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ADVA Should Look at Buying Xtera

September, 2015

ADVA Optical Networking’s CEO mentioned that it “is considering a ‘larger deal [than the Time4 Systems purchase] more in the mid-term’ that could give it access to a new group of customers,” according to a recent article in Light Reading. Xtera Communications, which we suspect would love to find a graceful exit opportunity, and so it would presumably be amenable to a price quite attractive to ADVA, somewhat fits the bill, even if it is not necessarily "small enough to absorb into...its operations in a pretty seamless manner." Xtera is a pure long haul/regional play both on the submarine and terrestrial sides of the network, offering technology truly unique in the industry.

Actually, it is that very last aspect that could be the most interesting to ADVA. More important than any products the supplier will introduce as a result of the Oscilloquartz acquisition, taking over such a major player in the synchronization realm provides an inherently significant, competitive advantage across the board over other optical transport vendors. In the same way, Xtera’s development of both cost-effective Raman amplifiers as well as on EDFAs provides similarly exclusive control over functionality that will permit service providers and hyperscale data center operators to achieve 15 to 64 terabits of capacity (lengths are decreased in going higher) on the line side without having to go beyond 100G.

Users are able to stay at that data rate indefinitely because Xtera’s solution allows for the utilization of the L-band along with the standard C-band. Therefore, there is no need for investment in new modulation formats and no other change-out on the existing equipment is required to be made other than on the amps.

ADVA’s takeover of such a solution would provide additional confidence in that Xtera’s smaller size has given customers pause at times. Four other advantages for ADVA would include the following: 1) Xtera’s sweet spot with submarine gear has historically been with the narrow market (mainly upgrades) with regard to festoon and to principally small-to-medium sized networks, which has been less appealing to the more prominent players like Alcatel-Lucent (undersea division expected to be spun off by Nokia), Huawai Marine Networks, and TE Subcom (all three of them desire much larger and more lucrative, full turnkey projects); 2) hardly, if any, overlap on the European terrestrial side (obviously a stronghold for ADVA) because long-reach capability is not needed with the dense networks on the continent; 3) although terrestrial suppliers, such as Ciena and Infinera, have successfully penetrated the subsea business, there can be significant advantages with equipment (especially at the 100G speed) that has been designed for this space right from the start; 4) ADVA might be impressed with some of Xtera's work done at the 10G rate.

When it comes to the three large incumbent carriers in the US, Xtera’s product line, most notably being much further out on the learning curve with Raman than any other supplier, would definitely enhance ADVA’s chances for new business. Nevertheless, it would not be startling if these service providers insist on an OEM arrangement with one of their incumbent vendors. Although the Fujitsu/ADVA relationship going back several years ago did not seem to be really successful, we believe that ADVA is in a much better position now to support the needs of such large and demanding customers.

Despite the really big need for additional bandwidth in the submarine market, and the questions concerning the future of ex-Alcatel-Lucent’s business as well as the inability to use Huawei’s equipment on a US landing, ADVA could decide to market Xtera’s longer reach/higher bandwidth capabilities just for terrestrial applications. Getting into the wet environment may be too far outside ADVA’s comfort zone (it would also mean taking on one other competitor, especially strong in the Asia region – NEC Submarine Systems). ADVA could then license/OEM Xtera’s technology for undersea deployment.

If it turns out not to be ADVA, then any other supplier that picks up Xtera would gain a substantial asset. Infinera, with its focus, on long-haul in general, would be another logical choice, but its obsession with PICs and its extensive rhetoric about 500G and beyond might prevent the company from pulling the trigger. Obviously, Ciena would bolster its dominant position in the optical business with such an acquisition, but as with the case with all of the large suppliers, there is presumably an irrational fear about anything that would suggest slowing down the migration to 400G to its customers. (Xtera's shift in its emphasis to the use of its devices at higher data rates should help to alleviate such a concern.)

Ironically, as we noted in the past, none of the vendors wish to be in a hurry to develop 400G as the return on investment on 100G itself will not likely take place in the foreseeable future. Xtera should have been purchased a long time ago. It remains to be seen which firm has the most amount of fortitude to move forward on what is otherwise just common sense -- and therefore, it is reasonable to assume that Xtera will cease being independent relatively soon.

[written by Mark Lutkowitz]

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