A Separate Piece:
3Com Courts Carriers
As president of the new 3Com Corp. spinoff CommWorks Corp., Irfan Ali has to steer his carrier service business past some decidedly dangerous market reefs. Broadband Week senior editor Karen Brown talked to Ali recently about what course CommWorks plans to take and whether the sector has any hope of weathering the financial storm.
BBW: To start things off, what's the significance behind the name CommWorks? How does that reflect your market strategy?
IA: That's a good question and one I have received quite a bit.
We chose the term CommWorks after a lot of analysis of that architecture essentially to imply several things-firstly that it had something to do with communications of course, secondly that it was a practical aspect of communications, where the focus was either on helping our carrier customers generate revenue or in helping our carrier customers reduce cost through a more efficient architecture. And that was the name CommWorks.
Subsequent to that, when we wanted to have a full-fledged separation and set up a separate company altogether, we decided to go with the name CommWorks for the name of the company as well, because that name had received a fair amount of visibility in the market, had built up quite a bit of brand equity and we felt that it was quite appropriate to link the very identity of the company to the architecture that it represented.
BBW: With the spinoff of CommWorks, what changes can we expect in your market strategy?
IA: Well, you should not expect any substantial change in our market strategy because this was a path that we had already started on ... this was a path that we had announced in March and the formal separation of our carrier business into a separate company called CommWorks is simply the next logical step in that progression. So this should not be a big surprise to anyone.
Now, our strategy all along has been one of building value-added networks for our service providers, because in the end our service providers do not build networks for the sake of building networks. They build networks either to reduce cost or to generate revenue. So our view is IP as a technology is going to be the cornerstone of the next-generation networks for various reasons-probably the most obvious one being it is a more efficient technology and lends itself well to the types of communication requirements in the future. So IP as a technology is here to stay. It will be a fundamental building block of the next-generation networks.
BBW: The carrier systems market has suffered in the past few months because of slowing operator orders. How does your business plan address this trend?
IA: The entire telecom market is going through a fairly significant change right now. What's more important however, is that the specific nature of that change varies by geography and by customer segment. In North America, I think the CLEC or the new-entrant market is finally going through a reality check, where the financial markets are no longer willing to fund negative cash-flow on the parts of these carriers forever. And it's very difficult for non-facilities-based CLECs to be profitable, because eventually they end up being reseller arms for the RBOCs and you don't make money doing that, as most of these people are finding out.
It's remarkable how rapidly this decline in their market valuation has been. So I think the CLEC market is going to have a very tough time finding the needed capital to grow and sustain their business. So as a result there will be a fallout. But in the longer term I think the facilities-based new entrants like the Qwests, Level 3s, Global Crossings, Frontiers-will actually do quite well because the underlying demand for network services is quite high and continues to grow. Now within the incumbent segment you find that all of the big carriers are going though some specific changes-AT&T for example has gone public with its intent to break itself up into four different companies and that's taking up a lot of their time and attention, which in turn is impacting their capital expenditures and their ability to run their networks.
And so the big guys are going through some very specific changes, which I believe are quite transitory and will soon pass. The underlying fundamentals of the market are still strong. The demand for network services is still strong and to the extent that a lot of these carriers have already invested a lot of capital in building the network infrastructures, they have a very strong interest in now looking at additional ways to generate revenue from that network infrastructure. So our view is, given these facts, we are extremely well positioned because our entire focus is on applications and services, and how you make networks capable of handling applications and services that the owners of those networks can generate revenue.
BBW: So how do you adjust your business plan to fit these changes specifically?
IA: Well, the adjustment for us is going to be less remarkable than for the other suppliers who are relying more heavily on the CLEC customers. Most of our customers are the established players-they are not the CLECs. So as we go through some of the specific issues that these people are facing, we are keeping a close eye on what revenue implications it has for our business. But I think we expect to come out of this situation a lot sooner than some of the other vendors that were relying more heavily on the CLECs. Our fundamental strategy has not changed, and we will continue to focus on the strategies I have described to you.
BBW: What projections do you have for the carrier market in the coming year? Are things going to improve?
IA: I think it will take us some time to come out of what we are going through. I think beside the changes that we have talked about already, I also believe that to some extent the access infrastructures in North America are slightly overbuilt, and it will take some time-about three to six months-for that excess capacity to be absorbed. Outside of North America I think what you are finding is a global capital crunch, which is making it extremely difficult for a lot of companies to raise the necessary capital to build out a network infrastructure even though the demand for network services has been very high. My view is in North America we should come out of this within the next six months. Outside of North America it might be slightly longer.
BBW: We've seen quite a lot of merger and acquisition activity particularly among smaller network carriers. How is this going to impact your business?
IA: Well, the consolidation part as we have seen it within the industry has been what I would say is more likely at the lower end, particularly with the new entrants. A lot of these new player CLECs, DLECs, etc., have now realized that in order to survive they need to gain size, and therefore there is a natural tendency for them to consolidate. I think we will be for the most part largely unaffected by that part. At the high end, I think the consolidations that were going to occur have occurred-though it is quite possible Sprint might yet find another buyer.
So I think within the incumbent segment we have probably seen most of the consolidations that we were going to see. There might still be a Sprint consolidation with a Deutsche Telekom. But I think it will be a handful. On the lower end, on the other hand, when you have a lot of these CLECs who have done a good job building a customer base but do not have the business efficiencies that come with size, they could be good acquisition targets for the incumbents. A case in point is what Verizon was trying to do with NorthPoint. They pulled out at the last minute, but I think someone else is willing to come along and pick up NorthPoint and some of these other folks as well.
So for the most part I think we will be unaffected, but we are keeping a close eye on it.
BBW: Where is your biggest market opportunity?
IA: I think our biggest market opportunity is wireless. This is a market where we started investing early. We have now had a wireless program for the last four years, and then last year was when the program picked up in revenue. Today it is our fastest-growing business and the most profitable, and in the CDMA environment we have perhaps as much as 90 percent market share on a global basis.
So the situation today is any CDMA operator that wishes to offer wireless services has to use our equipment. And our equipment works with all of the commercially available CDMA voice switches and essentially sits behind them to make the CDMA voice switches data-capable. It's a significant amount of value that we add, and we get paid quite handsomely for it.
This is a business that is growing quite rapidly, and at this point we have four initiatives within the wireless program. The first one is what we call 2G, which allows you access to a handset at 14.4 kilobits per second, and if you use Spring PCS today-the wireless Web application that allows you to access the Web from the phone-that entire application is ours. We built it for Sprint. We then have a second program called 2.5G which allows you to have a higher-speed access at 64 kilobits per second with a handset. This is what we are rolling out right now with KDDI of Japan along with Motorola. And then we have a 3G program which allows you access of 2 Megabits per second. We announced the first commercial win in the world with SK Telecom as a customer. With 3G we also announced the successful completion of a trial in North America with Sprint. The fourth initiative is called UMTS, or wideband CDMA, a variant of next-generation CDMA targeted at what used to be the traditional GSM market.
BBW: Does the delay in rollout of next-generation wireless here in the United States hamstring you at all?
IA: No, actually to the extent the general consensus now is that 3G deployment is going to be delayed for various reasons-some technical, some not. And to the extent that 3G deployment is delayed around the world, it will actually help us because people will have to rely on 2G and 2.5G solutions and at this point we are one of the very few providers of 2G and 2.5G solutions to the market.
Our entire strategy for breaking into 3G was based on utilizing our existing installed base because our proposition is we can take the existing platform and make it 3G-capable just through a simple software upgrade.
BBW: What trends do you see among carriers in the coming year?
IA: I think we are probably through with all of the visible bubbles. We're done with the dot.com bubble, we are done with the ASP bubble and now we are done with the CLEC bubble and I think in the process the industry as a whole has learned a lot. So I think we will see a lot of new activity in the telecom market but from carriers that have their own facilities. So I expect Qwest, Level 3, Global Crossing and Frontier to do quite well and become dominant players and be a competitive threat to the established providers.
I do see a rapid shift from existing technologies to packet technologies because I think we are at a very critical point from a technology standpoint-it is an inflection point where people now have a very natural incentive to move from existing technologies to packet technologies. I think in the next 12 to 18 months that will happen very rapidly.
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