Nortel sinks Xros to save the fleet

Industry analysts says Nortel Networks’ decision to walk away from a US$3 billion investment in all-optical network hardware makes sense for the company, but bodes ill for other optical-gear makers.

Just as Nortel came to the conclusion that all-optical networking is more trouble than it’s worth, “I can see those companies (other all-optical gear makers) running into trouble over the next couple of years,” said Jason Marcheck, senior market analyst with Pioneer Consulting LLC in Boston, Mass.

On March 6 the telecom industry was abuzz over Nortel’s decision to shut down Xros, a company it acquired in June 2000 at a cost of US$3.25 billion. Xros had developed an all-optical switch that spelled massive throughput for carriers – up to 1,000 Terabits (one Petabit) of data.

Nortel could not be reached for comment about the shut down.

Although the firm swallowed a bitter pill with the closing, Marcheck figures the decision was justified. “These all-optical switches were designed to be used for passthrough routes, where you just have OC48 signals sent all the way across the country; long-haul applications where there’s very little need to drop off smaller increments of traffic,” he said. “But that (market) hasn’t really materialized.”

These days, carriers are more interested in maintaining service levels than big throughputs, Marcheck explained, adding that optical-electrical-optical (OEO) switches are easier to manage and less expensive than all-optical switches.

“Whenever you convert the signal to electrical, you’re able to do monitoring, regenerate, find out if the signal has degraded and boost it up,” Marcheck said. “It just allows for more quality of service. With the pure optical, you don’t have that level of [control]. That’s what the carriers are looking for. They’re looking for the granularity and also the performance monitoring. That’s something that, at this stage, the optical switches don’t deliver.”

For the time being, all-optical switch technology is too expensive and too cumbersome for carriers to consider seriously, said Marian Stasney, a senior analyst with the Yankee Group in Boston. “The world just isn’t ready for these switches yet. It’s coming, but we still need some advancements, some improvements – faster, cheaper and better – before carriers can afford to deploy them.”

That fact suggests all-optical switch makers will have a hard time in the near future, Marcheck added. However, they won’t have as tough a time as Nortel.

“They’re making smaller switches,” he said of the competitors. “Nortel was going to come right out of the box with a 1000 x 1000 switch – a monster. There’s no demand for that right now.”

Nortel’s decision makes sense in other ways too. Stasney said, “It’s just indicative of the fact that they realized they have to focus on the products and business units that are making money,” which has been a yearlong mantra for the firm.

But Marcheck said Nortel has been remiss in at least one of those moneymaking areas, saying the company has fallen “behind the curve” in the OEO space and “they have to concentrate on that. That’s what’s going to be selling for the next couple of years.”

In terms of OEO, the company competes with Ciena, Lucent, Tellium and soon Cisco, which has a product on the way. Nortel has yet to ship its competing OEO switch and the firm “is in danger of losing a lot of its core business to competitors, like Ciena, if they don’t come up with the product that’s needed right now,” Marcheck said.

Nortel Networks in Brampton, Ont., is at http://www.nortel.com