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Coriant: Market Perils on Investment in Distressed Assets

December, 2015

There can be a fundamental problem when private equity firms buy up companies in a depressed condition in that the overwhelming desire to sell off those assets at the most favorable valuations can be in conflict with the best interests of the market, especially when the overall space is not that healthy. In the case of Coriant, it is one thing if it is a relatively quiet participant in striving to accommodate “third party [O]pen [L]ine [S]ystems” (OLSs), it is quite another to be an extremely aggressive cheerleader in order to possibly increase relatively short-term revenue, because at least on its face, it is not in the best long-term interest of the rest of the transport suppliers (as we pointed out in a recent article). While we continue to believe there will be hurdles in moving to OLS on the public network side, we have found out that this activity has started already in the Data Center Interconnect (DCI) market, and so, the service providers in the former sector will hardly ignore such pursuits in the latter business segment, specifically when such loud shouting is coming from a particular vendor.

Coriant is directly advertising in its "solutions brief" that its new Groove G30 product targeted at the DCI space “disaggregates transponders/muxponders and provides open line system compatibility to avoid vendor lock in” – a statement that does not need to be justified to outside shareholders because it is not a public firm. With private ownership, it is also not under the gun necessarily to meet any availability dates for the G30 (assuming it can overcome the more generic barriers to entry that we have discussed in the past), or to be as feature-rich as promised. In fact, in looking at the diagrams presented by Coriant (fully realizing that the device is probably not real, yet), an engineer may wonder how it gets all of the standard optical components being promised to connect in to the faceplate.

In addition, at OFC 2016, Coriant’s Product Line Manager of DCI Solutions (he is also the Head of Product Line Management, Americas), will moderate the first Service Provider Summit (SPS) panel, which is called, “Vertically Integrated WDM Platforms vs Open Line Systems.” There should not be a lot of conflict expected because it will assuredly be a slam-dunk that OLS by far would be preferred by any user as a means of lowering the expense of equipment. Also, the speakers will include network architects from Google, which has evidently deployed DCI in an OLS manner and Microsoft, obviously, a big proponent of OLS. (Two of the other participants include executives from AT&T and Verizon, both historically large transport equipment customers from "NSN" and “Tellabs,” respectively, and therefore, Coriant is still somewhat in a position to influence the future direction at both of those major carriers.)

Hopefully, there will be at least some debate at the SPS event over the statement, “[t]he measure of the competitiveness in optical transport has always been the cost per bit transported.” At least in the public network space, reliability and performance still can be important considerations, especially compared with the DCI market in which gear is looked upon as throwaway. (Furthermore, it is interesting to note that several of the key decision makers regarding infrastructure at Microsoft come from Level 3 Communications in which, over the years, the mantra has always been regarding the selection of the "CLEC's" transmission suppliers, “the lowest cost/bit/kilometer.”)

Although there have been other optical system vendors (both large and small) that have actually supplied just network elements to allow for a distinctive DCI box (with at least one other hyperscale data center operator other than Google so far), we are unaware of any promotion of such actions. Whether those big suppliers, in particular, which have in effect, turned themselves into component vendors need to have their heads examined, or if it is the case that there is a legitimate business justification, will be the subject of a future article by fibeReality. The key point to be made is that whether or not Coriant is successful with its extraordinary promotional efforts on OLS, it has no interest in the long-term ramifications for the entire optical ecosystem, most notably when it comes to accelerating the time frame for potential considerations by the traditional operators in a likely damaging way – because again, the manufacturer only cares about exiting the market as soon as possible in the most lucrative, feasible fashion.

[written by Mark Lutkowitz]

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