Researchers row over metro spending

Although some analysts say the metropolitan area network (MAN) is the hot new market for vendors, Nortel Networks Corp.’s recent earnings statement suggest that’s not the case.

Indeed, others point to Nortel’s Q2 2002 financials as an illustration of just how poor the metro market is for companies like the Brampton, Ont.-based network gear manufacturer.

The firm in July said revenues in its metro and enterprise segments had decreased 39 per cent in Q2 2002 compared to the same quarter in 2001. Despite the decrease, Frank Dunn, Nortel’s president and CEO, said during a press conference, “We will see strong metro growth.”

Nortel’s current metro market dip contrasts with the bullish report of at least one research firm, which seems to agree with Dunn. Infonetics Research out of San Jose said spending in the MAN would jump from US$420 million in 2002 to US$2.6 billion in 2006.

However, Roberta Fox, president of Fox Group Consulting in Markham, Ont., said she is “skeptical” of Infonetics’ numbers. As far as she’s concerned, the metro market started going soft in late 2001 and it will remain so for a long time.

“It (the MAN) was the hot new area because that’s where the LECs (local exchange carriers) were playing – the Stream (Intelligent Networks Corp.), the 360 Networks (Inc.s) and others doing the local loop.…The last mile or metropolitan area is where most of those companies that no longer exist were building their networks.”

After bursting onto the scene in 2000 with plans to build 35 metro rings in major cities the globe over, Vancouver-based network operator 360networks last year filed for bankruptcy. Stream, a broadband access firm in Toronto, went into receivership in March after running up $13 million in debt to an investor.

And they’re not the only ones to fall by the wayside, said Lisa Pierce, a New Jersey-based analyst with Giga Information Group Inc. Yipes Communications Inc. in San Francisco filed for “voluntary reorganization” with a U.S. bankruptcy court in March, according to a company statement. Other metro operators have been “awfully quiet,” Pierce said.

Perhaps the MAN isn’t as hot as predicted? Well, yes and no, Pierce said. On one hand, “there is a significant demand” for the big bandwidth and efficiency metro Ethernet affords. But the heavy cost of provisioning service scares some people off, she said.

But not all is lost for box builders like Nortel, said Fox.

“The MEUs, the municipal electrical utilities, are building out the last mile, so they’re spending.…You’ve got campus consolidations of hospitals and such. The services area, that’s where there may be growth.”

Nortel in July announced a big win with The Boeing Company in Chicago, which contracted the firm to build a private, U.S.-wide optical network. Nortel also in July announced that it had finally found a replacement CFO in Doug Beatty, the company’s controller since 1999. The former CFO, Terry Hungle, resigned in February amid allegations of insider trading.

Maybe Nortel will be able to pull back from the brink after all, Fox said.

“I think the fact that they are getting control of their costs and that Dunn seems to have worked through and has a plan to turn the company around is very good.

“The challenge will be to take care of their aces – big customers and the channel – so as not to affect longer-term revenue opportunities. If you’re so internalized, focusing on [operations] and financing, you could ignore opportunity.”

– With files from IDG News Service