Optical networking giants face economic downturn

Faced with a plummeting stock market and depleted sales, networking giants Cisco Systems Inc., Lucent Technologies Inc. and Nortel Networks Corp. are refocusing their optical strategies, either by offering products aimed at specific segments of the market or spinning off optical units altogether.

Most recently, Cisco has been abandoning the enterprise market in favor of the more fertile, higher-yield service-provider market. Cisco officials plan to address the company’s problems next week at its annual Partner Summit meeting in Las Vegas. The other two acknowledged networking titans, Lucent and Nortel, are trying to adjust their optical strategies by selling their optical components departments.

To many, the demand for optical hardware is simply exhausted. Many large enterprises have already built out their fibre networks to a level that can sustain their current needs. “IT infrastructure build out is being [slowed], unless [growth] is completely necessary,” said Brad Baldwin, an analyst at International Data Corp. (IDC) in Framingham.

The fact that optical vendors are now looking for sales means that enterprise customers can enjoy cost savings, said Dave Passmore, research director at The Burton Group in Sterling, Virginia. “[Enterprises] can get tremendous deals on network equipment,” Passmore said.

Some network hardware customers said investments in infrastructure are too weighty to be influenced by short-term fluctuations. “Most of our fibre plans were made half a year ago,” said Jonathan Taylor, CTO of Voxeo in Scotts Valley, Calif. “And when you’re going more than a couple of hundred feet, these are not services that you order and have installed in a week.” Voxeo runs a network that links the Internet with the telephone system.

Cisco president and CEO John Chambers, scheduled to speak next week at his company’s Partner Summit in Las Vegas, predicted recently that the economic downturn would continue for at least three more quarters. Cisco is focusing its optical strategy less on the enterprise market toward more lucrative sales to service-providers. “This has been happening over a number of years, and it will continue to happen,” said Carl Russo, vice-president of optical networking at Cisco.

The company is pursuing opportunities for fibre-related products in MANs (metropolitan area networks), which Cisco says are underserved. One of Cisco’s latest ventures is its ONS 15200 line of DWDM (dense wavelength division multiplexing) transport devices, which the company claims is the first platform to deliver DWDM services to metropolitan areas. Many observers feel that clearing the bottlenecks in metro centers is the best way to unleash the full potential of DWDM. “More people are building fiber into the metro area, and more buildings and customers are getting it,” Russo said. “It’s a big area of focus for us.”

Last month, embattled Lucent was forced to delay the IPO (initial public offering) of Agere Systems, its optical components spin-off company. The company also devalued Agere shares, dropping the value of the IPO by an estimated US$2 billion to $3 billion. By selling Agere, Lucent appears to be aiming for a cash infusion to fund the struggling parent company. But many analysts feel that Lucent does not consider optical networking to be among the company’s core businesses, and that dumping its components department will free up Lucent to chase the service-provider market more avidly.

Lucent’s strategy in the core optical market is to offer cheaper alternatives. “For the long distances, we’ll move from rings to meshed networks because that saves tremendous amounts of fiber and equipment for the carriers,” said Kathy Szelag, vice-president of marketing for optical networking at Lucent. In the metro network arena, Lucent’s plan is to migrate to higher-speed network rings and to marry more data capability directly into the hardware multiplexing platform.

Meanwhile, Nortel is facing declining revenue growth. Last year the company failed to sell its optical unit to Corning. “Their strategy is to compete in key segments of the industry, such as Internet datacenters and broadband, and to dominate the optical market and grow related businesses off that,” said Lee Doyle, an IDC analyst.

Some analysts said the future of optical networking belongs to smaller, nimbler companies such as Juniper Networks, RedBack Networks, Sycamore Networks, and Ciena, which aggressively target their offerings at service providers. “The [smaller companies] have figured out the simple rule: You focus totally on a particular market segment; for example, the service providers’ needs, not the enterprises,” said Jeffrey Young, author of the book Cisco Unauthorized.

Startups pursue emerging optical technologies

Because optical networking is such a specialized scientific field, many believe that well-financed corporate giants do not necessarily hold an advantage over small startups. In the world of optical, the riches often go to the most innovative companies.

For example, Baltimore-based TeON Optical Networks is preparing an optical technology that company officials say could increase carriers’ bandwidth by 200 per cent or more, reduce carriers’ costs for new equipment and fiber, and extend the life of legacy fiber lines. As the former CTO of Sprint, TeON CEO Marty Kaplan is attracting attention for the company. Kaplan would reveal only that the “revolutionary” technology – a repurposed version of technology developed by Lockheed Martin – will provide voice, video, and packet traffic services run on fibre-optic circuits.

Bothell, Wash.-based Lumera, with Cisco’s backing, has developed an organic material to be used in networking hardware and claims the material will increase optical data transmission rates. The technology uses organic molecules encased in polymers, applied to electro-optic modulator switches. The new components will cost less than incumbent technologies, such as lithium niobate crystals, because of lower manufacturing costs.

Others are pursuing the potential of VCSEL (vertical-cavity surface-emitting lasers) technology, which offer several advantages for short (850 nanometre) wavelengths. VCSELs take less power, generate less heat, and can be squeezed in huge numbers into very small spaces. Lucent spin-off AraLight, based in Monroe Township, N.J., is developing chips that will integrate VCSELs with silicon circuits.