GILDER October 2006 / Vol. XI No. 10 TECHNOLOGY Telecosmic Musings at the REPORT Marconi Gala o coarse and kludgey technologies and mediocre or mean people routinely triumph over good ones? Citing Dthe traps of “lock-in,” the monopoly loops of positive feedback, and the competitive barriers of “first mover advantage,” wiseacres may have reason to disparage as quaint and credulous the Listening at idea that in business, technology and life, it is good that prevails. Setting aside for Dennis Prager the issue of why bad things happen to Telecosm to the virtuous people and why evil sometimes prospers everywhere but at Google (GOOG), the technology argument usually revolves around such alleged exam- speakers from ples of triumphal techno-trash as the Qwerty keyboard, the VHS video, the Microsoft (MSFT) OS, and Intel (INTC) x86 microprocessor instruction set. Essex, Intel, and All are deemed to have prevailed over more elegant and superior alternatives and seem to show that “dumb and dirty” beats paradigmatic elegance every time. Luxtera, we learned As apostles of information theorist Claude Shannon, we espouse the paradig- matic elegance of “low and slow” (slow and low-powered parallelism beats fast that optics will (CONTINUED ON PAGE 3) ultimately win in FEATURED COMPANY: EZchip (LNOP) Following last September’s surprise sales slide to $687 thousand from $2 million the previous quar- all communications ter, EZchip (LNOP) has been building momentum, and the window of opportunity to buy at startup prices may be drawing to a close. EZ’s network processors or NPUs—programmable chips that channels, from the process data, voice, and video packets at high speed—should gradually find their way into Ethernet switches and routers across the network, especially in the metro regions, as triple-play (data, voice, inter-chip to the video) applications become ubiquitous. The last of the score or more NPU startups are now falling before EZ’s highly integrated NP-2 Internet. chip which is available in three interchangeable models and includes all the major line-card functions such as wirespeed 10 Gigabit per second (or 5 Gbps) processing, classification search engines, traffic managers, and Ethernet ports. Traffic managers (TMs) shape and schedule packets, and integrated NPU/TM chips are becoming ubiquitous. The networking industry is now as innovative as the PC industry was, constantly changing and creating new products. EZchip has survived because it boasts the most flexible and most highly inte- Inside: grated chips, becoming a general purpose solution to the network market much as the MPU (micro- processor) was to the PC. Full programmability enables systems houses such as Juniper (JNPR) to ■ Impending perils differentiate their products from competing vendors, to adapt quickly and economically to evolving ■ Hollowing out the router standards, and to fuel the proprietary network flavors being deployed by service providers. Now lost inside Broadcom (BRCM) is Sandburst’s less flexible 10 Gbps processor with a sepa- ■ EZ everywhere rate TM chip. Also languishing is hardwired Greenfield Networks, which lost a prior win at Cisco ■ Low and slow (CSCO) to EZ. Remaining with just a few design wins is Xelerated, whose faster chips (20 Gbps) ■ Wide and weak are less flexible and less integrated—notably absent is a TM. Though not likely a long-term threat, Xelerated may be able to pressure EZ on prices until it reaches its final resting place. By contrast, ■ What's happening at Ikanos EZ has now surpassed 90 design wins, including significant potential at four of the five top systems vendors. The Israeli’s are confident they will eventually win over holdout Alcatel (ALA). Impending perils 10 percent of exception traffic, but by ASSPs (application-specific stan- The final and most serious opposition to EZchip by far comes from dard products) from the likes of Broadcom. (An ASSP is essentially an homegrown NPUs, such as Alcatel’s, Redback’s (RBAK) internal solution ASIC—application-specific integrated circuit—sold to more than one developed through its Siara acquisition of several years ago, and Cisco’s company.) Toaster. But internal solutions are costly and require expertise many sys- Overlooked by Schmitt is that with every turn of the technology tems houses don’t have. Nonetheless, EZ’s ascendance over in-house ratchet, the network processor market changes. So much so, in fact, solutions will be hard won. It’s tough to get a big company to bet a billion that many in Silicon Valley believe that the demands are too exacting dollar product on a small startup. EZ has to assure prospective custom- and specialized to support a general purpose NPU comparable to the ers that it’s not going to succumb to growing pains and that its supply of Pentium. Thus, they disparage EZchip using precisely the opposite argu- NPUs will not get swallowed up by a Cisco. ment employed by Schmitt. These VCs and tech gurus expect the market That could be difficult to do without a strategic partner. Now that to fragment into special purpose devices from low-end access products Broadcom has absorbed Sandburst, Marvell (MRVL) becomes the (Wintegra, Applied Micro/AMCC) to high-end coprocessors (Cavium, leading candidate to fill that role. Based on EZ’s recent progress inside Raza Micro, NetLogic/NETL), and specialized hardwired Ethernet Cisco and considering that Marvell has a design center down the street switches (Broadcom, Marvell). from EZchip in Israel, we suspect that such a partnership may be in the Entirely hardwired, ASICs must get it right in every detail the first works. Because Marvell is one of Taiwan Semiconductor’s (TSM) larg- time or require a dreaded “respin,” with a renewed gouge of nonrecur- est customers, such an alliance would also help tiny EZ to get the giant ring expenses. While an ASIC might gather enough volume in an all- fab’s attention as sales surge. purpose Ethernet switch, with formulaic functions, it is unlikely to fill all But an alliance with Marvell or anyone else would come with strings the multifarious slots, blades, and interfaces on the rocky and protean attached, which we would examine closely. Other hurdles, both perceived shores of networks, where legacies cling and novelties proliferate with and real, remain in EZ’s way, and may put pressure on the stock price the favored protocol of the month contests or with the new virus remedy for several more quarters. or encapsulation scheme. For instance, to finance its sudden growth, EZ recently began draw- The folks at Greenfield, fresh from Cisco, were sure they had the ing from a $6 million line of credit. But EZ may need even more cash. To formula for the perfect hardwired Etherswitch. But Greenfield made not a pave the way for greater liquidity and institutional ownership, LanOptics dent as EZ continued its ascent past 90 design wins, beginning with the may soon complete a final swap of equity for the remaining EZ shares. NP-1, a fully-programmable, 10 Gbps packet processor with integrated (LanOptics currently holds 60.4 percent of EZchip, its only asset.) It search engine, which began shipping two years ago. Commercial ship- would also be a convenient time for the company to do a secondary ments of the NP-2 line, which adds traffic management and Ethernet offering. This would be good news. As of June, there was no long-term media access controllers (MACs) to the chip, began during the just debt on the balance sheet and net cash was $14.5 million, down from completed third quarter. The NP-3, a 90 nanometer version of NP-2, is $18.9 million in the year-ago quarter. Thus, after burning an average currently in design and is expected to sample next spring. On its heels of just $1.1 million per quarter over the past year, the sudden thirst for will be the NP-4, which will integrate the entire line card including the green liquid portends a coming boom. But beware: markets often view physical layer and fabric interface. Ultimately, EZ should be able to ease financings as negatives. up market into various programmable layer 4–7 applications. Also, it remains to be seen if EZ’s 95 employees, fully 70 of them in R&D, will be able to transition from thinking like a private startup to EZ everywhere running like a public company handling quarterly calls, GAAP reporting, Linley Group sees NPU sales reaching $700 million in 2008, includ- and other baggage that comes with public status. Furthermore, manage- ing both internal and merchant products. Growing to a third of the market ment hasn’t yet figured out how to forecast revenue—not surprising from $10 million in 2005 will be high-speed NPUs. These chips mainly considering that EZ’s customers are still trying to figure it out as well. target metro Ethernet to enable the triple-play networks that EZ is also Combine the forecasting challenges with both the likely sales lumpiness targeting. of the initial ramp and the liquidity draw, and we are likely to have at least But don’t count too much on these estimates. You cannot predict one “disappointing” report over the next two quarters due to a customer future markets by extrapolating current sales or even by surveying inventory correction, balance sheet scare, or margin slip. intended purchases by current buyers. The deployment of broadband and high definition everywhere is accelerating as today’s world of tele- Who will hollow out the router? vision and data moves toward life after television, where video is just Such a breather might appear to confirm Andrew Schmitt’s recent another form of data on the network. Every node in the enterprise and response to Telecosm Ten’s net processor session.