Tellabs turning to partners for ONTs

Pinched by negative margins on its customer premises gear, Tellabs is considering turning to partners to help it supply optical network terminals (ONTs) to fiber access equipment customers such as Verizon Communications.

“We’re exploring partnership opportunities,” Tellabs chief executive officer Krish Prabhu said during the company’s first-quarter earnings call this week. “We want to see, if we partner with someone for the ONT business, whether the two partners can share in the pain as well as in the gain.” He declined to elaborate, insisting that the company is only in early discussions with potential partners.

It remains to be seen which vendors Tellabs might be approaching as potential ONT partners. One likely suspect, according to Infonetics Research analyst Jeff Heynen, is TXP, an original design manufacturer based in Richardson, Texas. In early March, TXP announced the first shipments of its BPON ONTs to a major vendor and tier-one carrier. TXP acquired the ONTs (which include patents for both BPON and GPON ONTs) from Siemens late last year. TXP is also a photonics component vendor, and ONTs are only the latest addition to its portfolio.

“Because of the customer base [TXP] has, they can theoretically achieve price points that would help all the [system] vendors out,” Heynen said. “But that’s pure speculation on my part.”

Another candidate is Amedia Networks, which recently announced plans to introduce a combination GPON ONT/broadband home router later this year.

ONTs have notoriously had what Prabhu, this week, called “really lousy gross margins.” Tellabs priced its gear low to win a coveted seat as a key supplier to Verizon’s high-profile fiber-to-the-premises (FTTP) deployment. When Verizon opted to move from today’s broadband passive optical networks (BPON) to gigabit-speed PON (GPON), Tellabs lowered the price of its BPON gear to cool Verizon’s urgency. Those lower prices went into effect in last year’s fourth quarter.

“ONT margins are back in negative territory,” UBS Investment Research said in a note following Tellabs’ first-quarter earnings report this week, predicting ONT margins to rise throughout 2007 and 2008.

In theory, a third-party ONT vendor partner would improve the economics of the business by selling to multiple equipment vendors, thereby distributing its costs. Vinci Systems made an attempt to do just that before Tellabs acquired the start-up in late 2004. “In hindsight, maybe it made more sense to just partner with Vinci and allow them to also supply Alcatel and Motorola, to get the volume discounts that way,” Heynen said.