During Telecom Bust, Small Has Proved Beautiful

Niche equipment vendors find a new customer class

Provo City, Utah is thinking small.

22 October 2003—Provo City, Utah, 40 miles southeast of Salt Lake City and deep in the heart of Mormon country, is as big on economic development as it is on recreation. Ensconced among mountains, canyons, and three national forests, it has 300 high-tech businesses, including Novell Inc. and the genealogical software firm MyFamily.com Inc. Not only does the city want to keep these businesses, it wants to attract more like them.

To that end, in 2001, the city’s power company, Provo City Power, came up with a plan to build a high-speed fiber-optics telecom network for the city’s 70-square-kilometer area. Says Kevin Garlick, energy department director of Provo City Power, ”We run the electric utility so well, we had to go out and find another challenge.” 1003tele01.jpg

Provo is one of about 100 towns in the United States that are building their own fiber networks, says research firm Render, Vanderslice & Associates (Tulsa, Okla.). And small or rural towns aren’t the only ones seeking competitive technological advantages: small telcos and cable companies are also eager to adopt new technologies so they can offer new services and reap the benefits.

It turns out that this group of small customers represents a target of opportunity for small telecom equipment vendors [see table ]. According to Michael Howard, principal analyst and cofounder of Infonetics Research Inc. (San Jose, Calif.), that’s because these small customers act quickly and are more comfortable with a little risk than the giant Bell telephone companies—Verizon, BellSouth, SBC, and Qwest—which adopted conservative investment strategies during the telecom bust.

Thus, the market strategy for today's start-up telecom companies is to look for small customers who will take a chance on them, which brings us back to Provo.

Getting the technology

Once Provo City decided to give itself an all-fiber network, the question was, who could build it? First, Science Applications International Corp. (San Diego, Calif.) built three concentric fiber rings for the town in 2001. The next logical step was a feasibility demonstration, to test how homes and businesses could be linked to the rings. Provo wanted to try the network out with 250 homes and a few businesses, and it needed everything: routers to send traffic down the right paths; ”portals” at homes and businesses to translate optical signals into video, data, and voice, or vice versa; and ”concentrators” to combine individual low-speed signals from homes or businesses into fewer, high-bandwidth signals headed for the rings and beyond.

Provo immediately gravitated to small vendors. Explains Garlick: ”Demo projects and deployments don't generally involve big companies. We didn't even talk to Lucent or Nortel. Small companies are leading the way in this area.” The only vendor able to supply the full complement of equipment needed turned out to be World Wide Packets (WWP, Veradale, Wash.). It got the contract, first for the demo project and later for the citywide deployment.

WWP's product line-up prominently featured LightningEdge, an equipment and software package that can simultaneously carry voice, video, and data over Ethernet, whether it's copper- or optical-fiberbased. And as it happened, when Provo found itself thinking small, WWP was already on the same page. As the president and CEO of WWP, Dave Curry, puts it, ”Our original goal was to target the last-mile market. But we decided that going after the big Bells was pointless. We decided to go after municipalities.”

The same kind of strategic thinking prompted FiberNet Telecom Group Inc. (New York City) to go after telecom service providers, specifically long-haul carriers that need intra-city connections in their operating territories. For such telecoms--in New York City, Chicago, and Los Angeles--FiberNet provides both local connections (for traffic ending in the city) and links to other long-haul carriers (for continuing traffic).

FibertNet's growing niche provided business, in turn, for yet another small telecom vendor, Internet Photonics Inc. (Marlborough, Mass.). Its LightStack MX multiplexer combines eight single-gigabit signals together onto one light wavelength, which was just what FiberNet needed for certain situations. It would take four multiplexers from competitors as well as four wavelengths to get the same job done, says Ernest Hoffmann, FiberNet's vice president of engineering. ”Nobody else can do multiple gigabit Ethernet signals over one wavelength. [Internet Photonics] is saving me equipment and money.”

Sweet words for Internet Photonics' vice president of marketing, Gary Southwell, whose company had the foresight to pursue the same kind of strategy FiberNet and WWP had adopted. ”In 2001,” says Southwell, ”we could see that the [competitive start-up telcos] were disappearing.” Though small cable companies were Internet Photonics' first customer targets, it also decided to go after independent telcos like FiberNet.

Next Level Communications (Rohnert Park, Calif), which specializes in providing integrated broadband access platforms, has gone after the smaller customer right from the get-go. So, when Tri-County Telephone Association's TCT West subsidiary, in Basin, Wyo., decided it wanted to improve digital subscriber line services for its approximately 10 000 customers by offering them 1-Mb/s Internet access, as well as voice and video, it turned to Next Level.

The reason why TCT general manager Randy Lowe zeroed in on Next Level, in fact, sounds a lot like Garlick's reasons for hiring WWP to network Provo City. ”We found the older, bigger companies didn't have the technology perfected to a point that Next Level had,” says Lowe. He likes their responsiveness, too.

Hoping for the best

Dealing with small vendors has one serious drawback: mortality. The big question is always: will this business survive?

Small company survival strategies include partnering with--or getting purchased by--a big company. That's what happened to Next Level while we were writing this story. Motorola Inc. (Schaumburg, Ill) bought the company in April, but the transition was still hanging fire in August. Lowe didn't even know about it when we contacted him. Then he said, ”This solves the problem of cash!”

Many small vendors don't, in fact, survive, leaving customers stuck. Take DixieNet Communications Inc. (Ripley, Miss.), which, along with 14 other customers, bought the CityStream transport platform from Metro-Optix (Allen, Texas). Capable of integrating diverse traffic types over a network, the CityStream box--like Next Level's equipment--lets companies like DixieNet buy one piece of equipment instead of many and save money. But this summer, investors pulled the plug on Metro-Optix. Chris Marsalis, DixieNet's vice president of operations, says he's found four possible replacements for Metro-Optix, companies also of modest size and pretensions, and is talking with them now.

Two other Metro-Optix customers contacted by IEEE Spectrum, Network USA LLC (Lafayette, La.) and US Signal (Grand Rapids, Mich.), also said they intended to stick with small vendors. But, says Marsalis, ”It may cause us to look to bigger players or do more strident due diligence in terms of cash in the bank, number of customers, and units in service in the field. This had better be in the first paragraph of any sales presentation. And the only way they'll win is if their price is terrific.”

This story was updated on 31 October, 2003.

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