For Chief Executive Kevin Denuccio, it was the nightmare that wouldn't end. When he took the helm of networking highflier Redback Networks (RBAK ) in 2001, Wall Street expected the company to hit $1 billion in sales that calendar year. Instead, it registered just over $227 million, creating a frantic race to slash costs. The culmination came in late 2003, when he maneuvered Redback through a 46-day stint in Chapter 11 to recapitalize its staggering debt and get out of leases on two of its three swank office buildings in Silicon Valley.
Still, the slog wasn't over. Redback continued to pour hundreds of millions into a new router technology designed to help phone companies offer not only basic broadband service but a range of more sophisticated fare, including TV-style video services and movies on demand.
Finally, Denuccio's efforts are paying off. Redback's stock has risen 90% since May, to nearly $12. In the past year or so, his company has landed contracts with 11 of the world's 20 largest phone companies. And since only four of those accounts have actually gone into production, he thinks revenue growth in calendar 2006 could exceed the 30% pace expected for 2005. "This [growth surge] is only in its infancy," says Denuccio.
And Redback isn't the only networking company whose fortunes have improved. Other little-known survivors of the telecom depression -- such as Adtran (ADTN ) and privately held BigBand Networks, Calix, and Skystream Networks -- are also making a name for themselves.
Why now? Because the long-awaited free-for-all among media companies is finally heating up. For years, it has been clear that phone, cable, and wireless providers were heading for a battle royale, in which all would compete in one big uber-market. The secret to success: figuring out how to deliver quadruple-play service bundles that include Net access, phone, cellular, and video services.
To pull it off, all these competitors need far more intelligent networks that can automatically identify different kinds of traffic to make sure they're sent with the proper security and bandwidth -- say, more of the former for a sensitive e-mail and more of the latter to get a jitter-free, HDTV-quality movie. "It's a food fight, and ultimately there will be no absolute winners," says Skystream CEO Jim Olson. "[Phone, cable, and wireless companies] all have to find a way to stay in the game, so we'll be able to sell products to all of them."
Most of the opportunity is for companies making gear that resides close to where people live and work, rather than in the so-called core of the network. That's where much of the action was in the late 1990s, when many well-funded router companies figured out how to move vast amounts of information between countries and cities. This is about helping communications companies deliver just the bits each customer wants, in the most efficient way possible.
An example is Calix. Its gear sits in residential neighborhoods to connect phone networks to homes, whether they're connected by decades-old copper phone lines, or have been upgraded to the far speedier fiber-optic lines that may one day be essential to meet consumers' rising need for bandwidth. While it's possible to send one HDTV movie stream over copper, fiber might be necessary if different family members wanted to watch different films, for example.
While companies such as Verizon Communications (VZ ) are investing heavily in "fiber-to-the-home" plans, most phone companies need a way to get going without having to make such a massive upfront investment. "The network shouldn't get in the way [of new services being deployed]. It should facilitate it," says Calix CEO Carl Russo.
DEMAND FOR BANDWIDTH.
In the past, these markets haven't been big enough or profitable enough to garner much interest. All told, the market for broadband gear and so-called edge routers needed to deliver quadruple-play services adds up to around $13 billion, says market watcher Infonetics. That's around half the size of market leader Cisco Systems (CSCO ), which earns far larger margins by focusing heavily on selling corporate gear.
Yet the market's plenty big and varied enough for a slew of ambitious startups. Having worked on its product for nearly seven years, Big Bank Networks has convinced seven of the top 10 cable companies to use its gear to help deliver not just basic cable, but Net access, voice, and other services as well.
There's reason for continued optimism on a number of fronts, possibly in the U.S. Even with the sudden uptick in activity in the U.S. market, most of the action remains overseas -- particularly in Japan and China. As giants such as SBC Communications (SBC ) look to roll out new IPTV video services, the market for video-related gear should rise from $967 million in 2006 to $4.5 billion in 2009. And as more consumers use IP-based networks to get their video entertainment, it's going to significantly increase demand for bandwidth throughout the network.
That's because video hogs far more bandwidth than data or voice -- in part because a video has far more data in it than an e-mail or phone call, and also because people watch TV for hours at a time. "This year has been a watershed," says Richard Brandon, director of marketing for Juniper Networks (JNPR ). "It's still early days in some ways, in terms of its affect on the network in terms of traffic. But this has been the year of real services starting to be deployed."
There's an even newer crop of startups focused on Internet TV. Rather than distribute shows via a cable or phone company's own network, this crowd thinks programming can be delivered via the plain old World Wide Web, just like an e-mail or a Web-site -- particularly once more elegant ways are developed to deliver Net traffic directly to TVs.
That's the future envisioned by Brightcove CEO Jeremy Allaire: one in which everyone -- from giant Hollywood studios to film students -- can distribute, market, and bill for their creations directly to consumers. Brightcove is already working with cable networks, including A&E, Oxygen, and MTV, to create new Net-based offerings. Allaire says the company is also working with bigger players, who plan to make announcements next year.
There's still much more work to be done. For example, data-compression schemes have to be combined with more powerful gear to raise the quality of grainy Net video. And big phone companies are notorious for their glacial pace when it comes to deploying new services.
"But it's moving along. Consumers are going to have more ways to buy content than they ever imagined," says Frank Dzubeck, president of consultancy Communications Network Architects. And for some networking companies, a far better outlook than they had come to expect.
Burrows is Computers editor in BusinessWeek's Silicon Valley bureau