A few weeks ago, I looked at Infinera’s amazing success penetrating the next generation fiber networks. What I’m thinking about today is why they have had success amongst these networks but not with the larger more established networks so far – AT&T, VZ, BT, DT, etc. When I read about this phenomenon in various industry news sources, the difference is attributed to the difficulty any startup faces in breaking into the Tier-1 market, because they are just not trusted by the larger bureaucracies. And I understand this to be at least part of it – at least it explains why those Tier-1 carriers have been reluctant. But I think there is more to it, because Infinera has been so dominant with the nextgen carriers and the difference there is too stark.
I now think that Infinera did something else to deliberately target the nextgen market, they tailored their pricing structure to the cash-strapped. Think about the telecom market a few years ago: nearly all the smaller players – LVLT, Broadwing, XO, Global Crossing, etc – were struggling with cash, the need for capex spending to keep pace with bandwidth growth while pricing was still very fierce. Then, Infinera rolls out its new systems with a pricing model where their base systems are priced almost at cost, with the modules the plug into it and the software licensing being where the actual money is made over time. This allowed cash poor networks to overlay new capacity on their networks with very little cash outlay, matching the timing of sales and expenses more closely than they could have otherwise.
I was amazed that XO lit what they did without spending much money at all, because at the time I was monitoring their capex. I wondered aloud what it was that we didn’t know, how a company of their size could rebuild their network with an almost negligible effect on capex levels – I even wondered if they were really doing it. I think now that this effect was entirely the point, Infinera’s low initial cost made it much easier for these companies to jump in with them, and then Infinera makes money as these customers sell the bandwidth and buy modules to go with them.
Companies like AT&T wouldn’t care about this at all, but I think it made a huge difference to those like Global Crossing and XO, which probably couldn’t have done it at all otherwise, and to Level 3, whose cash levels are always a subject of scrutiny because of their debt levels until they demonstrate positive cashflow. In fact, Infinera may be more than a little responsible for each of these companies’ continued independent existence – I don’t think many could have afforded to keep up any other way.
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