optical Networks' plans, Martin asserts.
Gaining Brocade and Juniper as investors parallels the kind of equipment interoperability that will likely occur between the companies, Martin says. Brocade manufactures Fibre Channel switches and Juniper rivals Cisco in the gigabit router space. Logging both rivals Cisco and Juniper on the list of investors is testimony to the independent strength of Optical Networks, Martin asserts. Optical Networks has already disclosed details of the Brocade partnership.
Brocade initiative
Brocade and Optical Networks have launched an initiative to interconnect enterprise storage area networks (SANs) over metropolitan area optical networks. The two companies plan to ensure interoperability between Brocade's SilkWorm Fibre Channel switches and Optical Networks' DTS and to integrate their management software platforms. The software integration will enable a unified view of SAN management across an interconnected SAN, regardless of the backbone network and distance, the companies say. The initial phase of software integration is expected to be complete in the second quarter of calendar year 2000.
The Brocade switches connect servers with storage devices through a SAN for disaster recovery, remote backup, and server and storage consolidation applications. The collaboration will extend the bandwidth, reliability, and manageability of SANs across Metro area networks, providing up to 2 Gb/s transmission speed per wavelength (or 132 Gbps per system), according to the companies. A high-speed optical SAN-to-SAN connection will new SAN applications, such as dynamic data replication and disaster tolerance.
"As SAN implementations continue to increase in both size and complexity, connecting enterprise SAN islands over a larger Metro area is the next evolution of an adaptable storage infrastructure," says Sean Derrington, program director of Stamford, CT-based META Group. "As storage requirements continue to grow 200-300% per year," he continues, "Fibre Channel to fiber-optic connectivity will help organizations increase the flexibility and capabilities of their storage infrastructure."
Connecting SANs across optical networks in a Metro area will enable a new class of "storage utility" services for Metro carriers and service providers, proponents say. Service providers will be able to offer their enterprise customers cost-effective, outsourced storage services on-demand, freeing them from storage environment management.
"The relationship with Optical Networks will help simplify SAN deployment issues as our customers extend SANs across the Metro area and take advantage of the new class of storage services," says Peter Tarrant, Brocade vice president of marketing and business development.