SOUTHERN CALIFORNIA ENTERPRISE : Firm Holds the Line, Resisting High-Tech Trends

The telecommunications industry often seems like a technological gold rush--a series of scrambles to find riches over the next hill. But a 7-year-old Orange County company has found there’s plenty to be mined from the tailing left behind.

While the rest of the industry chases fiber-optics, wireless communications and other flashy systems of the future, PairGain Technologies Inc. is staking its fortunes on a remnant of the past--the aging network of copper telephone lines.

PairGain, started by a couple of plain-talking engineers from New York City, manufactures electronic boxes that boost the capacity of copper lines so that they function--at least over short distances--like the more powerful fiber lines that whisk voices, data and images along the information superhighway.

Fiber-optic cables already crisscross the country, but for most businesses, the only way to connect to this network is through copper lines that were probably installed when pay-phone calls still cost a nickel.

PairGain’s gadgets, which it sells to telephone companies for about $1,500 apiece, bridge this “last mile” of copper lines between businesses and the high-speed fiber lines.

It may not be the most exciting corner of the high-tech world, but the company’s growth has thrilled investors and has made its founders rich.

PairGain’s revenue soared to $60 million last year from less than $3 million three years earlier, and profit has been on a steady climb. The company’s stock has shot up to more than $30 per share, triple what it fetched a year ago.

Howard Flagg, 41, a co-founder and president, said PairGain is simply filling a neglected niche. Whereas the telecommunications companies were obsessed with fiber-optics, he said, “we just didn’t believe the world was going to switch over to fiber tomorrow afternoon.”

For one thing, installation costs for fiber-optic cable can run as high as $20,000 a mile, making it too expensive for telephone companies to lay a line to every business and residence.

“In the future, the cost of building [fiber lines] will come down, and the customer demand for services will increase,” said Michael Neiberg, an analyst at Furman Selz in New York City. “When these two trends cross, phone companies will start wide scale building of [fiber] networks,” and PairGain will have to look for a new product, he said.

Until then, however, telephone companies and other customers no doubt will be beating a path to PairGain or one of the competitors that have surfaced in the last 18 months.

Pacific Bell and other big regional phone companies account for more than half of PairGain’s sales, said Charles Strauch, the company’s chief executive. The company also sells to hundreds of tiny local phone companies and to as to businesses and universities that need to connect computer networks in separate buildings.

Before PairGain’s box hit the market two years ago, phone companies had to dig up copper lines and install special boosters, called repeaters, to help speed information along. Now, phone companies simply have to plug in a PairGain box--or a rival product--at each end of the copper line. A process that once took weeks now takes hours, said Phill Martinez, an engineer at Pacific Bell’s office in Tustin.

PairGain, the first to introduce these copper-enhancing devices, controls about 75% of the market, analysts say. Not bad, considering the folks at PairGain didn’t even invent the technology and the company’s founders had to overcome a series of financial and management struggles that almost forced them out of business.

The founders, Flagg and Ben Itri, grew up in the boroughs of New York. Flagg’s father was a grocer and Itri’s was an auto mechanic who had emigrated from Italy. The two engineers met while students at Cooper Union College in Manhattan.

After working for a decade as industry consultants, they started a company to manufacture devices that allowed two phone lines to be connected to a single copper line. In the industry, this doubling of capacity is called “pair gain.”

In 1989, they attended a technology conference where they listened to a speaker describe a technique that could vastly improve the performance of copper lines. The two engineers were immediately intrigued.

The technology “was open to anybody, that’s what was wild about it,” said Itri, 42, a stocky man who speaks with an accent that is a blend of his Queens upbringing and Italian heritage. “The real key was building something that worked.”

To round up money needed to develop their copper-enhancing equipment, Flagg and Itri had to turn over control of the company to investors, who installed their own executives. Their roles reduced to second-tier engineering managers, Flagg and Itri grew frustrated as they watched investor-installed CEOs pour resources into a number of dead-end projects.

In 1991, with barely enough cash to meet the next payroll, board members turned in desperation to Strauch, an industry veteran who had held top management posts at Memorex and other high-tech companies. His first move was to bring Flagg and Itri back to the front of the company.

“These guys were literally in the back room,” Strauch said. “They had very few shares in the company and weren’t even on the board of directors. I made Howard president and promoted Ben to vice president of development.”

Unable to squeeze any more money from investors in Silicon Valley or on Wall Street, Strauch turned to giant telecommunications companies for help. Finally, Alcatel Alsthom, a Paris-based telecommunications company, agreed to invest $5 million in PairGain to produce the booster device.

To drum up interest in its product, the company pursued a “trickle-up” approach. “We went out to the guys installing phone lines,” Strauch said. “When [the device] worked, the word got out. We worked our way up from the base of these companies, and that’s how we got our market share.”

PairGain, which went public in 1993, today employs 430 people and ships more than 12,000 of its devices every month. Some analysts expect the company’s revenue to grow by at least 25% a year for the next five years.

Although rivals have recently entered the field, Strauch said PairGain will try to keep its stranglehold on the market by making products cheaper than anyone else. Over the past year, the company has cut the cost of its products in half, he said.

When the company outgrew its Cerritos offices last year, it moved into Tustin quarters that were the cheapest it could find. “We’re a very frugal company,” Strauch said.

Indeed, the company’s 76,000-square-foot headquarters is adorned with little more than gray carpet and white paint.

The company’s huge success appears to have had little effect on the lifestyles of its founders, though Itri and Flagg now own stock that is worth a combined $25 million and are paid six-figure salaries.

“Sometimes we talk to each other about what we want to do with the money,” said Itri, who drives an 8-year-old Mazda and lives in the Huntington Beach house he bought nine years ago. “We’re still amazed that it’s real.”