Router start-up ready for next phase

FRAMINGHAM (11/14/2003) - At a time when most telecom equipment start-ups are slashing staff or conspicuously maintaining a low profile, core router maker Chiaro Networks Ltd. is building some momentum.

In addition to two installations announced last spring, the company's Enstara router is in trials at 10 service providers, four of which are in North America. Chiaro is also on the verge of announcing a new VAR deal in Asia, one that will take Enstara into the labs of Japanese carrier KDDI Corp., says company president Ken Lewis.

Lewis would not identify any of the other carriers trialing Enstara. But he mentioned that Chiaro is one of two core router vendors participating in an MCI "next-generation showcase network" demonstration slated for early December. The demo will highlight next-gen services provisioned over a high availability IP core, Lewis says.

Chiaro is also in discussion with some large, established equipment vendors in North America on a "big brother" strategic partnership to help take the Enstara router into some big telecom carrier accounts. These types of partnerships are in vogue, as carriers would rather not deal directly with unproven, unfamiliar start-ups that lack the financial wherewithal and service and support infrastructures to capably manage a large carrier account.

Lewis would not identify which vendors Chiaro is in discussion with, but he virtually ruled out Lucent, which recently struck a deal with Juniper Networks Inc. to address the core router market. He said the core router market, with its ability to stimulate pull-through sales of switching, transmission and other routing gear, cannot be overlooked by vendors such as Nortel Networks Corp. and Alcatel, which recently said it was discontinuing development of its own 7770 OBX core platform.

"All of the big guys recognize the importance of being in the core," Lewis says. "One way or another, they're filling out their portfolio."

Lewis says he expects Alcatel to re-enter the core router market, which The Yankee Group says will achieve 12 percent compound annual growth over the next five years after languishing for three years after the Internet and telecom bubble burst. Other analysts say revenue in the worldwide high-end service provider router market grew between 14 percent and 20 percent in the third quarter, the second consecutive quarter of positive growth after several quarters of decline, according to Synergy Research.

This decline resulted from a sharp reduction in carrier capital expenditures as carrier's realized they had too much unused capacity in the core of their networks for the amount of Internet traffic growth. This helped bring on the demise of start-ups such as Tenor Networks Inc., Pluris Inc., Crescent Networks Inc., Gotham Networks Inc. and many more, and to sharp staff reductions at other start-ups struggling to conserve cash and deflect attention.

Chiaro, meanwhile, has graduated to the enviable level of lining up a partnership, Lewis says. In this, the company's looking for a partnership with teeth -- one where the established vendor is committed to the start-up by putting some skin into the game.

"We're not after a superficial relationship," Lewis says. "Everyone being a distributor is not a good model. Potential partners don't want it either."

That's not to say Chiaro needs the additional funding. The company has enough money left from the US$210 million it has raised to see it through to mid-2005, Lewis says, in addition to the revenue derived from customers IP Networks and the California Institute for Telecommunications and Information Technology.

But Lewis expects to win a top-tier carrier account and wrap up a strategic partnership in the next two to four quarters.

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