Calix Files IPO. Will Cyan Be Mike Hatfield's Next Big Hit?
Posted by: Peter Burrows on November 21, 2009
After years of rumors, Calix Inc. finally filed to go public today.
Here’s the filing, which is sure to put CEO Carl Russo back in the spotlight. Besides being one of the funniest, most free-wheeling executives one is likely to meet, he’s also famous for having sold start-up Cerent Inc. to Cisco Systems in 1999 for $7 billion. Cerent had already filed for its IPO before Cisco came calling, paying one of the frothiest valuations of the late 1990s.
But while Russo may have been the front-man for Cerent and now for Calix, the founder of both companies was Mike Hatfield (He actually had a few co-founders on Cyan). While less well-known, he’s got a sterling record when it comes to knowing where the puck is going in networking. After stints at former high-fliers DSC and AFC during the formative days of the Information Superhighway, he created Cerent in 1997 to build optical networking gear used by phone companies to move massive amounts of voice and data traffic through the “core” of the Internet that connects major cities and regions.
Of course, demand for networking gear of all types crashed just a year later with the Net Bust, as it became clear that far too much capacity had been built. Nonetheless, Hatfield founded Calix just months later to take a crack at what had long been considered the least appealing part of the networking market: the so-called “access” gear that delivers traffic over “the last mile,” from the phone companies’ central offices located in towns and neighborhoods to each subscriber’s home. Traditionally, companies competed hard to make a thin profit on this more commoditized gear. But Hatfield sensed that Calix could attract a lot of attention if its boxes helped phone companies deliver more than just phone service. After all, cable companies were trying to add phone service to their menu of offerings, and Calix’ gear would let phone companies add TV and other services to their basic voice plans. According to its IPO filing, the company had $250 million in revenuees in 2008, though it lost $12.9 million on the year (so evidently Calix hasn’t been as successful at figuring out how to fatten those margins on access gear.)
So if Cerent was about the “core” and Calix was about the “edge,” guess where Cyan is aiming? That’s right—at “the middle mile.” This is gear that connects the central offices to the core network. While most venture capitalists are still loath to invest in any networking start-ups (Hatfield figures they lost $2 billion on them during the Net Bust), he figures this section will be the next big chokepoint on the Internet. The reason: millions of people are now routinely consuming and sending high-definition video and other weighty digital fare, to a broader range of devices, such as the iPhone. But much of this middle mile still contains huge amounts of old copper lines rather than higher-capacity fiber-optics. Cyan’s gear is designed to help carriers make the most of what they have, as they move to networks more capable of handling the load.
More than technology, Hatfield says Cyan is one of a new generation of networking companies with much lower-cost business models. That’s critical, because carriers can’t afford to just keep buying more of the same pricier gear as Net traffic continues to soar. While it has typically cost hundreds of millions of dollars to build a cutting-edge networking company in the past, he thinks Cyan will cost a tenth as much. It’s not just that consumers are demanding so much more bandwidth, but that they’re not willing to pay for it. “Today’s bandwidth hogs are the consumers of the future,” he says.”Consumers aren’t going to pay ten times the money for ten times the bandwidth,” he says. See a video interview with Hatfield, with the site Light Reading, here.
He says Cyan’s costs are so much lower because it relies on open source software and off-the-shelf communications chips—rather than proprietary code and chips (sounds like Arista, which I wrote about in the magazine a few weeks back). Evidently, Cyan is off to a promising start. Hatfield says the company already has more than 20 customers, and more are on the way thanks to the Federal broadband stimulus program.