A couple of weeks ago I posted on Calix's latest earnings call. You can find that post HERE. One of the topics on the call was the possibility of some PON business with Verizon. Given my history on FiOS, I thought it would be good to discuss the possibilities here.
The competition for this business is Adtran. Calix and Adtran are ongoing rivals in the Access Business and now have a shot at business in Verizon. I think that this is going to end up being very complicated for investors to parse and for observers to understand. The business of selling to the carriers has become a primary vendor and a single selection process. This means that second vendors get little to no business and there is no chance to enter the business in the future. On top of that, the pricing that is set and the purchasing behavior means that companies will not have a great chance to cost reduce products. The implication is that you best play to win on both cost and functionality. You won't get a second chance.
I have to make the assumption that both companies will deliver working products that meet a number of criteria that Verizon will test for. These products are unlikely to be perfect and may require a second pass through the labs. The challenge will be how much customization of the products that Verizon will require for their network. The ONTs that we shipped to Verizon has little to do with the ones we originally planned to ship. Verizon has their own way of doing things and does not feel obligated to take what the vendor already has available.
Adtran has an advantage in that it is already a supplier to Verizon. Adtran is also a significantly larger company than Calix. This may not seem to be a big deal, but the large carriers don't want to be a huge part of anybody's business. It prevents problems if Verizon chooses to go in another direction and impact's their vendors stock price. It also means that the company will be there for the long haul to support the Verizon network. Think about the 5ESS and DMS 100 telephone switches that have been in place for 30+ years. Lucent is on its 2nd buyer and Nortel is gone. Calix does have the advantage of being partnered with Ericsson. One thing is that I would not expect Ericsson to purchase Calix as they have already been burned twice in the FTTH business (Polycom and Entrisphere). This could be the first big benefit of buying Ericsson's FTTH business.
I think both will be announced as winners and it will confuse the market. One will be the actual winner but I think Verizon has gotten past the single winner business. The first one to reach deployability will be the real winner. I know that Calix has many veterans of FiOS and other Tier 1 deployments. If they are smart, they will listen to these folks about what it means to sell to Verizon.
Anyway, it will be interesting to see what happens. Have a great weekend!
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