The cash is certainly flowing for Ciena. When it went public last month, the Savage, Md., company saw its stock rocket more than 40 percent from its IPO price, to more than $37 per share. But don't be surprised if you've never heard of Ciena: It's got just one product-and three customers.
So why the excitement? Well, Ciena's WDM (wavelength division multiplexing) system increases by 16 times the traffic that can flow through fiber-optic cable. That's vital for its customers-Sprint, WorldCom and Teleway Japan-all of which feel the Net's fingers choking their networks.
Telco customers potentially offer rich rewards for Ciena and other small companies that can solve their Net-related problems. The market for WDM equipment will grow from $100 million in 1995 to more than $10 billion by 2005, according to ElectroniCast, of San Mateo, Calif. At the same time, the high-end router market, which accounted for $1.3 billion in sales in 1996, is growing at 50 percent to 60 percent per year, according to The Dell'Oro Group, of Portola Valley, Calif.
But selling to this customer base, which comprises both the major long-distance carriers and the RBOCs, is both arduous and time-consuming. Two-year sales cycles are the norm. And regardless of the technology sold, every customer runs rigorous testing efforts that sap the bucks out of most bank accounts.
Ciena's seemingly overnight success proves the point. It appeared to burst on the scene in May 1996, when it first shipped its WDM system of terminals, optical amplifiers and network management software. But the company is actually 4 years old. Ciena survived three years without revenue by living off $40 million in funding from Sevin Rosen, InterWest Management Partners and Charles River Partnership, among others. "You can't have shallow pockets with this kind of clientele," says Ciena CEO Patrick Nettles.
Ciena doesn't have to worry about shallow pockets. Its Feb. 7 IPO has blessed it with a market valuation of better than $3 billion. Plus, it pulled in revenues of $53.9 million and profits of $13 million for its first quarter ended Jan. 31. But it needs all the cash cushion it can get. That's because, while Ciena was the first to offer WDM equipment with as many as 16 channels (cost: $500,000 to $1.5 million per system), giants such as IBM, Lucent Technologies, Alcatel and Nortel plan to ship competing products this year. So Ciena is hurrying out a second offering, due later this year. The system will increase the transmission capacity of a single fiber-optic circuit by a factor of 40.
In spite of looming competition, Ciena has a year's head start, and that shows that small fry plying this space have some inherent advantages. Ciena initially had staked out a problem that was just too small to light up the competition's radar. "We had some indications that the interexchange carriers were experiencing fiber shortage, but no one had ever paid attention to it," says Nettles. "It turned out to be extreme."
He might just as well be describing the traffic jams involving routers and switches on the backbone, too. That creates an opening for yet another group of startups. Routers are the traffic cops of the network, "but at some magic point, you run into the problem where there's so much chitchat between routers that the routing traffic starts to dwarf the data traffic," explains Dataquest analyst John Coons. Adding higher-speed switches hasn't helped, because these relatively dumb devices can't size up the whole backbone landscape as well as routers do.
The result is an ossified backbone. And fortunately for the startups, routing giant Cisco has promised "big, fast routers" for a couple of years now, but has been late, says Coons. Cisco's tardiness opens the door for companies like Avici Systems, of Chelmsford, Mass. It's developing an IP switch with router intelligence that it claims will transmit data at a stunning 2 terabits per second.
The market for this kind of switch is small right now. And whether Avici and other startups can succeed is decidedly questionable. Remember: Like Ciena, they must pick a niche small enough that it won't immediately attract powerful enemies, yet large enough to lure generous helpings of venture capital.
But that's just another hard fact of life for the startups who have set out to soothe those bottleneck blues.
- The bandwidth riff: The market's wide open for startups offering next-generation remote-access technologies.
- Low-down latencies: Startups offer "pep pills" for the Internet infrastructure.
- Columnist Mitch Ratcliffe says there's only one way to fix the bottleneck: Net welfare