Ciena’s Last Chance to Fulfill Its Destiny

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Ciena beat the overwhelming odds as a startup in the 1990s to become the most dominant optical system vendor in the global telecom space. However, while it used to be the case that incumbency with major service providers always in effect meant never having to say you were sorry because of the all-important operational advantages inherent with having a large installed base of equipment, the downfall of several major players, including Nortel and Tellabs, has amply demonstrated that survival of well-entrenched suppliers is hardly a sure thing anymore. While Nokia’s purchase of Alcatel-Lucent means that Ciena’s position particularly in the US market has been strengthened (at least one big carrier in the States wants as little to do with Nokia as possible), it also creates a bigger void that has been created for other players to take a more active role – and Ciena can either finally resolve to fully execute as an optics player to ensure its survivability – or it can continue to go down a path of not fully embracing its legacy by looking to get into other markets outside of its core competency, as well as using its investors’ money on grand marketing efforts on fluffy, ineffective presentations, which will not be of any benefit to its future.

Sometimes it is better to be lucky than to be good. Ciena’s existence was enabled by the improbability of a major public network operator, Sprint, which was simply desperate for capacity resulting from the Internet explosion and decided to buy huge quantities of DWDM equipment from a newcomer because the carrier simply ran out of fiber. The problem went beyond the service provider using four-fiber bi-directional line switched rings for protection because some of the routes were built with only six fibers. (Moreover, at least one major route could not accommodate the installation of more fiber because of the inability to dig due to environmental sensitivity matters – not to mention the entire network had spans that were engineered for OC-48, and so, moving to OC-192 would have been quite expensive.)

While still in stealth mode with a four-channel system, Ciena was curiously resistant to the demand by Sprint for a 16-wavelength product and engaged in a heated discussion to just provide an eight-lambda device. The supplier fortunately relented and a Sprint engineering manager actually designed its 16-channel device. Within four months, even with that increase in capacity on the first system, there was exhaustion once again, and Ciena went straight to the 40-wavelength product.

Ciena later dodged another bullet when there was a battle over the control of the company. One of the founders wanted to move the company in a bleeding-edge direction and was forced out, ultimately creating Corvis, which was infamous for its all-optical cross-connects and other futuristic concepts, and that firm eventually disappeared.

Ciena has also been fortunate in that its major competitors were unable or unwilling to displace its presently biggest strength in the US market – its ownership of the broadband O-E-O cross-connect space, including these three prominent examples: 1) The last truly innovative product for Lucent in the transmission business in general was the DACS 1/0 (when it was Western Electric); 2) With the exception of its very successful leapfrogging to OC-192, Nortel, like Lucent, rested on its laurels, and never came close to doing anything meaningful in the cross-connect business; and 3) Ciena’s biggest break was Tellabs ignoring its own traditional heritage in cross-connects and failing to come through with an adequate response to the CoreDirector.

After the bubble burst, Ciena was able to remain in the game more in spite of its actions, not a lot of times because of them, including the following five instances: 1) several billion dollars in ill-advised investments; 2) certain notable failures to come through on promises of delivery to major customers; 3) an outright refusal to accept legitimate offers for a purchase of the corporation; 4) coming close to financial ruin on more than one occasion, partially on what appears to be to this day an insufficient understanding of the dynamics of the optical market by its very top leadership; and 5) a reluctance to call itself anything that what is actually is – an optical company.

Over the last several months, it is our opinion that Ciena’s lack of sufficient maturation as a firm as well as the long, overdue necessity for a change in administration has been on display. The company introduced its “transformation” concept with a pretty inappropriate amount of fanfare given the rather depressed conditions in the telecom/datacom market, which have been going on for a very lengthy amount of time. It is actually reminiscent of a watered-down version of Nortel’s FiberWorld during the early ‘90s, full of platitudes and little substance.

It may also be appropriate with Ciena’s latest marketing effort to use the line made famous back around the time of FiberWorld – “Who are the ad wizards that came up with this one?” The word, transformation (along with other buzzwords) is placed in a very widely spaced apart, square brackets, which may be a cost-savings measure to be able to insert any new jargon at a later time. More ironically, the use of brackets may reflect the unconscious realization that the notion of a transformation cannot be directly stated.

Networks are not transformed – they evolve. Transformation occurs in market conditions, as was the case with the impact of the Internet. Yet, even in this extraordinary situation, Ciena’s DWDM gear was only used for incremental change of the existing infrastructure.

While such impressively produced marketing demonstrations may be a hit at the country clubs for some high-level executives, they probably will not result in the sale of any additional equipment. The three big incumbent local exchange carriers in the US are really just interested in more practical considerations, such as having sufficient amounts of production capacity in case of unexpected demand. They also want to be sure of Ciena’s long-term commitment to fiber optics because we sense that the mentality at the highest level of the company incredibly might not envision optics playing a big of a role in telecommunications in the very long term.

So, if the industry sees Ciena moving in a wireless direction, it should be a wakeup call. Such a move helped lead to the demise of Tellabs.

[written by Mark Lutkowitz]

(To read our explanation as to why Sprint is supporting network neutrality, please click here. To see our blog article, “Would Nokia Sell AlcaLu’s Optical Landline Business,?” please click here.)