On Red Sea waves

"I was always taught to work modestly. That is why these offices are not ostentatious, we have no office in the US and have only two marketing people," says Red-C Optical Networking founder, COO and CFO Yossi Boker. Boker's motto may be old, but as it's accompanied by revenue, it would appear that he's onto something.

In the early 1990s, after completing his military service with the IDF Advocate General, Boker spent six years as a senior executive at Hapoalim Investments, where he was member of the board at Teledata (later acquired by ADC Telecommunications (Nasdaq:ADCT)) and other companies. The experience gave him on-hands knowledge of what he calls, "The range of opportunities and problems of high-tech companies."

In 1997, Boker resigned from Hapoalim Investments; "I was attending meetings with well-respected gentlemen and bad catering, but I wanted to work in the field." He took up the post of director of business development at El-Op Electro-Optics Industries, where he was responsible for converting El-Op's military technologies for civilian uses. During his three years at El-Op, Boker mainly dealt with closing unsuccessful ventures, but he also managed to get involved in the business and financial aspects of a project that in time became ImageSat International, the company that operates the Eros satellite.

Funding the dream

The project that attracted Boker’s attention was Dr. Uri Ghera's venture at the El-Op optical laboratory. El-Op focused on the technology’s military applications, but the MAGNET program (Generic Pre-competitive Technologies and R&D), founded in the 1990s, was also interested in its possible applications for broadband communications. In mid-1998, contact was made with Chromatis Networks founders Orni Petruschka and Rafi Gidron, who were looking for someone to build optical components for their planned metro network system. They found the people they were looking for at El-Op. Chromatis paid for components developed by El-Op’s optical division, with more orders later coming from ECI Telecom’s (Nasdaq: ECIL) LightScape division.

“In late 1999, I went to El-Op’s management and told them that we were taking the business to found a start-up,” relates Boker. El-Op provided the initial $500,000, receiving 36.5% of the new company, while its ten employees went out to drum up more funding.

MRV Communications (Nasdsaq:MRVC) chairman Shlomo Margalit and CEO Noam Lotan heard about the new venture, now called Red-C, and - in the middle of a trip to Europe - popped over for a quick Saturday night meeting. They decided to invest $11 million ($6 million in cash and $5 million in shares) in the company for a 37.5% stake. Red-C sold the shares at twice the price they received them, thereby generating a $16 million in total seed capital.

Boker says, “We have sufficient capital to last through the end of 2003, so we’re not looking for additional investment. However, investors sometimes come to us on their own initiative.”

At this point, Red-C realized they had to make their technology into a viable commercial product. They decided to focus on amplifiers for optical networks. They believed the project was a physical challenge, and there were few competitors in the field at the time.

Optical networks require amplifiers because the optical signals degrade over distance. The challenge was to amplify the signal while eliminating accompanying noise.

DWDM (Dense Wavelength Division Multiplexer) networks can simultaneously transmit several wavelengths, but require a different power for each wavelength to prevent loss of information from various physical effects. Correcting this distortion is called “flatness”, without which the optical signal noise ratio (OSNR) also becomes distorted. The OSNR is directly proportional to transmission quality and network reliability. The amplifiers themselves directly contribute to OSNR distortion; the solution to the problem is the installation of regenerators throughout the network.

Most amplifiers currently on the market are considered standard – which can defined as the capacity to compensate for the distortion in the arriving wavelength, and correcting it before sending it on. The problem with standard amplifiers is that while compensation for signal loss can be preprogrammed, it means knowing the precise compensation needed in advance.

Consequently, network operators need inventories of different amplifiers, making the whole thing uneconomical. Moreover, there are always unpredictable factors affecting the wavelengths, such as extreme temperatures, aging and work on the fiber optic cables, that create new unknowns about the compensation the standard amplifiers have to deal with. The problem is further complicated in a network, since any distortion in one amplifier spreads throughout the network in an unpredictable, chaotic manner.

Two dynamic marketers

The solution is dynamic amplifiers: instead of handling pinpoint compensation of a precisely defined amount, dynamic amplifiers compensate across a range of distortions in the incoming signal.

There are two types of dynamic amplifiers. One is a Variable Optical Attenuator (VOA), intended for use by existing standard amplifiers. VOA compensates across of range of distortions before they reach the amplifier, but they directly affect the OSNR, requiring the installation of more regenerators in the network.

The second type inserts a VOA into the amplifier itself, which Boker claims causes minimal degradation of the OSNR. Red-C’s amplifiers are of this type. Boker says they do not use exotic, costly components, thereby lowering the price of amplification in optical networks. Each amplifier costs $15,000.

Development of the amplifier was completed early this year, and it is now being tested by what Boker calls, “Israel’s largest communications equipment manufacturer.” Red-C already has several Israeli customers. Tests are also being conducted by major systems providers in the world. The first delivery made this month (“One of world’s largest communications equipment manufacturer”, claims Boker, naturally). Another order is expected soon, and that’s just within Israel. Red-C has only two marketing staff; Boker says, “We’ll set up a US infrastructure only when the orders backlog justifies it.”

While the dynamic amplifiers can be installed in access, long-haul and metro networks, Red-C is concentrating on the metro and long-haul markets.

Made in Israel

Red-C also develops Raman smart amplifiers. Unlike standard amplifiers, which amplify signals internally by acting on a fiber optic coil, the Raman amplifier acts similarly to an aerofoil. It launches photons in the opposite direction of the arriving information, lifting the incoming weakening signal. Red-C’s development is designed to dynamically adapt amplifiers’ performance to the optic fiber’s condition.

The Raman amplifier is more expensive than standard amplifiers, and their performance is weaker, but their advantage lies in their lower OSNR. In long-haul networks, where great distances makes maintaining amplifiers too expensive, Raman amplifiers can be installed adjacent to amplification points, thereby providing supplementary amplification.

Red-C’s competitors are few, but well-known, including Corning (NYSE:GLW), JDS Uniphase (Nasdaq:JDSU), Nortel Networks (NYSE:NT) and US start-up Onetta. Onetta’s shareholders include Sequoia Capital, Matrix Partners, HarbourVest Partners, JP Morgan Chase and Co. and Sumitomo Corporation, which have injected $68 million into the company.

“Some of these companies already have products on the market, but our results are better. Corning is the most serious competitor, but we’ve outperformed them in tests to date,” says Boker.

Red-C estimates it can produce 10,000 amplifiers a year, which means tens of millions of dollars in potential sales. Boker claims the amplifiers’ complexity means the company will have to make them themselves, although he does not rule out future cooperation with a specialist company.

Published by Globes [online] - www.globes.co.il - on July 17, 2002