Nortel and Cisco make big buys

The race to dominate optical networking systems is gaining momentum as Nortel Networks Corp., of Brampton, Ont., and Cisco Systems Inc., of Santa Clara, Calif., spent billions of dollars to make strategic acquisitions within days of each other last month.

“Right now, I would say that Cisco and Nortel are fighting a neck and neck battle, if you will, in this whole space around multi-service IP. I think that both companies have made strong statements about their commitment to that market,” said Dan McLean, an analyst with IDC Canada Ltd. in Toronto.

McLean said that although Nortel and Cisco are coming at the optical market from two different directions, both companies have announced product road maps that give them an edge over competitors.

“I think they’re getting a lot of mindshare from people. I think they’ve really in a sense blown away the competition, because I think if you look back in this whole play, about a year ago, it certainly looked like there were others that were going to be much bigger in this game, and I would specifically name Lucent [Technologies Inc.], Siemens [AG] and Alcatel [SA]. It looked as if there were five companies that were positioned to be big leaders and I would say that at this point Cisco and Nortel have clearly emerged as the front runners right now,” McLean said.

The acquisitions that have given Cisco and Nortel a perceived edge over competitors include Nortel’s US$3.25-billion agreement to acquire Qtera Corp., of Boca Raton, Fla. and Cisco’s US$2.15 million agreement with Pirelli SpA of Milan, Italy to acquire Pirelli’s optical networking systems division.

Qtera produces ultra-long-reach optical networking systems.

“They’re both definitely out to do the same things and sort of hyped up on as building themselves out as companies that will be suppliers of equipment that will be used to build multi-service IP networks. The whole game right now for both companies is to go out and try to fill in the missing pieces,” McLean said.

McLean addressed the concerns from stock investors and the media that had been raised over the cost of the two acquisitions.

“What it tells you is that the industry in general sees a lot of promise (in this area) and that there were probably other people looking [at these companies] as well,” he said.

Optical networks are clearly moving in the direction of becoming more intelligent and highly proprietary, Chris Nicoll, an analyst with Current Analysis, in Sterling, Va., said. For example, Nicoll cited intelligent wavelength management and bridging of IP ATM switching systems with optical transport as two recent developments. Whoever develops the optical networking systems of the future will dominate the market, he pointed out.

Both acquisitions fill a different need in each companies’ strategy for producing optical networking systems, Nicoll said. For example, Cisco needed installed base, product and something the firm could leverage now as it has no presence in this area, he said.

“What Pirelli brings [is] a revenue stream of [over] US$240 million a year. They bring products, they bring customers, and they bring access into those customers which are large service providers. What Cisco got was instant market presence,” Nicoll said.

IDC’s McLean explained that Cisco’s strategy is to gain a dominant position.

“When they look to buy anything, they look to get an entrenched leadership position in whatever products they happen to be buying into. I think their stated strategy is

they will not buy a company unless it launches them into a number one or number two position,” McLean explained.

If there is a concern for Cisco it’s that the company’s operations are now being spread worldwide and Cisco may have difficulty finding managers who wish to relocate to Italy, Nicoll said.

Meanwhile, Nortel’s strategy was to purchase technology. Both McLean and Nicoll believe Nortel made a good buy with Qtera. Observers that have expressed concern that Nortel has purchased a company that has yet to generate any sales or release a product until next year have “missed the point”, Nicoll said.

“Nortel didn’t need a product and they didn’t need installed base — they needed technology. Nortel has the leading 10Gigabit market share in the U.S. They’re number one. This is not going to sound good, but they don’t need any more customers, they got them. What they needed was the technology to go sell to their customers,” he said.

Qtera has developed a technology that enables optical signals to be sent as far as 4000 kilometres in purely optical form and operates at 10Gbps.

According to Nortel, Qtera’s technology makes the process of transmitting information over the Internet as light much more efficient and cost-effective, and is able to eliminate up to 75 per cent of optical-electrical-optical conversions. Data sent in the form of light through optical networks fades over distance, requiring periodic conversions to electrical form to boost the signal before re-conversion to light. Frequent optical-electrical-optical conversions introduce significant additional costs to today’s networks in terms of capital, space, reliability, and performance, Nortel said in a press release.

McLean agreed that what Nortel has purchased is “innovation,” that it hopes will translate into a product that will be a part of its future network solutions.

“I think it’s a gutsy move on their part and it’s something that is kind of unlike what Nortel has done historically. They’ve basically latched onto a technology that looks like it holds a lot of promise, but frankly is very much in the development stage,” McLean said.

There will be more acquisitions of innovative

technology companies by Cisco and Nortel in the future, predicted McLean.

“I would expect we’re going to see a lot more moves similar to this, and from that I mean not necessarily on the scale of purchase value, but in terms of start-ups that are doing interesting things in this whole space of multi-service IP networking or anything to do with high-speed networking along carrier backbones or infrastructures,” he concluded.