40Gb technology arrives in search of a market

Most of the startup activity at this year's Optical Fiber Communication Conference will involve equipment for 40Gbps networks. But the IC and optocomponent vendors launching products in that segment may be chasing what for now is a phantom market.

"This OFC may well be the last few moments of Nero fiddling while Rome burned," said Tom Nolle, chief executive of consulting firm CIMI Corp. "By Supercomm in June, there will be no place to hide."

The problem is more profound than a simple lag in scaling from 10Gbps (OC-192) to 40Gbps (OC-768) networks.

The core transport carrier field, led by interexchange carriers (IXCs), has been self-immolating since the telecom recession began. After the bankruptcy of Global Crossing last month, such leading IXCs as Level 3 Communications, Qwest Communications International, Sprint, Williams Communications and WorldCom have seen bond ratings drop and revenue opportunities disappear.

The optical-transport OEMs serving those carriers have subsequently seen their own stock prices fall, from hundreds of dollars per share to less than $5. Many smaller OEMs will likely go out of business, and even larger companies, like Ciena and Nortel, are expected to consolidate their target markets in the coming months. That leaves component suppliers for transport functions courting a very uncertain customer base.

For some of the young suppliers, it is not just a matter of holding out for a few quarters. The aggregate amount of data transport traffic in the United States in mid-2002 is approximately 3Tb of offered load, while the nation has 9Tb of lit capacity in its backbone networks, Nolle noted. Although localized bottlenecks may crop up in the next couple of years, Nolle does not expect to see significant fiber buildout and attendant equipment purchases before 2005.

"The chip and module guys can follow us into Zombieland," quipped an executive at one startup metropolitan optical aggregation OEM who asked not to be identified. Competitive local carriers are gone, the IXCs on their deathbeds. Virtually the only potential customers left are the incumbent Baby Bells?and they are doing very little purchasing.

"We see a lot of our competitors simply holding on, week to week, with no sales on the horizon?and those are the folks these new chip startups want to sell to," the executive said. "If there were optical startups popping up in the VCSEL [vertical cavity surface-emitting laser] or in-room interconnect space, it might make some sense, but 40-Gbit transport? Good luck."

Venture firms and investment banks that fund 40-Gbit startups are following the "deliberate Ponzi schemes" promoted during the Internet boom, CIMI's Nolle said: If your payoff date is so far in the future as to be inconsequential in the short term, you can fund a startup without being concerned about whether it makes it to IPO or acquisition.

"The last wave failed not for the VCs or the banks, but for the small investor," he said. "The backers of a company like Sycamore could get out when the stock price was still high, and it was the everyday person who got hit when the stock collapsed. There may not even be the opportunity for a stock bubble this time around, but VCs can bail on their 2001 investments after a year."

Exuberance vs. reality

Last year's OFC displayed irrational exuberance, filled with buzz and large booths even as the carrier industry was showing the first signs of collapse. This year, Nolle predicted, OEMs and component suppliers will do their best at the trade show to deny reality. But reality will bite by the end of spring, when surviving carriers place their orders for the coming year.

If OEMs aren't on the short lists of at least a few key incumbent local carriers or IXCs, he said, they will have little reason to delay dissolution of assets.

The crisis in long-haul optical transport, driven in part by physical overbuild of fiber in some regions, has been exacerbated in many instances by the "Enronitis" that has driven a closer examination of non-revenue-generating capacity swaps between carriers. After the Securities and Exchange Commission began exploring the way that bankrupt Global Crossing swapped "indefeasible rights of use" with other carriers, the agency expanded its probe to every carrier with which Global Crossing had done business, including Qwest and WorldCom. Qwest president Joe Nacchio told analysts Monday (March 11) that a Denver SEC probe further soured some investors on long-haul carriers' profit prospects.

The SEC also is probing WorldCom, in a broader investigation of several areas of financial management. One factor common to both probes is an investigation into the practice of giving away network equipment.

A year ago, poor results at Cisco and Lucent were blamed in part on their having provided free equipment or special funding to startup carriers. The deals were a means of writing off assets in public networks that could serve as proving grounds for new equipment. But many of those public "overbuild" fiber networks never made to the break-even point, and several of the carriers developing them have filed for bankruptcy.

'Vicious circle'

Now, the SEC is probing whether Qwest and WorldCom gave free equipment to enterprise users and specialized carriers, in effect carrying through the vendor financing received from equipment manufacturers, so that the IXCs' enterprise and special-carrier customers could provide the large IXCs with free or low-cost service.

"There's a common vicious circle to all this shell-game stuff, and that's the fact that the hardware vendor never gets paid," said the equipment vice president. "The startup carriers went belly-up, the big carriers are hurting, but think of what this means for your manufacturer. You can't make switches and routers for free."

Along with the government probes come the decisions by many nationwide IXCs and super-regional carriers to halt all capital expenditures centered on new buildouts, or even on new packet switches.

Those moves, Nolle said, may finish off several equipment startups that are just hanging on.

? Loring Wirbel

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