Acme Packet, the iPhone 5, and the End of Telecom
How much is the iPhone 5 affecting tech infrastructure businesses? Quite a bit, as it turns out. To see what the global impact of millions of new devices coming onto 4G LTE networks is, it’s useful to take a look at a company like Acme Packet. You know, just another Boston-area tech firm with a billion-dollar market cap (and pushing 900 employees).
Acme Packet (NASDAQ: APKT), the Bedford, MA-based Internet Protocol networking company, has been on a rollercoaster ride over its 12 years. Founded in 2000 by Andy Ory and Patrick MeLampy, the firm survived the tech bubble and went public in 2006, before its stock price fell to earth during the financial crisis of late 2008-09. From a low of around $4 a share, its stock then climbed to over $70 in the spring of 2011. Since then, however, the price has fallen steadily again, to less than $20 since this summer.
The company’s future rests on delivering networking technology that helps mobile operators, Internet service providers, and enterprises handle communications in the cloud—voice and video over IP, as well as other services—more securely and efficiently. And that’s where the iPhone 5, and other devices like it, come into play.
I recently sat down with Ory and MeLampy (pictured at left) at company headquarters in Bedford, MA. They updated me on Acme Packet’s strategy in the mobile and enterprise sectors. But the discussion also led us to some much bigger issues—things like the decline of Europe and rise of Asia in telecom manufacturing, the shifting role of wireless carriers in the tech ecosystem, and the very future of Internet communications and telecom.
That’s pretty heavy stuff, but Ory, Acme Packet’s CEO, starts off with a simple statement: “The two biggest things that have happened in our lives, from any type of communications perspective, are the Internet and the mobile phone,” he says. “Apple’s iPhone 5, and LTE in general, represents the true convergence of those two trends. I think that’s going to be very, very profound. It’s going to change the communications landscape globally for the service providers and for the enterprise.”
Why is that? “Architectures and business models change when you hit the Internet,” Ory says. “So I think you’re going to see the largest communications service providers in the world undergo transformations of architectures, technologies, business models, relationships with customers, and brand. We talk about it as the end of telecommunications and the rise of IP-communication service providers—and they’re all going to be cloud providers.”
In other words, Ory sees wireless carriers changing their entire network infrastructure over to IP-based technologies—which are, of course, what Acme Packet sells, in the form of “session border controllers” that sit at the edges of private networks to reorganize data packets as they move around the Internet. The idea behind a session-based approach is to create semi-permanent paths to help smooth IP communications for things like multimedia; the technology can be of use both to service providers and to big enterprises that send a lot of data around the world. “We’re engaged in 25 to 30 different carrier discussions about what they’re going to do with LTE. You will see a number of them launch in 2013,” Ory says.
MeLampy, the company’s chief technology officer, adds that the world’s 5.9 billion mobile phones currently use different networks and radio equipment to handle voice and data. That’s expensive and inefficient. “Long term, LTE will prevail,” he says. “Carriers need to cost their costs. LTE is dramatically simpler and cheaper to run.”
Once the carriers switch to voice over LTE (from GSM, say) and unify their infrastructure for voice and data, MeLampy says, “That builds a giant network of session-oriented networking devices. We think that network of connectivity is going to be used for more and more. There’s no other option I can see as a technologist. I just hope I’m young enough to enjoy the fruits of it.”
He’s talking about the fact that in telecom, things move slowly. “When we started the business 12 years ago, we thought it would happen in the next three years,” MeLampy quips.
So, Acme Packet has been forced to expand its customer base beyond carriers and into enterprises, which made up only 3 percent of its bookings in 2008, but are now about a third of the company’s business, Ory says. Wireless carriers “are relatively few and tend to be very cyclic,” he says. “A business that is both selling to service providers and to enterprises, where there’s synergy between those two groups, is a much more sustainable business and a more valuable business.”
On the enterprise front, Acme Packet is looking to ride the wave of BYOD—bring your own device—in the workplace. “This is the last year people buy desk phones,” Ory says. “Phones come from wireless carriers,” and those carriers “are going to want to connect directly to the large enterprises.” Acme Packet’s role, then, is to provide security and session management for networked devices in big-company environments. (Its biggest competitor in enterprise is Cisco.)
In other words, the big idea Ory and MeLampy had 12 years ago could finally be coming to fruition, thanks to a trigger in the form of LTE and the iPhone 5.
But all of this raises some bigger issues. For one thing, Acme Packet’s founders have really been talking about the broader future of the Internet all along. As MeLampy explains, the Internet as it exists today runs on packets of data that are largely independent and go their own ways around the network before being reassembled at a destination address. But there are big questions around identity, security, and trust with this approach, especially with the addition of so many mobile, networked devices.
“We think the Internet is going to switch to a session orientation for valuable things like communication and trusted exchanges of transactions. That will require an end-to-end signaling system,” MeLampy says. “It could be SIP [the Session Initiation Protocol that Acme Packet is based on], it could be something else. I don’t think you can do it on a packet-by-packet basis.” Furthermore, people using voice over LTE from carriers “may start using it for other sessions that need identity and trust,” he says. “So the session orientation might become a bigger part of the Internet than people think.” At the same time, he emphasizes, “We do what we do without any change to the Internet.”
Another big shift has to do with the center of power in mobile infrastructure and equipment. “I actually see the demise of the European network equipment vendors,” Ory says. “We’re seeing more valuable business relationships in Asia-Pac. The center of gravity is moving away from Europe and to Asia for large communication manufacturers.” (European carriers are still big customers for Acme Packet, as noted in this Seeking Alpha report.)
This could have a major impact on the industry—and the world’s economies. “When Pat and I started the business 12 years ago, the people you wanted to partner with were Alcatel, Lucent, Ericsson, Nokia, Siemens,” he says. But now it’s large Asian companies like NEC, Samsung, Huawei, and ZTE.
Interestingly, those last two companies were singled out as national security threats by the U.S. government last month. And Huawei, now the world’s largest telecom equipment manufacturer, actually competes with Acme Packet for carrier business. Meanwhile, Chelmsford, MA-based Sycamore Networks, a former high-flyer that competed with some of the above providers, is shutting down.
“I don’t know what it’s going to do to Europe over the next 10, 20 years, but those companies employ a lot of people. They do a lot of R&D, and that’s where the spinoffs would come from,” Ory says. “As those companies start to contract and as the center of power moves into Asia, that’s going to have longer-term ramifications.”
Looking to the future, he says, “We’ve realigned in the sense that we’ve hired some significant business development resources in Asia-Pac. I think we’re going to move more resources over there.”