Orckit Expands Sideways

Why has Orckit just signed a large contract with US giant GTE for the sale of ADSL technology modems? Initial cracks in the wall of silence surrounding Orckit.

Even Orckits win in the large tender of the US telephone company GTE, one of the eight largest telephone companies in the world, did not persuade company president Yitzhak Tamir to grant an open, on the record, press interview. However, cracks can be seen in the shrouds hiding the company from the media, contributing perhaps to the recognition that the companys most precious asset is its workers, and it cannot hurt if more is known about them.

Orckit was established in 1990 by Military Intelligence electronic unit 8200 graduates Eric Paneth and Yitzhak Tamir. The unit has provided Israeli high-tech a significant proportion of its engineers and managers. Paneth was commander of the unit, replacing Zohar Zisappel, chairman of the RAD-Bynet group.

Orckit was initially a sub-contractor in the wireless field for US communications companies. In 1993, the company started developing components (in fact modems, minus the dialing element) to upgrade the copper lines to telephone companies customers, and became one of the major players in the world in the field of Digital Subscriber Line (DSL).

The need for data and multimedia transmission and rapid connectivity to the Internet soared, and anyone engaged in the development of technologies capable of providing copper lines with broadband transmission capabilities became very much in demand in the international communications market.

If until then the only way to increase the communication capacity had been to increase the number of lines or to compress the data transmitted onto a pair of copper wires to facilitate larger traffic movement (prominent in this field too are Israeli companies ECI Telecom, Tadiran Telecommunications and Teledata), DSL offered ways of widening the bottleneck of copper lines, enabling the bandwidth to be increased, without changing the infrastructure connecting the end user.

First to be developed was the HDSL standard, which permitted data transmission on a two mbps bandwidth, to a distance of 4 kilometer from the exchange, via two pairs of regular copper wires, by installing modems both in the exchange and at the end users side, the data being transmitted without dialing.

The principle is exploitation of 50% of the pair of copper wires theoretical capacity, by arranging the transmitted data in a certain manner. The development utilized the existing service, and marketing could therefore start immediately development was completed. HDSL technology using regular copper wires is less expensive than point-to-point lines, and some contend it is more reliable. ADSL and VDSL standards were developed afterwards.

HDSL is regarded as Orckits less innovative product, compared to the eight mbps of ADSL, and the 52 mbps of VDSL. The market is growing at a rate of 30% annually, which makes its economic potential enormous.

One of the contributors to the new standard is Israeli company MetaLink, which also develops DSL chips. One of the companys shareholders is Zohar Zisappel. The technology is more advanced from the point of view of the number of error corrections, and is currently developed by two entities: a joint development of Orckit and US Rockwell (on chips) and Fujitsu USA (on the system), and a joint development of LevelOne and US Pairgain Technologies.

The new chips will revolutionize the market: the cost of equipment will be halved and the market will greatly expand. Orckit believes that the big breakthrough will occur in the US. HDSL will also increase the level of integration: more modems can be installed on one exchange board, which will lead to savings in the internal area of the exchange, and it will be possible to integrate it with transmission technologies such as SDH and Sonet. The international market for HDSL currently stands at $500 million per annum, mostly in the US. The leading company in this field is Pairgain Technologies, selling $300 million per annum.

In Israel, Orckits competitors are ECI Telecom and Tadiran Telecommunications. ECI is directing ever increasing resources to this field, whereas Tadiran is fading out. Second generation development products are modems based on the ADSL standard, and are capable of transmitting multimedia broadcasts on telephone lines at 8 mbps or 4 video channels on the downstream, and 640 kbps on the upstream, by the consumer, to a distance of 2.5 kilometers. ADSL technology utilizes 85% of the theoretical capacity of copper wires, compared to 50% exploitation in HDSL technology.

The products immediate application should have been video-on-demand home service (VOD), drawing video films and programs to the customers home via the regular copper wire telephone system infrastructure. However, VOD has now become second fiddle to ADSL. The application now in demand is high speed Internet and data files traffic, "FastInternet".

It is, in fact, the telephone companies answer to the world of cable and satellite broadcasting cable-modems. The vision is for HDSL and ADSL cards to be automatically installed in PCs.

Orckits contract with GTE is the second of its kind in the world for the supply of ADSL modems. The first contract was announced by US West, which chose the product of NetSpeed, the company Cisco recently purchased.

The question remains, why, at the beginning of 98, has ADSL development accelerated? Orckit managers have two explanations:

  1. The cable-modem market has gained force.

  2. Intel, Microsoft and Compaq have jumped on the ADSL bandwagon.

At the end of 97, 100,000 modems for cables operated in the US, while only 4,000 ADSL modems were in operation, as part of a trial run. In the wake of large competition in fast access to the Internet, telephony companies began to realize they were chasing after the cable-modem bandwagon which was liable to escape them by going to the Internet, together with the customers.

ADSL is regarded as a crazy technology. It was promoted by several professors at Stanford University, who set up a company called MT, and pushed the technology standard to a level difficult to maintain. In the meantime, only five companies maintained the standard: MT, Orckit, Pairgain, Alectel and Aware. None of the products is compatible with the others.

Therefore, Intel, Microsoft and Compaq intervened to re-define a new, simpler standard, which would enable them all to work with one another. In recent months work has been in progress on the application of a UAWG standard (Universal ADSL Work Group). The three companies are exerting pressure, and work is progressing rapidly.

Outside the US, there are tenders for ADSL commercial service in Germany, France, Sweden and Italy. Bezeq also plans shortly to publish a tender for a trial run of 10,000 lines.

The next stage is VDSL technology. This system uses optic fibers which convey information through light pulses either in the street, or the basement of skyscrapers, from where the data is transmitted to the user via regular copper wires. It differs in this way from HDSl and ADSL, which are based on direct transmission from the exchange to the customer.

VDSL bandwidth is 52 mbps. The technology enables 26 video channels to be delivered to homes, via regular telephone infrastructure.

To date, Orckit is the only company throughout the world which has an operational VDSL product, and it is being tested in ten companies, among them Deutsche Telekom, France Telecom, BT, Bell Canada, NTT of Japan, and Telecom Korea. At the end of 97, Orckit and Siemens of Germany signed a joint development, manufacturing and marketing agreement for VDSL systems. Orckit believes the trial runs on VDSL led to the contract with GTE.

Three companies around the world are developing VDSL chips, and two of them are Israeli. The first is Orckit (joint development with US company Harris, which also sells the chips), the second MetaLink and the third Broadcom, issued last week on the US stock exchange. The share price soared from $12 to $54.

Orckit engages in developing products that require much patience and perseverance by company personnel. Investors also need faith and patience. In October 95, the company presented a commercial HDSL product and an ADSL product in initial trial run stages at a Telecom exhibition in Geneva, and only now have they reached the commercial stage. Each product requires years of work until it is ready to market commercially, and the market is ready to absorb it. A staff of thirty is currently working on the VDSL product, and it is estimated that the market boom will occur only in the year 2000. In the meantime, $3-$4 million are spent every year on R&D.

Published by Israel's Business Arena April 28, 1998

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