Israeli kit makers must focus as consolidation bitesSeptember 3, 2009 Total Telecom
By Roy Rubenstein
Consolidation, fierce competition and a rapidly changing industry have all left their mark on Israel's telecoms vendors. Established firms and start-ups alike have been forced to become smarter in identifying market opportunities to complement noted strengths in innovation.
Yet even becoming market savvy, challenges remain.
"The Israeli telecom industry has changed substantially in the last decade," says Eyal Kishon, managing partner at Genesis Partners Venture Capital. "The global market has seen a lot of consolidation and it is affecting the Israeli market and start-ups."
In 2000 Israel's fixed and wireless equipment vendors developed products addressing the general market. Now Israeli telecoms firms must identify opportunities far more carefully, says Kishon: "They have to do something that the big players can't do, or are not able to do [as their focus is elsewhere]."
Israel's established telecoms vendors include Amdocs, Comverse, Check Point Software Technologies, ECI Telecom and the RAD Group. In April one of the RAD companies, Radware, acquired Nortel's Layer 4 to 7 application delivery business.
And while telecoms may have dropped in the technology sector pecking order of the venture capital community, Israel still boasts notable start-ups. They include handset maker Modu, mobile content adaptation firm Infogin, and chips firms Percello, which is addressing femtocells, and Siano Mobile Silicon, a mobile TV device maker.
"Israel is disproportionately successful in telecom," says Peter Mottishaw, principal analyst, global telecoms software at Analysys Mason. Israeli firms have a strong technology focus coupled with a good understanding of market opportunities, he says: "The companies I see are very pragmatic with a good combination of skills."
Identifying market niches and offering differentiation is not confined to start-ups. Established players such as ECI Telecom and Lynx Photonic Networks have had to adapt their strategies in recent years given industry consolidation and competition made fiercer with the rise of Chinese players Huawei and ZTE.
"There is a new landscape in telecom," says Daniel Tal, CEO of Lynx Photonic Networks.
He highlights the disruptive effect of the two leading Chinese vendors which has accelerated vendor mergers and Nortel's demise.
ECI Telecom, which went private in 2007, lacks the scale of the leading system vendors, and in addition it is not blessed with a large local market. Indeed, Alcatel-Lucent, Ericsson and Nokia Siemens Network are the main suppliers for Israel's incumbent and mobile operators. Moreover, there are certain countries in places like South-East Asia where ECI is excluded as a supplier because it is an Israeli firm.
"We are so much at a disadvantage that we need to excel, to redefine ourselves and be very flexible," says Aviel Tenenbaum, ECI's head of global sales and marketing. "We must be as innovative as anyone else and our costs cannot be any higher."
Lynx Photonic Networks was one of over a dozen promising Israeli optical component companies that came to market during the 1999-2000 optical boom. However, after the telecoms downturn the company realised it had to change direction due to the long time-to-revenues for components. Lynx says it takes two to three years from developing an optical component to getting revenues: first, the device must be designed into telecoms equipment and then the equipment must be qualified and trialled before operators deploy in volume.
Accordingly, Lynx become a systems vendor, using its technology as the basis of its optical switch and protection products supplied to carriers.
"If I characterise what the [telecom] crisis has done, it has shifted the thinking towards: 'hear what is required, make sure the requirement is not too exposed, and try to be unique enough so as not to compete with the major players'," says Tal.
Kishon believes Israeli firms' strengths are identifying market niches and addressing them using small, multi-disciplinary teams. Such teams comprise systems, software, algorithms and chip design expertise and are typically smaller than found in companies elsewhere.
Modu with its staff of 200 — 20 hardware and 140 software engineers — is one such example.
"Modu is an outlier; by any metric it is not typical," says Kishon, whose firm has invested in the start-up. "Any other firm [tackling the handset market] would require 2,000 [staff]."
ECI, competing in the mainstream equipment markets of access, transport and Ethernet router/switches, must also differentiate itself. A key part of ECI's business strategy is focused on developing core relationships with its customers.
"We look to be an integral part of their business," says Tenenbaum. "If you fight just box-to-box, the winning ratio is much lower."
For example, in a discussion with a European operator ECI discovered that the main hurdle to faster deployment was not technical but licences. "We ended up in a long brainstorming session as to how to get licences granted," says Tenenbaum.
Other examples include ECI winning an IP networking contract with Togo Telecom that includes high-speed Internet services such as IPTV and VoIP. ECI brought in a consultant, formerly a chief marketing manager for a leading Israeli mobile operator, to help in packaging and pricing services for the operator.
ECI also addressed repeated failures at an Indian operator's network operations centre (NOC). The problem was the result of the NOC being located next to a parking lot with associated gases and particulates. ECI improved the circulation and coated its own systems' cards, a solution it is now using for other emerging markets.
Laura Howard, chief marketing officer at ECI, views emerging markets "as a growth engine and a new frontier for telecoms".
Tenenbaum claims ECI is carrying between 30% and 40% of the mobile backbone traffic in India, a market that is adding between 10 million and 15 million mobile subscribers a month. "Show me another market other than China that has the growth of a Bharti Airtel or a Vodafone [Essar]," he says.
One Israeli firm that is competing head-on with larger competitors, in the huge mobile handset market, is Modu. The start-up has developed a modular phone weighing only 40 grams. The novelty of the handset is not its minute size, but rather its changing functionality depending on the various 'jackets' it is slipped into. These form-factors turn the module into a music player handset, a mobile Internet device or a digital picture frame that can also act as a hands-free handset using on-screen widgets.
But analysts question whether a late entrant start-up can succeed in such a mature marketplace.
"It is very hard for any company to enter the handset sector," says Oren Raviv, an emerging technologies analyst at IDC. Modu has raised $85 million in funding, he says, "but to penetrate the mobile handset market, you need huge amounts of money".
"The mobile handset market has a high barrier to entry but at $200 billion it is also a huge market," says Dov Moran, CEO of Modu. "There is a place for a new entrant but only if you are innovative and bring something new."
In July Modu shipped its first 2.5G mobile handset to Israeli mobile operator Cellcom, quickly followed by launches in the Philippines and India. It is already working on a 3.5G cellular module to be launched in 2010, aimed at mature handset markets such as Japan.
The ability to adapt and execute is also illustrated by Israeli start-up Percello.
The femtocell chip maker came out of Modem-Art, a 3G UMTS chipset company that was acquired first by Agere Systems in 2005 and then by Infineon Technologies in 2007.
"We had a team of 70 who suddenly had no job," says Yoav Volloch, Percello's vice president of product management.
The design team decided to develop femtocell chips, but could only take half of the former unit, says Volloch. Although it had not been focusing on femtocells, the team managed to produce a product definition within three weeks. "We recognised that if we didn't do something quickly we would be out of a job," he says.
Launched in December 2007, the 30-staff Percello now has HSPA+ femtocell silicon which can support up to 16 users, a download data rate up to 21.6 megabits per second (Mbps) and 5.76 Mbps upload rate.
"We have over five customers... including [U.K. firm] Ubiquisys, while products [using the silicon] are in field trials," says Volloch.
Another chip company addressing the mobility market is Siano Mobile Silicon. Established in 2004, this start-up is now supplying devices to over 30 companies including handset makers Samsung and Motorola, and netbook suppliers such as Dell.
The firm has two mobile TV product lines: a multi-standard mobile TV chip and one specifically for the Chinese market.
"China Mobile is the number one operator for volumes and every 3G handset must have mobile TV," says Ronen Jashek, vice president of marketing at Siano.
Yet despite such innovative start-ups, Israel's telecoms industry continues to struggle to grow firms into large-sized telecoms companies. There is still no Israeli Nokia or Cisco Systems.
"I don't think it is an issue nor do I think it desirable," says Kishon, who argues it is better for the economy to have ten Amdocs rather than be dependent on a Nokia.
But others disagree.
Modu's Moran believes Israel's telecoms industry has suffered from having no large company. "Instead of 10 mid-sized companies we get three small ones," he says. His concern is the limited infrastructure that results. "A large company builds an infrastructure of small companies around it. You also get managers at large companies," says Moran.
This is also the view of Vollach. "We would have seen more success [with larger players]," he says.
There is less industry concern with regard to the growth of Israeli Web 2.0 start-ups.
"Maybe there is a trend within Israel's high-tech of people going from one sub-market to another, like telecoms to IT or telecoms to Web firms," says Jashek. But he does not believe this is starving telecoms of entrepreneurial talent or potential engineers with systems or hardware expertise.
"It is easier for a software-based start-up," says IDC's Raviv, compared to a traditional telecoms start-up where the barrier to market entry is higher. That helps explains why software-based companies outnumber infrastructure ones by three to one, he says.
Modu's Moran sounds a note of caution for the future though.
"Israel is by nature innovative, but the future is unclear," he says. He believes the outlook for telecoms vendors is in the balance: the dangers of a limited infrastructure versus Israeli entrepreneurship. "I sincerely hope the second wins through," he says.