BigBand S-1 Filing: Tale of Two Markets and Two Companies (WRKoss)

Good post on Big Band. I like his discussion of what happens to companies after they go public ( or get big ). But I really like this line best:

Startups must make a decisions in the course of an afternoon or a few days, then orient the company to where the market will be spending money in the future. My experience has taught me that this will not be found in a research report. If it can be found in a research report – then it is too late.

Too true. In the ’90s, ATM chips were actually shipping more than double analyst estimates. When analyst’s finally caught up, the market wasn’t that great. — Iain — full post follows.

BigBand S-1 Filing: Tale of Two Markets and Two Companies: “

Five days
ago BigBand Networks filed
an S-1
to go public. This filing
caused me to (1) write this blog entry when my last posting
said I would not post this week and (2) it caused me to think deeply about the
last five years.’ ‘

BigBand
Networks is an interesting milepost in our evolution post the tech crash.’ They were founded (1999) a year
earlier then the spinout of Internet
Photonics
(2000) from Lucent. If you
consider that the
founding team of Internet Photonics
(IPI) was working on the IPI technology as
part of Bell Labs well before the spinout, then essentially the two companies
were founded at the same time – but both companies took different paths.

IPI was
founded to build 1U optical ethernet transmission products for the emerging
market of data centric alternative service providers. Companies like Yipes, Telseon and Looking
Glass. In 2001, these service providers
were having difficulty making their business models work. IPI quickly found our way to the cable
service provider market and the video on demand (VOD) spending
cycle. I distinctly remember how this
happened at Internet Photonics. An
engineer from the hardware group came up to me one day when I was starting to
build the sales team and said he had been an SE at Lucent and would like to come back to sales. He then said I should meet
with his old boss from his first job at a cable company called Cablevision on Long Island.’

I
went to this meeting in June of 2001. After about twenty minutes of PowerPoint slides, the person we were
meeting with stopped the presentation, turned to me and said he was one of the
first, if not the first, buyers of the Cerent 454 and that it was a
revolutionary product. He said if our
product does what it says for the price we are offering, then it is a
revolutionary product and he will need about 250 10Gs worth of bandwidth in the
Cablevision footprint to support the deployment of their first generation
VOD. In the summer of 2001, anyone
needing 250 10Gs was our new best friend. A long story short, IPI was a company founded by a team from Bell Labs
to build products for telecom service providers. In the space of a few hours after a meeting in Hicksville Long Island,
IPI became a cable/VOD centric company. Cable and VOD were not in the original business plan of the
company. We made the decision to go
after the cable market very quickly. It
did not require hours of deliberation or months of study. VOD appeared to be were the money was going
to be spent and small companies like IPI have the entrepreneurial spirit to
attack markets without convening a 9-month study and endless meetings. This is the difference between technology startups and
public technology companies.’ ‘

As a side
note, it took a few quarters to get the VOD business rolling as we had to crush the
Barconet/Scientific Atlanta team at Cablevision, wait on the QAM suppliers, wait
on the set top box suppliers and wait on the VOD Server suppliers to make all the
parts of the VOD ecosystem work. Once it
got rolling, the market for VOD just happened and it was game of selling. It was actually quite fun.

I have
seen in my business life several examples of startups that become public
companies in which a cultural metamorphosis occurs post the listing of a symbol
in the equity markets. After the money
is in the bank, the company culture becomes conservative in their thought and
investment processes. This is partly due
to the fact that they have to live with budgets and achieving quarterly financial
expectations that for the first time are in the public record. When this occurs, companies that were once
innovative risk takers become conservative, study centric leadership teams who
spend more time reviewing materials to ensure they are not wrong – rather then investing that they will be correct. At IPI, we
bet that we would be correct in cable and VOD. Startups must make a decisions in the course of an afternoon or a few days, then orient
the company to where the market will be spending money in the future. My experience has taught me that this will
not be found in a research report. If it
can be found in a research report – then it is too late. ‘

Here we
are on the verge of 2007 and BigBand is filing to going public. Along the path from their inception to their
S-1 filing, BigBand built a business in the cable service provider market. During the dark downturn of the telecom
market (i.e. 2001-2003) the cable industry aggressively rolled out VOD services
and BigBand was able to build a healthy business. To complement the cable service provider
market share, they purchased the broadband business of ADC. ADC’s broadband business was composed mainly
of their September
2000 acquisition
of Broadband Access Devices for $2.25B. In the BigBand S-1, the revenues for this
business unit are listed for FY03 at $38.2M and eight months of FY2004 at
$13.1M. These are great revenues for
BigBand, but call into question the price paid by ADC in September 2000. We must remember that September 2000 was
still the bubble and this data point highlights the differences between two
markets.’

I like to
define luck as ‘the point or points at
which planning meets opportunity.
’ This is what happened to BigBand. They were able to catch the cable spending wave, just as IPI did, that
bridged the company into the time period of early to mid 2004. In mid-2004, the RBOCs were busy issuing RFPs
for the deployment of video as part of their triple and eventual quad play
offerings. When the broader service
provider market moved to spend CAPEX on video, BigBand was waiting with a
comprehensive product suite ready for when a company like Verizon declares it
is going to spend $18B on their FiOS build.

The
glorious market evolution (i.e. luck) for BigBand was the adoption of video by
the RBOCs. When I wrote that all service
providers are converging on the same market
from different cultural
heritages, this is an opportunity for equipment supplies to broaden their
customer bases by acquiring market share in cable, mobile or telecom centric service providers. While the RBOCs were busy
planning to spend billions to deliver video to the home, BigBand used this
opportunity to broaden their customer base to include telecom centric service
providers, specifically Verizon.’

This is
why the BigBand IPO is going to be exciting.

  • The company has been building their business for long time, seven (7) years.
  • They have a strong customer base of cable centric service providers
  • They are a significant supplier to Verizon and the FiOS program
  • They are profitable

BigBand
has what most late stage system level startups lack. They have the biggest cable and telecom
centric service providers as customers. When Google purchased YouTube.com for $1.6B it sent a message across the
networking world that video matters. I
will be buying stock in BigBand on the IPO day. Here is a quote from page 1 of the BigBand S-1 ‘We have sold our product applications to more than 100 customers
globally, including Cablevision, Charter, Comcast, Cox, Time Warner Cable and
Verizon, which are six of the ten largest service providers in the United States. Our net revenues increased 59.6% to $113.6 million for the nine month period
ended September 30, 2006 from $71.2 million in the same period in 2005. We
achieved our first quarter of profitability in the three months ended September
30, 2006.

As for
Internet Photonics, we had made great progress in the market, but the funding
environment for system level optical companies was challenging in
2003-2004. Our choice was to accept an acquisition offer from Ciena. In hindsight, we probably sold too soon, but
in February 2004 we took the better of two offers that we had in hand.’


As
always, thoughts and comments welcome, whether private or public.’

/wrk

(Via Technology and Geopolitics.)

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