If you Lose the Product Development Marathon, Can You Start a New Race?
When I posted my note on the mobile device industry, I stated that mobile device industry was a product development marathon. Miss a product cycle and the punishment can be swift and harsh. This is a lesson that can be identified over and over again in the history of tech. Look at the history of the ethernet switching business that I wrote about in my Cisco earnings preview. Six years ago Cisco dominated the ethernet switching business. Miss a product cycle and you fall behind. Ask companies like Foundry, Extreme, 3Com and Riverstone about the product development marathon and missing product cycles. Six years later ask Cisco about missing a product cycle in ethernet switching and what happens when new competitors enter the market like Juniper, Arista, Brocade/Foundry and other competitors get bigger with global distribution like HPQ/3Com.
Before I look at Sycamore, I want to quickly look at Avici or as it became known Soapstone Networks. Avici had only one big customer win and that was AT&T. The company did go public and they had a lot of cash, but beyond AT&T there was little market follow-through. This should not be a huge surprise because there was about $1.5B in venture capital committed to starting core routing or MPLS switch companies ten years ago: Procket, Chiaro, Celox, Corona, Caspian, Pluris, Tenor, Maple Optical, Axiowave. They all failed. Avici did not have the scale and reach in the global market to maintain pace on the product development marathon versus CSCO and JNPR. The company eventually decided to exit the core router business and turn the company into a self-funded software startup. The problem was they were still a public company. They had no revenues, but cash. That was the trigger for quant funds and activist funds to build equity ownership positions and then advocate for a one time special dividend, shut down the company and delist. In the end the Board had to do what was in the best interest of the shareholders. If Soapstone was private, they could have continued down the product development roadmap. Perhaps the team at Airvana took a lesson from the Soapstone outcome and they went private to transform the company’s product line without the distraction of quarterly earnings and those pesky shareholders who demand a return on their investment.
When Sycamore Networks lost the optical switching battle to CIEN, which was the result of company scale, market reach and market size, they too decided to change target markets. Ciena dominates the optical switching market and the proof is a trail of failures: Tellium, Calient, Xros, Centerpoint, Network Photonics, Nortel and Lucent. As a side note, CIEN missed the 40G product cycle and when presented with a chance to correct this mistake in the form of Nortel’s optical business, Ciena acquired the optical business unit of Nortel. It costs a lot to catch up when a company misses a product cycle. Looking at the state of the optical switching market, SCMR apparently started to develop a new set of products for the mobile network infrastructure market. In mid 2010 SCMR announced their IQstream product. Details were scarce and they are still scarce today. I have a number of presentations and white papers from the company and most of them say:
- Focuses on content optimization in the RAN
- Unique Adaptive Content Optimization technology and advanced learning algorithms
- Dynamically adapts to mobile data traffic, smoothing peak periods and flash events
I have met with the management team a few times after they announced the product and I have listened to their quarterly calls. What I gleaned from those events was that the company (1) is out of the optical business, (2) have been developing a new product for a few years and (3) they are like a startup with cash, legacy customers and a new product. I am still left asking how does the new product work and whether the market big enough or accessible enough to support the company?
Purely speculative on my part, I am thinking that SCMR has built a similar solution type to RVBD to resolve the RAN congestion issue without actually interfacing with the RAN. What I have been told is it is not a caching solution. It is not a compression solution, but I do think it is a replication technology. The solution set is really two boxes, 1U for tower site and a mid-plane ACTA hardware based unit for aggregation site. The two box solution is a non-intrusive overlay that does not affect billing and OAMP functions. This is really a play on video over the backhaul. The 1U unit at the tower site (~250k tower sites in the US) learns through a set of algorithms what wireless devices are requesting common data feeds such a real time video of a game or broadcast. The aggregation site unit streams one stream to the tower unit, which then uses a multi-cast technology to replicate the data over the RAN to the subs. Backhaul is backhaul, it does not matter if it is copper or fiber, the problem of persistent network connections requesting real time content is the same. Therefore the solution set looks like a RVBD solution to reduce the chatter of chatty protocols, but in the case of the mobile network it replicates common requests for content such as a real time broadcasts.
Is IQstream a product solution or a business? There are not too many standalone wireless backhaul providers in the world. Most companies that targeted this market have been acquired or merged: World Wide Packets, Anda, Overture/Hatteras. Most the revenues for wireless backhaul have been going to larger equipment suppliers: CIEN, TLAB, ALU, CSCO, JNPR. When pressed I have been told by management that the IQStream solution compliments existing GGSN and MPC suppliers. I would suspect that wireless broadband caps are not a positive market development for IQstream as SCMR would rather have unlimited wireless broadband use. My conclusion is this is nice product solution which would sit well within a larger solution portfolio.
The next question is where is the stock going? I somehow think that SCMR transforming itself into a new company is unlikely, even though they have new website just for this product and brand. They have $432M in cash. Revenues are a mystery because they do not guide and are in a business transition or metamorphosis to the mobile market from the optical market. If you assume that the IQstream product revenues are worth $75M over the next twelve months x7 (STAR multiple) = $525M+$432M in cash = $957M. At $957M / 28.54M shares = $33.5 per share.
* It is all about the network stupid, because it is all about compute. *
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