Why Tellabs is right to quit its Verizon GPON job
Can you remember the last time an equipment vendor won a highly competitive contract with a megacarrier and then turned it down?
The news that Tellabs will relinquish its seat as one of three suppliers to Verizon’s GPON rollout is a striking illustration of just how hard it is for even a mid-sized equipment vendor to serve the megacarriers that dominate the US market.
On the other hand, it shouldn’t be all that surprising. As Verizon shifts from BPON to higher speed GPON this year, Tellabs went from being the carrier’s primary supplier of fiber access gear (with Motorola as a minority second supplier) to being one of three suppliers (the two incumbents trailing lead vendor Alcatel-Lucent). Rob Pullen, Tellabs’ CEO, described that scenario aptly back at the Telephony LIVE show last fall, when he was still just a VP. “Being second is okay,” he said. “Being third is terrible. You don’t get a return on your [research and development] investment.”
But even the role of primary BPON supplier was fraught with headaches. The original Verizon BPON contract was won by Advanced Fibre Communications, which Tellabs acquired in 2004. Before the acquisition had even closed, AFC had incurred penalties for not being able to keep pace with Verizon’s schedule. Those problems allowed Tellabs to renegotiate the merger, and AFC fetched a smaller price as a result. Later, when Tellabs entered the GPON race, it again had trouble meeting Verizon’s timetable.
What’s more, Tellabs’ access margins were smushed into pancakes all the while, with its customer premises gear often essentially given away for free (the same went, at least initially, for ROADMs sold to Verizon). In fact, Tellabs forestalled the current GPON migration to some extent by lowering its BPON prices.
And with Verizon devouring all its attention, Tellabs was unable to serve other markets such as independent telcos, something the vendor has vowed to correct in recent months (make that recent years).
And yet former CEO Krish Prabhu referred to the Verizon account as “beachfront property,” an investment of obvious and indisputable value.
Maybe it took a new CEO to fully admit what Zhone Technologies’ CEO Mory Ejabat spelled out back in 2005. “Dealing with RBOCs isn’t worth it,” he told Telephony then, when asked about bidding for a Bell GPON contract. “We got burned when they came out with the [BPON] RFP…We spent a lot of time and money, and at the end of the day they gave it to their existing vendors and said, ‘Here, make us a system that looks like this.’”
Since then, the environment has gotten worse for such vendors. Again, Pullen expressed this last fall at Telephony LIVE, saying, “If you didn’t help write the [request for quotation], it’s too late.” Lately, he’s been talking about the importance of managing carrier projects over merely selling products, signaling the company’s future evolution.
The news that Tellabs is giving up its GPON seat at Verizon will no doubt be welcomed by other GPON vendors, including Adtran, which picked today to announce its first GPON product. (Nice timing!) Verizon isn’t yet saying whether they’ll look to replace Tellabs or just use two suppliers. The carrier didn’t expect to deploy Tellabs’ GPON gear until later this year and doesn’t expect today’s decision to impact its GPON rollout. (In fact, one wonders if Verizon picked three suppliers instead of two for GPON in anticipation of this very scenario.) To the extent that Tellabs’ departure opens up a seat at Verizon for another vendor, it will likely be filled by a large manufacturer like Ericsson (through Entrisphere, which, along with Alcatel-Lucent, was picked to supply AT&T’s more modest GPON plans) or Hitachi Telecom USA. For smaller players such as Calix and Adtran, the question they’ll have to ask themselves is: Would they really want the job?
Would you?
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April 2nd, 2008 at 2:33 pm
I used to call on tellabs before I retired from my company and they used to throw their weight around in purchasing towards me personnaly, but also my company. We too stopped calling on them. They now know how that feels. I own their stock and am currently taking a whipping along with anyone else who is a buy and hold type investor.
There is the age old saying that what goes around comes around. It did not take that many years, 10 I believe, for me to see that happen.
I formerly lived in Chicago
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