Lasting legacy
Lucent and Nortel Networks have long been the leaders in supplying equipment for telecommunications networks. But both had commitments to older technologies for networks built for voice conversations, and both were late with high-speed equipment for datacentric next-generation networks.
Nortel's mascot could be Buck, Jack London's wonder dog of the Canadian north: huge yet fast, smart, nimble and cutthroat when it has to be.
A network equipment company born of the breakup of Canada's staid old national telephone company, Nortel owns an astounding 53 percent of the overcrowded and burgeoning Dense Wavelength Division Multiplexing equipment market. DWDM divides light into dozens of channels - each capable of carrying voice, video and audio traffic - and is expected to be the highest-growth area in the red-hot optical market.
What could go wrong? How about last month's forecast by Nortel's CEO John Roth that the company's sales would grow just 15 percent this year, an estimate that sent its stock plunging 33 percent?
Nortel is an agile giant by most standards, but in optical networking it seems there is always another company with a newer architecture, a more sensitive finger on the pulse of the market.
Nortel is "perfectly positioned to deliver old solutions," Nettles says. "They have their whole business built around SONET and ATM. They talk a lot about new systems with new-generation products, but as far as we can see, they're not delivering much of their touted open-system DWDM systems. They have infrastructure and sales, but they're missing product."
But expert observers say Nortel is still plenty nimble. "No incumbent vendors are going to stay on top by continuously leveraging simply what they have," says Grier Hansen, optical analyst at Current Analysis. "Nortel is a very good example of incumbent vendors that have seen the space explode and know there are a lot of compelling technologies out there from start-ups, and have taken the necessary steps to compete with them."
Service providers will particularly feel the tightening money supply, Nettles says. "There's going to be a separation of the haves and have-nots - those that have capital and can move ahead with deployments vs. those who will have to take a conservative wait-and-see approach," he says. Level 3 Communications, McLeodUSA, Qwest Communications International, Sprint and others that anticipated the tightening and prefunded their build-out plans will enjoy a widening advantage over those without money, he says.
Deploying the hottest new technology will bring advantages to carriers. Last month, Corvis and Williams Communications sent a signal a record-breaking 4,000 miles without regeneration. Williams, one of the new-generation carriers not tarrying in the long-distance voice market, has committed to purchasing $300 million worth of Corvis' optical products.
Corvis' all-optical products can slash network costs in half because the signals never have to be regenerated, says Shyam Jha, vice president for marketing communications at Corvis. Still, it's tough competing with the legacies of Lucent and Nortel, he says. "They have the advantage of incumbency," Jha says. "We're the new kids on the block, and loyalty counts for something. We have to convince them that this is a better technology."
Ten years ago, when all routing was done by mainframes, Cisco Systems had a tough time convincing companies that they could save up to 90 percent by buying something called a router, Jha notes.
"What Corvis has going for them that no one else has, is they have a switch that works," Hansen says. "Their competitors have lambda routers in trials." Corvis took some heat last quarter for relying on only a few key customers. "But they have one in a network now passing traffic," he says. "That solidifies the validity of their solution."
Hansen applauds the newer companies such as Corvis, Sycamore Networks and Tellium on their all-optical products. "Certainly, it's harder to get in now in the all-optical market," he says.
Says Corvis' Jha: "Different people see the market evolution differently. The bandwidth barons - Williams, Qwest and Broadwing - are the first to build true optical networks, while the legacy long-distance companies - Sprint, WorldCom and AT&T - are slower. The game is changing rapidly. The newcomers such as Broadwing are selling bandwidth to the granddaddies."
Lucent is everyone's favorite whipping boy, but after overhauling product development and assembly at its optical plant, it is vowing to be the first to market - targeting later this year - with 40-Gbps switches. It also will bring to market this year a lambda router capable of switching up to 1,024 signal channels.
Lucent needed a shock to its complacency, but will come back, says Roger Wery, an analyst at Pittiglio Rabin Todd & McGrath. "They still have some amazing technology and will produce some great products," he says.
Lucent must trim its complex layers, so the spin-off of its microelectronics division, Agere Systems, and the reported interest in selling its fiber-optics plant are probably good moves. Layoffs, the spin-off, the possible sale and the recent US$4.5 billion in bank loans will net Lucent plenty of money to buy cutting-edge technology and vault it into the lead when carriers go on their next spending spree, experts predict.
Nortel, too, will bounce back, Wery says. A good way to start would be to recognise that competitor Cisco has about one-third the employees, with total revenue in the same ballpark. "This may be a trigger to be more nimble and get rid of some of their past and their overhead, to trim down their cost structure and become a sleek athlete," he says.
Nortel may have slipped a bit, but it hasn't been complacent. Last month, the company announced a suite of products that can make Web surfing easier, and help advertisers target banner ads to individual Internet users. A week later, Nortel purchased a Swiss subsidiary of rival JDS Uniphase, paying $2.3 billion for a company that makes 40 percent of the world's 980-nanometer pump lasers. It's those pump lasers that are needed for each channel of a DWDM system.
