Calix hasn’t escaped the speculation generated by the current rash of equipment vendor merger and acquisition activity. A modest-sized access equipment supplier, Calix has a reseller agreement with Nortel Networks, which left the access space years ago. And Optical Solutions, which Calix acquired last year, reportedly partnered with Cisco Systems to pursue Bell broadband passive optical networking contracts in 2003. Calix’s Chief Executive Officer Carl Russo is a former Cisco man himself, having once famously sold Cerent Networks to Cisco for $7 billion. Russo spoke with Telephony’s Ed Gubbins about vendor consolidation, access network economics and the effect of having hit a concrete wall at 145 miles per hour.

On equipment vendor mergers and acquisitions: What you see is peer-group consolidation. It’s not people acquiring growth engines as much as consolidating big engines. To the extent we do any acquisitions at all, we’re going to focus on something that is strategically aligned with our goals and is high-growth. We have a tremendous history of acquisition. [Optical Solutions] was privately held but rapidly growing in the [fiber-to-the-premises] space and had hammered out a heck of a footprint. Our goal is to accelerate the rate of innovation, so we won’t be doing many acquisitions. To the extent we do them, they’ll be done to further that acceleration of innovation. I think that’s a very different approach than what you might see the larger companies doing.

On becoming an end-to-end network supplier: We’re totally focused on access infrastructure and nothing else. We’re not going to go take on an end-to-end challenge. Your strategy has to start with who you are. We’re not a $10-billion company. We’re a rapidly growing, privately held company. We believe that, given the rapid change in consumer and business demand for services, the access network will have to go through a tremendous amount of change over the next two decades.

On Calix’s partnership with Nortel Networks: We have a reseller arrangement with Nortel. In certain circumstances, Nortel will serve as the reselling partner. We’ve achieved a number of customers to date jointly. Our relationship remains as it has been. We interface with Nortel frequently. We think it’s a good relationship. How it may change or morph over time, I don’t know. We’re certainly open to having the relationship continue in some form. That’s a Nortel decision and our customers’ decision.

On the prediction last February from Kevin Walsh, Calix's vice president of marketing, that the company might outgrow its Nortel partnership next year: Part of what happened there was that Nortel announced they were going to enter into a joint venture with Huawei Technologies. They’ve announced in recent weeks that they’re not going to go forward with that. We may or may not believe ourselves to be strong enough to not need the safety net of a Nortel. But it’s not our perception that matters; it’s our customers’ perception. If customers are desirous of moving to a direct relationship, then that’s what we’ll accommodate. I think Nortel is continuing to look at its strategic options. I think you did an interview with George Riedel recently where you talked about strategy and where they’re going. Nortel’s strategy will be part of the decision process, and our customers’ desire will be part of the decision process. After those two things, I think what we do will be very clear.

On Siemens: The relationship we had with Siemens was an interoperability relationship, where we would co-market in appropriate places. It was nothing more than a statement of interoperability and that if a customer wants to buy an [optical line terminal (OLT)] from Calix and an [optical network terminal (ONT)] from Siemens, we’re more than happy to bring that solution to bear. We continue to interoperate with Siemens products. Siemens has been through a pretty big reset of their own. Now they’re into a joint venture with Nokia. We have the same interoperability working with Tellabs. The interoperability we worked with Siemens and Tellabs on was their BPON ONTs with our OLT.

On going public: I’ve stated on numerous occasions that we’re happy to be private and remain so. There are two things that would cause us to look at the public markets. One is if we wanted to do an acquisition that required public capital. So far we haven’t run into that situation, but I could certainly think about some day in the future when there’s something we wanted to acquire that we needed public currency for. As the market heats up, you probably go public almost from a defensive standpoint. You don’t want to have a lesser company using the public markets, which are now all of a sudden hot, and go around you. Those are the two reasons we would look at going public. I don’t know that the M&A going on today measurably changes that in any way.

On Sprint, a major Calix customer, becoming Embarq: My speculation is that Embarq, now as a standalone entity, will probably establish their strategy and increase their investment in the wireline business going forward. I think it gives them clarity. So we’re very excited by our relationship with Windstream. I meant to say, “Embarq, and by the way it would be the same for Windstream.” Somehow I left out half the sentence in there because one of the neurons in my brain collapsed.

On FTTP deployment costs: I hear different [vendors] saying they’ve hammered the price of the box down lower. While that is certainly true, that’s not what we’re focused on. To us that’s an ante to the game. If we’re not constantly lowering the first cost of our product, we’re in the wrong business. We are focused on the installed capex of our customers. Our customers’ CFOs don’t just capitalize the products they buy; they capitalize the labor used to install it, all the ancillary site preparation that goes on around it-- that all gets capitalized and depreciated. We’re focused on trying to innovate around our product design to try to lower the total cost of that installation. We’re trying to lower the cost of the solution, not just the box. You’re going to lower the [cost of the] box as a matter of course. One way you see that is in the 700 series [optical network terminal]. It’s a BPON and GPON ONT on an auto-detect basis. There are a number of innovations inside that product that speak directly to lowering the expense of not only installing and building an FTTP network but lowering the operating expense as well. Let me give you two of them. One is on BPON to GPON. It enables customers to install the ONT irrespective of what the OLT is. They can upgrade the network whenever they choose, without having to go back out to the customer site. Another example is the opto-electronic module is so well designed that, not only doesn’t it need shielding from an EMI standpoint (and virtually every other ONT does), but in addition, it’s a pluggable module. It snaps into the case. That’s important because most ONTs are put on houses at the time of construction. Unfortunately, when they’re a solid unit, you’re installing the ONT, the electronics and everything whether or not you’re going to get the customer. Or you’re not installing it at the time the house is built, which means when you install it, you’ve got to snake wires and pull things to it. You’d like to have the enclosure put on the side of the house and have all the things pull to it but not put the electronics in until the customer moves in and you acquire them. That’s precisely what the 700 series does, and there’s no other ONT like it. You’re dramatically lowering the cost to deploy those services. That has nothing to do with making the ONT $299 instead of $327.

On IPTV deployment challenges: Most of it happens to be in the back office, the billing systems, the [operations support systems] that enable them to provide the service, sign up subscribers for it and bill them. Most of the issues of making the copper go that fast or getting the set-top box to work with the middleware, etc., have all been resolved. We can provide solutions today that are pretty much--I don’t want to say “plug and play,” but they’re a long way away from “plug and pray.” We have over 80 installations.

On the debate over how much bandwidth is enough for residential consumers: It’s the silliest debate I’ve ever heard. You have this uni-dimensional debate: “27 Mb/s is enough.” “No, no, no, it’s got to be 42 Mb/s.” “No, it’s got to be three streams of [high-definition television], and that makes it 41 Mb/s.” “It’s got to be 100 Mb/s.” You hear all these arbitrary numbers. It’s a meaningless debate. The actual calculus that goes on in the discussion is multivariable. Some of the variables are, number one, the quality of your copper plant. Number two, is this brownfield or greenfield? Number three, how much fiber do you have in your network, and how deep does it go? Number four, what’s your soil type? If you’re in Las Vegas and you can stick a butter knife in the ground and trench fiber, that’s one cost. But if you’re on the island of Kauai, and you’re trying to trench fiber through volcanic lava, it’s an entirely different cost. You’ll make different economic decisions based on what the soil type is. Next, who are your competitors and what are their offerings? If you’re dealing with a robust competitor with a big pipe, you have a different equation than if you have little or no competition. It’s always going to be more over time. But the specific answer for any given market at any given time has many variables in it.

On where that leaves consumer demand in the discussion: Customer demand or need is meted at some level by who you’re competing with as a service provider. If your customer’s only service to date is a black-and-white TV with rabbit ears, you might think differently about what your next service is to try to either get them as a customer or keep them as a customer. If [your customer is] sitting in downtown Manhattan with three HDTVs and 43 [personal video recorders] cranked up, those are two very different things. Customers have different levels of options and different levels of sophistication. So customer demand varies depending on where you are. It’s an important factor, but it’s very much meted against competitive forces as well.

On Net neutrality: At the end of day, we consumers will pay for the building of the net, simple as that. All you can choose is your method of payment. We can pay by the bit that we use, by the service we use, we can pay the deliverer of the service, or we can pay the content creator of the service indirectly because the deliverer may charge us that way. We can pay the federal government through taxes to do it. But we’re going to pay. Otherwise it isn’t going to get built. Does anybody debate that? Does anyone think there’s going to be some gift that’s going to miraculously show up from somewhere? If the government’s paying for it, we’re paying for it. So what’s the most efficient mechanism? Just look at a shipping model. If you want to look for a service provider analogy, look at FedEx or UPS. If you have something shipped overnight, do you pay more for that than you pay for something that’s shipped in two days? If you ship something big versus something small, do you pay more? If you ensure it, do you pay more? It’s pretty simple stuff. By the way, if you buy something from Amazon.com and they ship it to you and you don’t pay for Fed Ex, do you think you’re paying for Fed Ex? Sure you are. Maybe they got a better rate. So pick your method of payment. It’s sort of a bastardization of the peer-to-peer debate. Does anyone honestly believe that a service provider is going to turn off a specific service because they can’t extort money from that Web site? Here’s the problem with that: The consumer will find a different way to get to it. Simple as that. I think it’s a relatively simple equation. And I think if you let the market forces work, they will work.

On next month’s San Jose Grand Prix, in which Russo’s team will race: If we don’t win the race, I may go home and cry. It’s the second year of the San Jose Grand Prix. They had 160,000 people out there last year. They’re expecting more this year. We are one of the top three teams in the series. It’s one of 14 races. This season we have four [second-place finishes] and no wins, which is getting old. I don’t drive; I’m merely the owner. There are two people far more qualified and capable than I to drive. I stopped driving when I started here in 2002. I drove for many years, but as Clint Eastwood said, a man’s got to know his limitations. I ran into them. Some of them were concrete. I’ve hit two at various speeds. One was about 117 mph, one was about 145 mph. There are no visible [scars], but the psychological and emotional scars are on display for everyone who works here at Calix.