Oops Orckit Did it Again- part I

More than 20 years ago, telecom operators started massively deploying circuit switched optical transport networks, benefiting from the increased capacity and cost efficiency of optic fibers. These networks, which are still very wide spread, were originally designed for the transmission and aggregation of a very limited number of TDM services, mainly voice traffic. Most of the optical networks were built and operated using a set of global standards referred to as SONET (Synchronous Optical NETwork), which were characterized by guaranteed delivery and network resiliency. During the 90s, things became more complex as numerous data services started to penetrate the market, leading to one of the biggest revolutions in telecommunications history. Data traffic differs from voice traffic by being less time-sensitive and by having a bursty nature, with dynamically varying levels of utilization of communication channels, as opposed to voice traffic, which requires constant levels of channel utilization. While SONET networks were very reliable and efficient in dealing with traditional voice services, they lacked the flexibility and scalability needed to deal with the flood of new IP- based services and the high levels of data traffic.

Building a new optical transport network was out of the question. First, carriers had to maintain their existing networks in order to support the huge number of voice customers. Second, with the huge investments in circuit switched networks, it was a waste to build new optical networks from scratch. Fortunately for the carriers, a new technology was introduced: Next-gen SONET. Next-gen SONET equipment made it possible for carriers to use circuit switched networks for packet-based traffic as well as traditional services. It certainly earned telcos some time, but they are still facing the inevitable migration towards a network dominated by packets, since packet-based services are not just coming to supplement traditional services but are gradually displacing them. In the face of the strong shift from TDM to IP traffic, next-gen SONET is reaching its limits in regards to the amount of data, variability of services and flexibility to support new applications. In the not so distant future, handling packet services by adapting them to circuit-based networks will become obsolete, as packet based networks enable a much better and more efficient utilization of the optical infrastructure. Transport networks must fundamentally evolve to become packet based, however, carriers will still have to support TDM services for the foreseeable future.

 

Therefore, the next generation transport networks will be packet switched networks that are able to support legacy services, instead of the current circuit switched networks that are able to support packet services. There are several technologies and architectures which enable the deployment of a packet transport network, however, they all share the same idea: a generalized, converged network that can support and aggregate any type of traffic or application regardless of its origin and nature. Transport networks in metropolitan areas (metro networks) are experiencing the most dramatic shift from carrying primarily voice traffic to carrying a growing mix of data, video and voice traffic. These networks specifically require high-end switching solutions due to the enormous traffic volume.

 

Orckit Communication (ORCT), which started as an ADSL company in 1990, foresaw the shift and its magnitude already in the beginning of this decade. Orckit’s subsidiary, Corrigent started to develop metro transport solutions that enable carriers to make the inevitable migration from legacy circuit switched transport networks, to next-gen packet based transport networks. By 2004, while all the major vendors were busy promoting next-gen SONET solutions, Orckit commercially launched its first optical transport switch – the CM-100. Optical packet transport didn’t get much attention those days, as carriers and vendors alike were still licking the wounds of the dot.com bubble burst and spent very cheaply on optical networks. However, KDDI, the second largest carrier in Japan decided to be the first carrier in the world to carry out a national upgrade of its metro transport network from circuit switched to packet switched. This upgrade included the deployment of tiny Orckit’s CM-100, raising many eyebrows across the industry.

The exciting project, which has generated more than 200$ mil in cumulative revenues for Orckit, seemed like the first win with many more to follow. After participating in the buildup of one of the most (if not the most) advanced transport networks on earth, everybody expected ORCT to replicate the success with a growing list of new customers. Orckit’s managers were sure they would have a line of carriers willing to upgrade their networks as soon as late 2005. That confidence was based on extensive field trials with more than 6 tier-1 operators, especially in Asia, who seemed pretty happy with ORCT’s product. To date, from various reasons ranging from M&A activity and plain old conservatism, none of these evaluations actually ended up with a large-scale deployment. However, ORCT’s management keeps on claiming they still haven’t lost any of these accounts, and that customers are simply delaying their decision. Without a last minute twist, 2007 will be another year Orckit’s investors would rather forget. In a striking resemblance to 2006, the current year started with big expectation build-up from management, and ended with disappointment. Granted, every small technology company, especially in an emerging field like optical packet transport, is subject to delays, fluctuations and surprises. However, ORCT’s case is especially tragic due to the strong contradiction between the very high hopes and very poor delivery.

In December 2005, more than one year after the official win with KDDI, Orckit’s CM-100 was selected for deployment by WilTel, a U.S. wholesale telecommunications carrier. This deal was supposed to generate substantial sales in 2006, however, Level 3 Communications (LVLT), which acquired Wiltel decided not to purchase additional products from Orckit. Then, on the Q405 conference call in early 2006, the company’s president said he would be “personally very disappointed” if they didn’t win at least one more customer in Asia in the first half of 2006. The company’s expectations to get at least one win in Asia during 2006 turned out to be premature, as in 2006, the company had meager sales, which sent its shares sliding more than 50%. In the beginning of 2007, the company started mentioning an “imminent” tender in Asia that should be awarded in the second half of 2007. Again, there was no announcement about the imminent customer until the end of Q2, but during an investor conference in the beginning of July, the company’s CFO explained that the selection by the imminent customer was delayed but still claimed they were well positioned with this “lucrative” carrier. In August, on another investor conference, the company’s VP of marketing did not want to comment on specific customers but said the company was still expecting to announce wins (in plural) already in 2007. Only one week after, on August 15th, during Q2 conference call, investors again heard the bad news: The imminent customer decided to go with a legacy product (next-gen SONET) from one of Orckit’s competitors, delaying the decision for its next generation transport network to 2008. During the call, (which ironically was of very low quality and with too many cut offs), company’s management stated that a win this year is still possible. Investors didn’t take that comment seriously, sending the stock to a new low. Frankly, who can blame them?

With all the depressions and skepticism surrounding Orckit, current price levels may represent a good opportunity to invest in one of the most interesting telecom equipment vendors around. Despite the series of failures in expectation management, being a pure-play in such a hot segment has very promising prospects going forward.

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