To the best of our knowledge, fibeReality has been the sole source in the world to continue to report on the substantial laboratory, the Germany-based optical vendor, ADVA Optical Networking, has built in Ottawa, Ontario. To say that this move has been stealth in nature endures as the ultimate understatement. We believe there have been three major motivations for the construction of the complex: 1) conduct the necessary R&D work (including the formation of partnerships) to become sufficiently vertically integrated; 2) establish a true North American presence to penetrate into two of the very large incumbent ISPs (our intelligence has revealed that ADVA is already a metro supplier to CenturyLink) and make further in-roads into big enterprises, as well as go after the burgeoning opportunities in 5G and in edge nodes; and 3) hopefully entice the Canadian-driven Ciena to buy it out in the long-term (a possibility we considered a while back). On our first point, we understand that Acacia Communications forced ADVA to still pay for gear, which was meant to be incorporated in systems scheduled to go into a large account, it happened to lose (the only concession evidently was an extension of the contractual term). Acacia apparently gambled in the same way as the original Avago (which itself exhibited similar types of negative behavior towards certain buyers like declining to offer volume discounts) that an acquisition would take place before such divisive practices with customers would catch up to them. For ADVA, it evidently determined that it was going to do everything possible never to be placed into a position like that ever again, and it observed that large successful players, such as Ciena, were increasingly moving to greater internal development efforts of componentry.
Apparently, ADVA is doing a lot of work on transceivers in Ottawa, and appears to be targeting all aspects of componentry, down to the chip level – as well as focusing on software design internal to their systems. The supplier has likely determined that a direct presence on the continent can help facilitate its nimbleness as a smaller vendor to customize solutions more quickly for network operators (both ISPs and ICPs), as the requirements for each of them are increasingly becoming less uniform, while the ability to differentiate meaningfully on hardware, in general, has become close to non-existent.
The new location also will suggest a greater seriousness of purpose to large buyers of gear across the pond, as historically, ADVA clearly dropped the ball in going after North American opportunities. There was inadequate support given to the US effort, in particular, and we remember a specific case of a very fine executive at ADVA unfairly being made the scapegoat. It would probably also help if something resembling a manufacturing plant is added in Ottawa, even if it is just for final assembly purposes.
The timing for making additional penetration into NA has never been better, as the major service providers are starving more than ever for alternatives to Ciena. Chinese system house suppliers will continue to have limited options, even with a trade deal. Nokia Networks is lukewarm at best when it comes to optics. Cisco Systems’ buyout of Acacia has alienated end users. Juniper Networks has lost some credibility with its recent rhetoric -- and still does not tend to be viewed as a stand-alone optical player. Even if Infinera can make a comeback, it would not happen overnight. Fujitsu moving away from disaggregated systems anytime soon does not seem likely. The remaining players in the world are either too small to be considered or at the very least, require an inherently unattractive OEM type of arrangement.
The choice of Ottawa for the lab was a good one, given the extensive talent available there in the optics sector. Of course, it is also the home of the “Nortel” folks, which may be less inclined to worry about turf protection in possibly purchasing a company that has a base nearby in exchange for gaining a greater number of European accounts. Ultimately, the extent to which ADVA would be a threat to Ciena’s home-base would obviously be the determining factor.
North America represents the last frontier for ADVA to substantially increase its revenue. While it could survive indefinitely, one would suspect that the upper management would prefer to ultimately exit, as despite always being a technologically-proficient firm, the margins will always look on the unimpressive side. The unfortunate part for customers is that if Ciena purchases ADVA, the products from the latter would not be supported anymore, based on the historic behavior of the former.
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As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.
[written by Mark Lutkowitz]