Nortel takes $3.25-billion all-optical hit

Industry analysts say Nortel Networks Ltd.’s decision to walk away from a US$3 billion investment in all-optical network hardware makes sense for the company, but it also indicates problems for other optical gear vendors.

Just as Nortel came to the conclusion that all-optical networking is more trouble than it’s worth, “I can see [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.

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

David Chamberlain, Nortel’s director of communications in Richardson, Tex., said Nortel has not given up on all-optical technology. Chalk up the Xros decision as a postponement and nothing more.

“It has become clear that optical spending will now focus on interconnected bandwidth management as well as operational challenges,” Chamberlain said in an interview with Network World Canada. “Given that, Nortel believes that large-scale standalone photonic switches are likely to meet longer term market requirements. In the short term the company decided not to bring the PX (the Xros all-optical switch in question) to market.”

Although the firm swallowed a bitterly expensive pill with the closing, Pioneer’s Marcheck figures the decision was justified. Telecom companies are not clamouring for high bandwidth beasts like the Xros switch.

“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.”

Marcheck figures that fact bodes ill for other all-optical gear makers. These days, carriers are more interested in maintaining service levels than big throughputs, he explained, adding that optical-electrical-optical (OEO) switches – the switches carriers buy today – are easier to manage 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.”

Canadian carriers agree with Marcheck’s assessment. Kelvin Shepherd, the CTO with MTS, Manitoba’s incumbent telco, said optical network technology has not taken off yet and “until you see a lot more pure optical carriage that needs to be switched and groomed, I don’t think a product like [the Xros switch] is going to have a near-term fit.”

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.”

Although the situation suggests all-optical switch makers will have a hard time in the near future, Marcheck said most wouldn’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.”

Benoit Fleury, the vice-president of product management with Ceyba Inc., an optical gear manufacturer in Ottawa, said Xros’ demise does not necessarily signal trouble for other photonic-friendly firms.

Ceyba itself announced new optical core technology just this month and “we’ve had a lot of [carriers’] input into our product design,” Fleury said. “Every carrier we talk to is interested.”

Of note is the monitoring technology Ceyba uses, he added. It should allay the concern that all-optical gear is not as user-friendly as OEO. It offers “the ability to monitor optical signals as they’re propagated. We can look at individual wavelengths, optical signal-to-noise ratio.…There’s a lot of optical testing and measurement that we’ve built into our product, which is something that has never been done before.”

Despite contention over the grand meaning behind Nortel’s decision, it was the right choice, said the Yankee Group’s Stasney. “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 year-long 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.”

Nortel’s Chamberlain said the company’s OEO switch, the HDX, has been “in trials and generally available” since late 2001.

Not everyone thinks Nortel’s decision regarding Xros was the best move. Kevin Lo, a technology analyst with Lightyear Capital Inc., an investment firm in Calgary, said the shutdown harms the company’s credibility.

“They’re saying they’re going to postpone this technology that they paid billions of dollars for,” Lo pointed out. “(Nortel said) it was going to be revolutionary. I think…the credibility for Nortel to deliver products on time, on budget is clearly not as high as it should be. When you’re an investor, you’re looking for a company that can deliver.”

Credibility speaks to technology advancements as well as investment decisions, he added. And in an increasingly competitive landscape for telecom gear makers, it’s important for Nortel to make its mark, to stand out with high-tech wizardry. A massive all-optical switch would have done that for the firm.

“As more competitors come out, a technology company really has to differentiate itself somehow. If you come out and say you can’t deliver on a high-profile product, your credibility is going to be harmed. That’s going to [affect] other products, not just that one.”

Chamberlain said Nortel’s commitment to photonics should not be questioned. “It’s just that as we continue to develop our long-haul product line – Xros was successfully trialed with customers – in today’s market the HDX meets customers needs better than the PX.”

Marcheck said Nortel, which battles Ciena Corp., Lucent Technologies Inc. and Tellium Inc. for OEO clients, “is in danger of losing a lot of its core business to competitors…if they don’t come up with the product that’s needed right now.”