Since the time of the Business Plan in 2001, we in the AFC Management team were working on building our Tier 1 carrier revenue business. We viewed the BPON RFP as a chance to help redo the landscape of telecom access in North America. Yesterday, the blog included a link to an old story about UBS handicapping the bidders. I can tell you that we viewed the field essentially the same way. If we didn't do something dramatic, that Alcatel or one of the big partnerships would take the prize. We did not know the next time we would get a chance to win a large RFP. All of this impacted our decision making around our bid.
One thing that was required for the RFP was the inclusion of Video Overlay components. All the telco access players were cozying up to various cable optical providers to deliver a total solution. Given our position, we were not able to get one of the largest players (Scientific Atlanta or Motorola at the time) to partner with us. So we bid with Harmonic. This was always a partnership of convenience and I am pretty sure that even Harmonic was not happy with it.
Part of the reason for that was that nobody believed that there was really a business here. Even we thought that this was going to take a long time and be a lot less revenue than were predicted. The RFP included volumes over time from each carrier, but I do not believe anybody really thought that these volumes were real. Perhaps they did in the former Quantum Bridge, as they had a close relationship with Verizon. We used a model from Marconi to get the timing. They told us as part of the diligence (and I will get to that acquisition next week) that it took 4 years from RFP win to volume deployment. We said in our internal meetings that this meant that it would be at least 2 years.
What this meant to us is that we could bid low and not expect to have to deliver volume for quite awhile. We would in parallel go through at least one and preferably two cost reduction cycles. I was already having Paul Ripy take a look at the idea of a single chip ONT. We had already done work with ARM processors to plan for the day when we would build microprocessor IP into our ASICs. So, our bid was much lower than our initial production costs. We were going to ship a couple of hundred dollars with each ONT. But the OLT margins were awesome (70%), and if ONT shipments were small (16K ONTs or less) then our margins would actually be the same or better than our existing business.
That is what we did. We bid a disruptively low price. We bought the business. We had about $1B in cash and that would buy us time to cost reduce our way into profitability. I remember a meeting led by Kevin McClain where we agreed on the initial bid price. Now given the changes that happened later we never shipped an ONT at that price, but we were substantially the low bid. So, the low bid was simply part of the plan. Not the whole plan but just a part of it.
People have questioned this decision for a long time. I am here to defend the plan. I can not defend the execution, which I will get to. But the plan was win the bid, aggressively cost reduce, and get SBC for sure. Getting Verizon was a hope but we crossed our fingers and sent in our RFP response. The actual results were different, of course, and that comes up on Friday. But from what I understand, when some details of our bid came out that Alcatel was stunned. They dithered and did not respond effectively.
People have tried to analyze what we did. You can not analyze disruption. You have to vision disruption. We created a change in market shares that was dramatic in a very short span of time. We had ideas of how to make this a good change for our shareholders. Our execution went almost immediately awry and that is a topic for Friday.
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