DSL's biggest fan

Catena Networks CEO Bob Machlin has spent a lot of time explaining his cheerful outlook on DSL to boardrooms full of skeptical bankers and venture capitalists. And as Machlin will tell you, it's hard to convince the investment community that the future of the industry is rosy when its best-known carriers are closing shop, vendors are exiting the business and any stock-related technology is either in the gutter or has disappeared from the exchanges entirely.

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But eventually a modicum of Machlin's upbeat outlook penetrates these investors' hardened exteriors and generates some enthusiasm for an industry that most of the world has left for dead. Enough enthusiasm, in fact, that Catena's crew of former Nortel and Lucent stars has raised $117 million in three rounds of financing since December 1998 from heavy hitters such as Goldman Sachs, JP Morgan and Menlo Ventures.

CATENA NETWORKS Headquarters Redwood Shores, Calif. Number of employees: 340 Founded 1998 Executive team Robert Machlin, president and CEO; Jim Hjartarson, chairman, chief technology officer and co-founder Products CN1000 Broadband Loop Carrier  Integrates the functions of a DSLAM, a DLC and a media gateway into a single platform CNX-5 DSL Upgrade System An ATM multiplexer and two-line POT-DSL channel card solution that upgrades current Lucent SLC Series 5 Carrier System equipment to support DSL CatenaView Element management system for the CNX-5 Source: www.catena.com

Now Catena only has to show all that enthusiasm is justified.

“There is a big misunderstanding about DSL out there,” Machlin said. “There is a big difference between Covad/Rhythms/NorthPoint — competitive local exchange carriers geared at small and medium businesses — and incumbent operators. Residential asymmetrical DSL has been growing and has, in fact, exceeded expectations.”

Catena purports to have invented the anti-DSLAM, a product tailor-made for Bell companies and other incumbent operators looking to cram as much DSL punch into remote terminals as possible.

The engineers at Catena have performed all manner of unspeakable acts on silicon, torturing and cajoling it until it finally gave up its resistance to carrying analog POTS and ADSL on the same signal path. The result was a chip that Catena claims eliminates the need for a DSLAM, POTS splitter and integrated access device.

The architecture lies on a single line card, which plugs directly into any Lucent SLC Series 5 Carrier System equipment and replaces each POTS line with a POTS/DSL line. Carriers can upgrade an entire central office (CO) or remote terminal to scale to 100% DSL capacity without sacrificing any voice capacity and without buying new hunks of real estate.

Therein lies Catena's strategy. Instead of marketing to enterprise-oriented competitive carriers, Catena has, from Day 1, targeted incumbents focusing on residential customers. Machlin believes Catena's strategy has played out. The data CLECs expanded themselves into bankruptcy court, and the only carriers still deploying DSL are the Bell companies. Those four carriers — and a handful of other incumbents worldwide — make up the core of Catena's prospective customer base. According to Machlin, it's not a bad customer base to have.

“Those are the people important to us — the two dozen large incumbent carriers,” Machlin said. “They may be few in number, but they make up 90% of telecom globally.”

To believe in Catena's strategy, you have to think of broadband in glorious, heroic — though slightly cheesy — terms. Think of broadband, particularly DSL broadband, as the great equalizer or as a basic human right. Carriers chant “broadband for the masses” all day long for the benefit of the politicians and regulators, but Jim Hjartarson, Catena's chairman, chief technology officer and co-founder, says he really believes it. If he didn't his company would fail.

Catena's business model is built on the premise that carriers will seek 100% DSL penetration in residential markets and somehow make a profit by doing so. To reach that level, carriers must install equipment in every remote terminal, where space is at a premium. Carriers also must manage the DSL side of the network just as they manage enhanced voice services, turning DSL on and off as if it were voice mail, Hjartarson said.

“The network has to run just like a POTS network, and DSL has to go anywhere a POTS line runs today,” said Hjartarson, a 16-year veteran of Nortel's engineering corps.

Catena's CNX broadband equipment and element management system is designed to do both, Catena says. Carriers will have to upgrade their infrastructure with Catena's line cards, but they won't have to install several racks to house both POTS and DSL equipment. Once the equipment is installed, carriers can configure any individual line from the CO through a simple IP-over-ATM connection. Carriers will not only save on real estate, they'll eliminate most truck rolls. It's with this value proposition Catena plans to hone its competitive edge.

And just who is the competition? As far as Machlin is concerned, it's only one company. “Alcatel, Alcatel, Alcatel,” he said. “The rest of the vendors have either gotten out of the business or are backing away from it. Alcatel is the one that controls the market.”

Lucent Technologies and Marconi Communications are both selling their current DSL equipment lines but have stopped developing new products, Machlin said. Alcatel is forging ahead with its significant lead in residential DSL, but it's a product that is basically 14 years old, he added.

“The market has already set the price points for DSL at around $50 a month,” Machlin said. “Given consumers aren't going to pay more than that, Alcatel has little choice but to take a fairly old technology and reduce its cost.”

Catena still has quite a way to go before it starts registering on Alcatel's radar screen. It brought the CNX line to market earlier this year and announced its first official sale in late July. Frontier, a rural LEC owned by Citizens Communications, tested Catena's CNX-5 Broadband ADSL system earlier this summer and is deploying the equipment commercially in markets in the Northeast.

Catena officials said they expect to make several more announcements in the coming months.

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