Dot-coms come and dot-coms go, but the folks selling optical gear for the Internet seem unstoppable. Witness startup Chromatis Networks Inc., a maker of equipment that routes Net data over capacious fiber-optic cables. Even though it hasn't shipped its first product, the Herndon (Va.) company was gobbled up on May 31 by giant Lucent Technologies Inc. for $4.5 billion. That's par for the course these days in the esoteric business of turning data into laser beams and pumping the bits through glass fibers. In the last nine months, equipment makers led by Cisco Systems, Nortel Networks, and Lucent have shelled out nearly $30 billion to buy startups proffering gear that bridges electronics and optics.
Why the frenzy? By some reckonings, the amount of data traversing the Net doubles every three months. Standard electronic networks simply can't keep pace. Optical networks carry much more data for lower cost than their electronic counterparts. That guarantees strong demand for them regardless of the ups and downs of other e-commerce segments. "There's a fundamental need for such products that exists independently of market cycles," says Vinod Khosla, a partner at venture firm Kleiner Perkins Caufield & Byers, who has launched a dozen networking stars.
Intrigued by a business that could top $52 billion by 2003, VC firms are continuing to pour billions into the sector. In the first quarter, they sank a record $3.6 billion into networking start-ups, three times more than the previous year, says researcher VentureOne. Much of that went to companies chasing the market for optical gear in metropolitan exchanges, where local traffic joins and leaves the huge fiber-optic backbones of the phone system--and where data bottlenecks are a serious problem. Technology such as Chromatis' could halve costs while improving performance, says Salomon Smith Barney analyst Alex Cena.
No wonder startups are still able to pull off IPOs--when they don't get bought out first. Nine optical-networking companies went public in the first quarter, raising more than $1.4 billion, says VentureOne. ONI Systems was expected to raise $176 million in a June 1 IPO.
UNQUENCHABLE. Investors are still bullish on optical networking companies because, unlike dot-coms, they're satisfying a nearly unquenchable demand for communication bandwidth. "The optical Internet will be the economic engine of the future," says Anil Khatod, president of Nortel's Internet Business Solutions unit. And optical technology is evolving even faster than silicon chips. "It's the most rapidly improving technology in history, period," says James Crowe, CEO of phone company Level 3 Communications Inc.
Moreover, the networking companies that have already gone public are holding their value better than dot-coms. Five stars of the so-called Class of '99--Extreme Networks, Foundry Networks, Juniper Networks, Redback Networks, and Sycamore Networks, all of which went public last year--have a combined market capitalization of $70 billion, even after the Nasdaq correction. Their combined revenues: just $760 million.
These and other companies are lining up to grab new business in metro networks. Redback, for instance, unveiled a box on May 30 that zips data traffic onto optical fibers more efficiently than earlier alternatives. The result will be faster Net access and "a whole new wealth of services for users," says CEO Dennis L. Barsema. For instance, customers will be able to request different amounts of Net capacity or different levels of service at a moment's notice--and pay only for what they use.
Over the next decade, such systems could replace existing phone networks with cheaper and more flexible technology. That's a potential market of hundreds of billions of dollars. No wonder purveyors of high-tech Internet plumbing are leaving dot-commers in the dust.