Metro-Optix designs, develops and manufactures optical transport systems, termed Multi-Service Protocol Platforms (MSPP) or "bandwidth managers" in the company's parlance, for deployment at the network edge. These products are designed to perform cost effective multiple service aggregation outside the core of the network, close to the end-user. For carriers, the product is designed to aid efficiency and flexibility through the integration of functions currently performed by a number of separate, high-capacity devices.

The company currently employs 280 staff, with this number set to increase to approximately 300 with the soon-to-be-closed acquisition of an India-based software house. Funding of approximately $136 million has been raised to date, over three funding rounds. Initial capital of $20 million was boosted with two further rounds raising $63 million and, in September 2001, an additional $54 million.

Commenting on Ericsson's role, Mr. Orr stated that the primary input from the company derived from the transfer to Metro-Optix of substantial intellectual property rights. Present cash reserves are projected to be sufficient to carry the company to the end of 2002, when further funding will be sought. Mr. Orr noted that the company is confident of its financial standing, and that no problems are envisaged concerning attracting additional capital.

Metro-Optix is therefore developing a single platform able to aggregate services of any type that will be economically viable when situated at the network edge. The product will be suitable solely for deployment at the edge because of difficulties in scaling up to handle the large traffic volumes found in the core network. This is the obverse of factors that have led to present core solutions, which are themselves impractical for deployment in lower capacity situations.

Mr. Orr, commenting on this approach, said "The Metro-Optix product has been developed for metro networks where it will sit at the network edge, introducing functionality and operational efficiencies currently found only in the core of the network. This segment of the network has yet to be modernised in the way that the core of the network has."

While to date, the Metro-Optix system has been only developed for the North American SONET market, the company plans to address the global market, and an SDH-compliant version will be produced in the future, primarily in response to market demand. Metro-Optix is utilising its ongoing relationship with ex-parent Ericsson to assess and monitor demand for the product in markets outside of North America. According to Mr. Orr, current thinking within the company is that the global version of the product will not be forthcoming for at least one year. Regarding the market outside of the U.S., it was stated that Ericsson has retained the option to act as source and distributor for the system.

The product conforms to such industry standards as NEBS and OSMINE, giving compatibility with the back-office systems of carriers, primarily the RBOCs, for provisioning, control and alarm management functions. Mr. Orr remarked that meeting the requirements demanded by these standards involves a lengthy, and expensive, qualification process. However, Metro-Optix sees such compliance as key to gaining access to the RBOC market - the prime customers for this class of product. Mr. Orr added that adoption of industry standards, over proprietary specifications, was considered essential when developing the product, ultimately to enable interoperability with equipment from other vendors.

Compact size

In its most basic configuration, the Citystream 5000 acts as a 3-1 cross-connect, supporting 10,000 ports of DS-1. The key strength for deployment at the network edge, in such locations as aggregation offices, is the extremely compact size of the device - the above configuration requiring one shelf (one-third of a rack) of standard equipment space.

According to Mr. Orr, competing systems, as deployed in the core network, are estimated to require significantly more shelf space, equating to between five and seven equipment racks. In high-capacity core network locations, however, Citystream's size advantage is lost due to the 'all-in-one' design of Metro-Optix system necessitating duplication of certain components in order to accommodate traffic volumes.

Multi-service

Metro-Optix cross-connect system is capable of handling all traffic arriving from a customer's links, such as DS-1, DS-3, or OC-3, no matter whether originating from a PBX, computer, channel-bank, or any other device, including DSLAM. Traffic is 'packed' very efficiently for onward transmission to the core of the network. At present, carriers operate separate links from the edge to the core of the network, dedicated to a specific service type, for example DS-1, Ethernet or DSLAM.

The Citystream 5000 system is now commercially available. Mr. Orr noting that an ATM and SONET enabled release was officially launched in February 2002, and is now available for shipping to carriers. Awareness of the product is now growing, and customers are conducting initial laboratory testing.

Commenting on manufacture, Mr. Orr said that, as is standard practice in the telecommunications industry today, all production processes are outsourced to specialised third-party companies - from prototype build to final production. Finished product is shipped to Metro-Optix for supply to its customers.

Metro-Optix owns all intellectual property relating to its products. Excepting that signed over to the company by Ericsson, all IP has been developed internally. Mr. Orr commented that limited stack and protocol technology has been bought in from external companies.

"This class of product has not yet reached Europe, deployment of new technology there, and in other geographic markets, will usually trail the U.S. by around two years."

It is planned that the Asia-Pacific region will be addressed subsequent to development of the European market.

Mr. Orr expanded on Metro-Optix's view of the market by contrasting the position of the company with that of the major systems vendors.

"Looking at the market from the perspective of the major vendors, such as Lucent, Nortel and Alcatel, there has been a massive downturn over the past year, by perhaps as much as 50%. However, from our point of view, even taking just the transmission market, the carriers are still spending huge sums of money. Basically, if your position in the market is zero, there are infinite opportunities for growth, whilst if your market share stood at say 30% one year ago, it will have contracted enormously in real terms today."

With respect to Metro-Optix's relationship with Ericsson, Mr. Orr said that, assuming the association between the two companies matures beyond the investment stage, it would be leveraged when entering Asia, notably China, where Ericsson has established a strong market presence.

The Metro-Optix system is considered to be ideally suited to deployment in mobile networks, where it will deliver voice and data aggregation functionality - of particular importance in future third generation networks. The compact size of the product means that it is practical for location at cell sites. These features, in tandem with the Ericsson link, make the mobile market a significant opportunity for Metro-Optix.

Customers

Metro-Optix has engaged with more than twenty customers and Mr. Orr noted that this count is now increasing on a weekly basis. To date, four customers have been announced publicly, although the majority do not wish to be identified at this stage. Mr. Orr said that non-disclosure was due first and foremost to the early stage of testing at which many of these customers are presently, but in some cases would be due to an unwillingness to reveal adoption of a new technology judged to hold an economic advantage for the carrier.

Current Metro-Optix customers comprise the small carriers for which the product and its capabilities are ideally suited. The ultimate goal for the company is sale of product to the RBOCs, whose operational needs are seen to offer a 'natural fit' for the system. However, these companies will also pose the toughest sale according to Mr. Orr.

"Today, the large carriers, including the RBOCs, are organised around network functionality, with separate business units handling the different functionalities, for example 3-3 cross-connect or ATM services. The Metro-Optix system pushes these, at present discrete, network functionalities together within the organisation - with a result perhaps similar to a peanut butter and jelly sandwich! Our first task is therefore to overcome an inherent resistance within these companies at an organisational level."

"Currently in this market sector we are concentrating on selling systems for performance of a single function; at a later date we can advise the customer that increased functionality may be achieved simply through the addition of a line card - no further boxes are required. Basically, in today's market, the smaller the company the quicker and easier the sale."

Metro-Optix does not perceive any problems with respect to expanding its customer base. Mr. Orr feels the main consideration now is with regards to the quality, in financial terms, of potential customers. The prime targets currently are the regional CLECs and regional long-distance carriers in possession of a funded business plan. The next tier of customers, on route to the RBOC market, will be the long-distance carriers such as AT&T, MCI, Qwest and Sprint, who are viewed to be logically the next adopters of the technology.

Discussing deployment of the Metro-Optix system, Mr. Orr said that sales have been made to small carriers, whilst a number of long-distance carriers, and one RBOC, currently have the product in their laboratories for testing. Regarding the RBOC market, it was stated that no commercial order is anticipated 'any time soon'.

Market size

Offering a view of the size of Metro-Optix's addressable market, Mr. Orr cited a total market value of between $5 billion and $8 billion for the U.S. - comprising SONET ring and ADM, digital 3-1 and 3-3 cross-connect and edge ATM switching and aggregation equipment. Qualifying this figure, Mr. Orr added that this market is shrinking by the day, and is at present impossible to forecast with any accuracy. The expectation is that capital investment will proceed to creep out from the core to the edge of the network - from large, high-capacity, systems, to smaller scale systems, such as that offered by Metro-Optix.

Taking these factors into consideration, the company's addressable market is estimated at between $2 and $3 billion for 2003, standing at $1.5 to $2 billion in 2002. Breaking down the overall market value, Mr. Orr noted that the 3-1 digital cross-connect segment alone now accounts for in excess of $1 billion annually in the U.S.

Metro-Optix hopes to carve out a substantial portion of the addressable market. "For us, a 30% market share would represent outright victory, although a 15% to 30% share would be very good," offered Mr. Orr.

It is predicted that the market for current generation legacy-type systems in this market sector will decline significantly over the medium term, as MSPP systems begin to take hold and increasingly replace them.

Mr. Orr cited as of particular note, Tellabs' 3-1 cross-connect, acquired via Ocular Networks, and Alcatel's 3-1 cross-connect, acquired with the recent acquisition of Astral Point. Fujitsu is also thought to be close to launching a similar product. He reiterated that none of the systems offered by these vendors are felt to encompass the capabilities of the Citystream 5000 product.

Metro-Optix considers that it is only a matter of time before the major vendors, such as Lucent and Nortel, begin to direct resources towards this market segment - with Fujitsu already leading the way. Mr. Orr commented that in the present market environment, it is very difficult to decipher the product strategy and focus of large system vendors - "The market is still settling down following the recent tumult."

Mr. Orr commented that with an MSPP system, support of the key services - traditional TDM, ATM and IP - is essential. Metro-Optix currently supports TDM and ATM capability, IP is in development. He stated "Development of IP capability is a priority for Metro-Optix - we are devoting considerable resources to realising this and expect to launch an IP-enabled system by late 2002 or early 2003."

Major future concerns for Metro-Optix centre on the customers - firstly progress with the large carriers, seen as the key customers, and secondly resolution by the long-distance carriers of present debt issues and clarification of strategies.

Mr. Orr said that basically, the challenge today lies in making sense of the macro-economic climate and the ramifications for the telecommunications industry at large. The bottom line being that these factors have a fundamental impact on company valuations. Beyond these external factors, major concerns relate to research and development schedules, getting product to market, and simply keeping customers happy.

Fundamental to Metro-Optix's approach is the fact that it is not seeking to revolutionise the market with its technology - its product simply extends present day functionality out from the core network.

"We are not banking on adoption of a radical new and untried technology in order to open up a completely new market sector. Basically, Metro-Optix offers a solution that cost-effectively extends network functionality and improves operational efficiency. Ultimately, we are offering our customers - the carriers - an alternative way of running their networks to better meet their customers needs."