VOIP

Ascend to the Voice Services Zhone

The team that built Ascend Communications has not been sitting still since they sold the company to Lucent for billions of dollars. Meet Zhone Technologies, the next step in voice services.

by Max Smetannikov [March 18, 2002]

Ken Carter doesn't need a lesson in economics. He needs a reliable partner who can give him all things telecom for a reasonable price so that Carter can deal with the pressures of running a 150-associate commercial real estate firm with the help of just one IT manager.

For most small and medium size businesses, such a request would be wishful thinking.

The economic slowdown has eliminated scores of companies that were hoping to serve entrepreneurs like Carter. Jato Communications, Mpower, ICG Communications—the list of bankrupt Competitive Local Exchange Carriers with advanced data offerings grows longer every day. Then there are the national ISPs that made it big, such as Digex and Concentric. They have lost interest in customers like Carter.

But firms like Bakersfield, Calif.-based Watson Realty, where Carter is a president, have not gone away.

It hasn't been easy for the ISPs that survived. In tough markets, CLECs have to have a combination of technological excellence, marketing savvy, and customer focus that makes them better than the local incumbents. They have to figure out how to sell voice and data to niche customers like Carter. Small business demand for competitive communication services remains largely unfulfilled, especially in rural areas.

Watson Realty is an exception because Carter found a local player that was looking for small business customers. Whereas many business models have crashed and burned, Arrival Communications developed an approach that at the moment seems visionary and recession-proof.

Bakersfield roots
Arrival started in Bakersfield, Calif. 11 years ago as a long distance reseller and grew to be a full service communications provider by 1999. The company now has the financing and the management team to take the company national.

Extreme caution has saved the company from a bankruptcy. When equity markets started deflating in 2000 Arrival's backers and senior executives decided to refocus their efforts on making the business at hand work, and concentrated on undeserved areas in northern California. This decision should pay off early next year when Arrival breaks even and starts thinking about future expansion again.

For now, Arrival has made good on its promises to customers like Carter, who put his trust into the CLEC by signing up with an unknown startup three years ago. Focusing on sales in its hometown helped.

"They are just good people: I know without a shadow of a doubt if there is a problem I could go to any of the principals and I know I will get their immediate attention," Carter said. "As the highest compliment, I would say they have not forgotten where they started."

But Arrival needed more than a good business plan and trustworthy management. The company needed to find a technological advantage that the local phone company lacked. Arrival found that technology in a partnership with Zhone Technologies, a flamboyant Silicon Valley startup packed with former executives from Ascend Communications, whose products are still popular with readers of the ISP-Lists.

Access riches
Since selling Ascend Communications to Lucent for $24 billion in 1999, chief executive Mory Ejabat and chief technology officer Jeanette Symons have raised about half a billion dollars for Zhone. Founded by Symons, Zhone took in a lot of Ascend human capital. The total head count of ex-Ascenders at Zhone stands at around 60, with Ejabad being employee number 17. While no technology has been transferred into Zhone, the brain trust gathered under Zhone's roof shouldn't be underestimated.

"What many people tend to underestimate is the depth of the rolodexes at this company," said David Markowitz, Zhone vice president of marketing and an ex-Ascender. "These are the people who know literally everybody in the industry."

The philosophy and business plan behind Zhone are simple. Backbone technology has little margin left with carriers now talking about enabling multiple OC-192s on certain routes. Bandwidth glut doesn't exist on the access level: an OC-3 pipe is prohibitively expensive to most users. Zhone set out to build an access platform that would give carriers economies of scale similar to those in the long haul.

Six acquisitions and three years later, the vision has begun to take shape, and carriers that came along for the ride are not disappointed.

Arrival started talking to Zhone when it was shopping for its first voice over packet platform. The pickings were between Zhone, Jetstream, and Coppercomm. TollBridge was not considered since Arrival was looking to do voice over ATM as opposed to voice over IP, and considered VoIP a niche market.

Arrival execs believe that VoIP remains a niche market today in spite of success of companies like ITXC, and base their reasoning on the cost of last mile investment. Existing telecommunications networks that customers of companies like Arrival have already paid for can support voice over packet and satisfy their data needs without a major investment. Asking customers to invest into a new technology would, Arrival executives feel, be a risky business model.

After a careful look at each vendor's offering, Arrival concluded that while Zhone was not yet well publicized, its product was in essence ready for the market (the company was more or less in the final beta with its voice -enabling platform). The Arrival technical team decided that Zhone's history and Ascend origins made it a company worth betting on. Arrival decided to become a Zhone-powered carrier (to steal a marketing line from Cisco).

Arrival first used Zhone to help it deliver Plain Old Telephone Service (POTS) over ATM and DSL networks. The service used several Zhone's Sechtor 300 digital terminals. Next, Arrival started looking at Zhone's Broadband Access Node, which Zhone calls a next-generation Digital Subscriber Loop Access Multiplexer (DSLAM). Besides supporting DSL loops, the BAN terminates ATM, frame relay, IP data, and POTS voice.

"Not only we can get a gateway with Zhone, but we can get other products out on the edge that we can all manage with a common Zhone Management System," said Phil Henry, Arrival's chief technology officer.

Zhone's pitch to carriers is that its product provides all services on a single gateway. The same box can support a customer terminating a T-1 leased line or an ISDN line carrying POTS calls, and this box can be conditioned for a new service with a couple of keyboard clicks.

"For guys like Arrival, Zhone helps lower operation costs on a per line basis, and more importantly, drives the revenue per line much higher by allowing them to offer multiple services," said Markowitz. "Once the line is up, and a broadband infrastructure is in place, adding services is an obvious evolution if you do it cost-effectively."

For Arrival, the choice is clear. The company plans to switch to Zhone BANs from Lucent DSLAMs in future rollouts.

The basic strategy zone
Building an access strategy on ISDN, leased line, and DSL technology is a good for now, but can carriers like Arrival rely on Zhone to keep them up to date with the latest trends?

It's 2002, and the economy has changed since the business was founded, in 1999. Executives at both Zhone and Arrival believe most business owners are far from demanding new technologies like Gigabit Ethernet connectivity because such installations would require paying for expensive connectivity.

"IP and Ethernet are going to take over the world. But when is that going to happen?" asks Markowitz. "A Gig E NIC is less than $100 right now in a retail store; Gig E is roughly an equivalent of an OC-48 on the telecom side; what does an OC-48 port cost on the router—$100,000? The economics just can't sustain themselves—yet."

Customers giving expensive access innovations a cold shoulder are not luddites. Many professional, high tech businesses are not adopting Gigabit Ethernet. At Watson Realty, for instance, all databases are online, and brokers can't access them unless they are online.

But firms like Watson Realty don't need the latest in communications technology. They just want affordable technology that works. Watson Realty has two offices, which are connected with one T-1 leased line. The company gets Internet access through another T-1 connection.

"We have been on the cutting edge before and it hurts," said Carter. ISDN line, leased lines, and DSL technology will sustain Arrival for some time, allowing it to provide to Ken Carter and Watson Realty a competitive, friendly service without hidden charges or unneeded pricey connectivity.

—End