GLG News by Samuel Greenholtz

Implications: 1.      If one did not know any better, it seems that Infinera has not received the memo that the large carriers have shifted their focus away from 40G to 100G. 2.      While the supplier puts a lot of emphasis on its 40G development, the predominant customers are worried that the lower speed may become obsolete before they would get their return on investment. 3.      It does not seem to be clear at all that Infinera’s road map is anything other than an undesirable 10x10 scheme.

Analysis:  Apparently, Infinera has figured out it can get to 40G without significant re-architecture of its fab.  However, at some point, it will need to spend a lot of money to get to a particular future design.  Is that 100G?  Being a public company, it is going to be reluctant to spend tens of millions of dollars to update its manufacturing facilities.  

Infinera will need to go through the same process with 100G as it did with 40G.  While it evidently found a way to tweak its existing PIC to be able to deliver 40G, it is going to be a lot more difficult to do so with the higher rate.  In recent presentations with industry analysts, Infinera appears unprepared to talk in depth about reaching 100G.  One wonders whether it is muddling around in the background trying to determine how to move there without having to build a new fab or change things significantly.  With sole ownership of the PIC, Infinera is going to grapple with unique technology issues compared to its competitors.        

Implications: 1.      As we stated in a previous article, it has become clear now that there is a high probability that 100G will ultimately dwarf 40G. 2.      However, Ekinops asserts that the cost advantages of its 40G solution will be so compelling that the large service providers will take a second look at the lower rate. 3.      It remains to be seen how much psychological resistance there will be at the carriers to the supplier’s “Wave Bonding,” which is similar to FDM technology.

Analysis:  Ekinops itself is hearing from the big service providers that they are heavily leaning toward 100G rather than 40G because the latter is too expensive.  In order to get 40G economically viable, they understand they would need to start deploying – otherwise it would never get to volume – exactly what happened with 10G.  It might take three years to get to volume, and by that time, the carriers will be looking to switch to 100G to begin getting that down on cost.  As a result, they will not be able to take advantage of that time they spent paying a premium for 40G.   

Ekinops believes that in offering a solution today that is already cheaper than four times 10G, it will result in a whole different game – to be more spectrally efficient in carrying 10G – and to further bring down the cost of 10G.   In effect, Ekinops could care less whether a 40G serial interface is ever rolled out ubiquitously because it is all about gaining a leadership position in 10G.  The customers may just deploy the 20 or 30 routes that they have between their Cisco Systems CRSs – but beyond that never deploy anything else.  

However, in using a solution that is like FDM, it brings with it negative connotations from the past.  The concern is that in starting to tightly pack waves together, one would run into non-linear dispersion effects, which causes a loss in performance pretty rapidly.  Ekinops claims that it has developed some intellectual property to counteract these effects – and that it has done so successfully in the labs with four wavelengths within a 50 GHz grid.  

Ekinops says it is confident it will be able to hang in there as an independent entity during these troubled economic times because it is actually not that far from profitability.  Then it will look to go to an IPO when the market recovers.  

The vendor also acknowledges that lack of incumbency is its biggest challenge in every deal.   

Implications: 1.      Nobody at AT&T appears to be sure where its wireline CAPEX is going to come in. 2.      AT&T is apparently struggling to figure out what is the best solution or even solutions for delivering cable services. 3.      A real problem is if the carrier is going to continue to deliver U-verse services, it has to significantly increase its spending on copper.

Analysis:  In some cases, large segments of copper wiring in the AT&T network may have to be replaced because they have been through the mill. There are many miles of copper facilities in the network that require upgrades if they are to provide the best service for U-verse.


While there are lots of people at AT&T who are scratching their heads – and wondering why not just put fiber in – the current obsession by many individuals at the company is on selling U-verse off of copper.  They just falsely believe whatever is out there hanging off a pole is usable. 

More importantly, there are still not enough high-level executives willing to admit they made a mistake in going with FTTN – and that they should have adopted a FTTH approach all along.     

Some recent changes to the  hierarchy of the company gives an indication of more emphasis to the FTTH approach but no clear direction has been established.

 In the meantime, the discussion regarding the 2009 and 2010 budgets is moving forward without a clear consensus on which direction is best. As AT&T continues to fall behind the leaders in the cable industry, now is the time for them to realize that in the end, fiber is going to be the solution that is required.

Implications: 1.      Originally, Verizon was intending to slow down on FiOS around the 18- million point. 2.      However, given the level of success the carrier has achieved, its apparent intention is to push out even further.   3.     Indications are that Verizon is attempting to amintain spending for FiOS in 2009.

Analysis:  It is interesting to note that earlier this year, Verizon started mentioning businesses as well as homes as part of the 18 million entities it will pass with fiber into 2010.  This change serves two functions.  The RBOC hopes to make it seem that large enterprises were always a big part of the original plan.  Also, it gets more flexibility in terms of avoiding less attractive areas in order to reach the projected total.  

More importantly, Verizon is evidently seeing a wider marketplace for FiOS.  It intends to penetrate into more suburban areas.  With a new administration, and eventually a different type of FCC chairperson, a greater emphasis on the residential side will not hurt it in striving to avoid regulatory changes.  

So, while Verizon will continue to lose residential lines in general, the business in the optical arena keeps on growing impressively in serving video and high-speed Internet.  And in the wireless market, even as AT&T can say it is the biggest, Verizon can honestly state that it is number one.  As a result, CAPEX for 2009, at this point, is being solidified more in a positive direction.  There are still no discussions about significant cuts in the FiOS budget. Other areas will be scrutinized more heavily as the economic downturn deepens.    

Implications: 1.      By a process of elimination, Ericsson would be the most likely vendor to buy Ciena. 2.      Ericsson has lots of cash and it wants to make further inroads into the US optical market.   3.      Historically, the vendor has not been a favorite among any of the RBOCs.  

Analysis:  Ericsson has no stronghold on the public network wireline side in the US.  The RBOCs’ disenchantment with the vendor goes back as far as the days right after the first divestiture of AT&T in 1984.  These negative experiences with Ericsson still stick in the craws of top executives at these carriers.  Overcoming this resistance is Ericsson’s big problem.  With any small company that would be acquired, these service providers could drop that business in a heartbeat.  The large telcos would not be able to walk away from Ciena.   

Other potential suitors appear less likely to be interested in Ciena.  Nokia Siemens would be highly improbable.  Alcatel-Lucent is struggling with figuring out what it is doing now.  Fujitsu does not tend to buy optical vendors in the US.  While Tellabs’ position could theoretically change tomorrow, there is still no attraction at all.  Cisco Systems does not want to get into the optical business and anything Ciena is doing in Ethernet could be replicated by Cisco very quickly.  There does not appear to be evidence so far that the new CEO at Juniper would be inclined to move in a big way to hardware that feeds into its routers.  Sycamore has not made a bold move in ages.  And while JDSU might be tempted to move further up the food chain in dealing with full systems, it could also be leery about getting so much further into optical.   

Implications: 1.      If it does not begin to increase its wireless budget – along with actually spending in adequate amounts -- AT&T is going to start hurting in the near term. 2.      The problems range from 3G upgrades to backhaul requirements. 3.      There seems to be some excessive concern at AT&T about Verizon and its new Blackberry.

Analysis:  Although AT&T put a lot of money into its 2008 wireless equipment budget, its actual expenditures fall well short of what it needs to sufficiently fund major projects.  The tendency has been to hold onto the money because it may be needed for other purposes.  

AT&T Wireless has been inclined to use the minimum engineering standards – and never the maximum -- in putting up 3G cell sites.  In daytime hours, it has been discovered that as much as 200 percent more capacity is necessary.  Hence, some customers have become disenchanted with quality on the iPhone, especially in the AT&T territory.  They get dropped back to the older network, which obviously is incompatible with the iPhone.  

While there are clear functionality problems within the iPhone itself, the wireless faction at the service provider understands that it needs to make the necessary upgrades to get the handset to perform well everywhere.  The division knows that it will have to fight hard to keep money in the budget – and perhaps get even some more.  

These general concerns at AT&T have helped to raise what appears to be excessive fears  regarding Verizon potentially taking over the iPhone market with the upcoming version of the Blackberry.  However, all of indications point to the new product being nothing to write home about.  There are apparently people even at Verizon who are tempering overexcitement because they do not believe that it is the answer to the iPhone.

Implications: 1.      Not too long ago, the price of oil was at $147 a barrel. 2.      Now it has gotten below $70 a barrel. 3.      Falling gas pricing may lead to noticeable reductions in OPEX for fiber to the premises.

Analysis:  Industry analysts can be that much more confident about further FTTX construction at AT&T as well as at Verizon.  The trucks that provide equipment all run on diesel fuel, which even costs more than regular gasoline.   In New York recently, the price of diesel climbed to over $5 a gallon.   

While in contracts Verizon has negotiated for favorable terms, declines on gas pricing make it that much more certain that the RBOC will not cut its CAPEX budget for fiber in the access.  Most engineering and construction firms have written into their contracts that if the price of certain commodities rise (gas increases), then the RBOC would have to pay the difference.  

At a time of economic uncertainty, the RBOCs are undoubtedly happy about the decrease of any operational expense.  It will help ensure that both FiOS and U-verse developments remain on a steady course.  AT&T’s assertion “it’s on pace to exceed its year-end goal of 1 million users” is that much more realistic.

Implications: 1.      The biggest problem right now in telecom is access to money. 2.      Small companies will be feeling the pressure the most because they all need further investment. 3.      With potential investment opportunities for cents on the dollar, there will probably be more M&A activity.

Analysis:  Firms with large amounts of cash including Cisco Systems, Ciena, JDSU, and Sycamore are well positioned for the current market.  While smaller companies, such as optical players, Sierra Monolithics and U2T Photonics, are growing pretty rapidly, they still need money for their investments or their operations are going to be starved.  Other companies are not standing still and are developing the next-generation technology including 100G.  

While, as always, Sycamore will probably sit on the bulk of its cash -- and ride out the storm, there is probably going to be a spike in M&A actions.   Distressed companies with attractive technology will be able to be taken over for close to nothing.  For example, Bookham, which will have difficulty getting any kind of cash infusion, has a pretty good integration story for DQPSK.  Another supplier could take it over and, in effect, become the default leader for this solution. 

  Large service providers including AT&T and Verizon have the advantage of a very big recurring revenue base that continues to put money back into the till on a monthly basis.  Even Sprint’s CEO can legitimately state: “We think there will be some impact on our business, but compared to most other industries, we’re relatively well insulated.”     

Implications: undefined 1.     Obviously, Level 3 is being vocal about its traffic capacity requirements rapidly exceeding the combining of multiple 10G systems. 2.     Is this also perhaps a signal that Level 3 is sending to Infinera, which believes one can package ten 10G systems and call it a 100G? 3.     If Infinera does not change its philosophy quickly or if there is too much of a delay in developing a true 100G system, look for the service provider to begin a more concentrated effort to build out the network using a different vendor.   undefined

Analysis:

Infinera has apparently conducted trials so far doing inverse muxing of ten 10-gigs.  While it is claiming 100G transmission, the supplier is essentially doing the same thing as everybody else -- using a MLD interface and talking to a 100G MAC.  It is not truly a system – it is just an implementation.

Level 3 is not likely to be attracted to Infinera’s 10 by 10-gig approach based on the lack of scalability.  A 100G serial using QPSK does scale from the number of bits per channel standpoint.  At the end of the day, it is all about how many channels are available in the C-band.  So, the way Infinera has done its trials is not the future.  Of course, the manufacturer still has to finish its current 40G PIC, and while working on a 100G PIC, it will clearly not be the first to offer a 100-gig solution.  

Normally, with any other carrier, Alcatel-Lucent and Fujitsu would have the upper hand, given that Level 3 wants to standardize as much as possible on these two suppliers.  In the end, the carrier does not play favorites and is pretty vendor-agnostic.  Level 3 will be happy to build an overlay with whatever company has a viable 100G system.  In addition, while Level 3 may deploy a little bit of 40G, it has not pulled the trigger on this rate, yet.

Implications: undefined 1.     Perhaps, many of us were mistaken about the need for 100G transmission. 2.     We believed that the industry would follow its normal pattern of moving up the line in optical networks as it always has in the past – the ITU way of going from 10G to 40G – and then maybe even to 160G. 3.     It appears to be more than hype that carriers such as AT&T, Verizon, and Level 3 want to change this notion. undefined

Analysis:

Glen Wellbrock is quoted in the featured article, “They’re all (applications) killing us right now.”  In fact, in actuality, the bigger carriers wanted to have 100G capability yesterday.  There are also indications by the service providers that as soon as 100G comes along, they will end their 40G programs because there will no longer be any need for the lower rate – from the standpoint of the eventual cost per bit.

Of course, the availability of a true 100G system is not here today.  Certainly, there is really nothing production worthy.  Apparently, Nortel, Alcatel-Lucent and others are trialing band-aid versions of dual aligning 40G channels to make a quasi-100G, but it is obviously running at 80G.  The most optimistic timing for 100G continues to be mid-2010.  And for smaller vendors, it has become difficult in the current market to get cash for R&D to execute and build actual 100G boxes.  Lastly, 100G is certainly going to cost more than 10 ten-gig systems for a while.

Nevertheless, 100G is expected to be dominant over 40G.  Once coherent receivers get going in volume, and phase modulation schemes are standardized a little better, the belief is that 100G will be substantially cheaper than 40G was ever going to be.

Implications: 1.      There could easily be another reason for AT&T “putting wireless chief Ralph de la Vega in charge of all consumer offerings...[than] to better coordinate marketing of landline and mobile services...” 2.      It has been long known that AT&T’s strategy of extending copper out for video is not going to be viable in a lot of cases. 3.      The top leadership at the service provider continues to want to move away from the FTTN/IPTV scheme.

Analysis:  Throughout his career, AT&T has been shifting Ralph de La Vega around to often use his talents in dealing with demanding tasks.  His responsibilities at the ex-BellSouth ranged from heading up its Latin America business to being in charge of its Broadband and Internet Services group.  At the new AT&T, he was Group president-Regional Telecommunications and Entertainment.  In fact, the bulk of his 30+-year career has been on the wireline side of the business.   Back in 1990, de La Vega was an executive involved in fiber to the home trials as well as in efforts to deploy fiber to the curb at the old Southern Bell.  His participation in testing FTTH continued at BellSouth.  de La Vega has also been acknowledged as the person turning around the DSL business for BellSouth.  

The AT&T CEO is facing a lot of internal resistance in moving in a more fiber-to-the- premises direction.  He probably views de La Vega, as an outsider of the original SBC crowd, as pushing that transition sooner.  AT&T has about a million and a half lines of FTTC in the BellSouth territory.  And that deep fiber can readily be extended to the home. 

Implications: 1. Despite the economic downturn, the overall telecom services business in the US continues to remain rather good. 2. While residential building has taken a hard hit, the performance numbers at the three major service providers have stayed fairly strong – especially at AT&T and Verizon. 3. Future competitive pressures at the RBOCs will be a driving force to maintain CAPEX budgets from big swings downward.  

Analysis:  The telecom industry suffered through a depression in the early part of this decade.  This severe slowdown was unprecedented in the history of the industry.  Even during the Great Depression, telecommunications remained one of the best sectors in the market.  But in the more recent past, Wall Street and venture capital entities caused such humongous buying and overbuilding of the basic networks that the balloon burst under its own weight.  In the so-called “golden years,” it has often been said that if one was able to spell “fiber optics,” money was thrown at that person by the handful.  Today, thankfully, that mentality has been replaced with one of building a solid network with a minimum of frills and a method to expand as needed.  

It is for those reasons that even in this tight financial market, it would be wrong to suggest that there is a sense of panic at the RBOCs. Yes, they are feeling the pinch of the reduction in builds in the housing and commercial markets.  But the key point is that it is more of a slight squeeze, not excruciating pain.  

Verizon, AT&T, and Qwest have all been taking a closer look at their CAPEX budgets. While there might be significant cuts in the 4th quarter (5% or more), the year will wind up at worst down one or two percent compared with last year’s forecast.  While 2009 is being billed as slow in the first half, a strong finish is forecasted.  Overall, the CAPEX budgets are expected to be flat for the year over year numbers.  

Several factors influencing the RBOC equipment market are as follows:  

· AT&T is still struggling to get its house in order from the triple merger process. During this ongoing reorganization, the networks (both wireline and wireless) have tended to have relatively little, if any work, completed in terms of the various modernization efforts.  The company realizes that it will soon face major challenges from competitors, if it does not make improvements.  AT&T cannot afford to wait until the general market cloud passes over.  

· Verizon has the cable companies on the run and its business offerings have been improving over the past couple of years. With fiber now at the front door of the vast majority of the Fortune 2000 companies, it cannot afford to let down the pressure to make further penetration in the enterprise arena.  

· Even Qwest is beginning to make waves in its territory.  This carrier, too, must maintain a steady improvement in its network offerings, if it wants to remain the first choice of consumers within its footprint.  

So, while other segments of the business world might face a major downturn, the telecom space will experience some reduction in equipment expenditures -- but certainly not as severe as many analysts are predicting.  The need and desire to be ready to meet the certain challenges that will follow a recession are going to fuel spending during the storm.  Of course, all of the RBOCs are making the assumption that access to credit will stop being any kind of hindrance in the very short term.    

Implications: Incumbency will be critical in whether vendors win or lose during the downturn in the US telecom market. R&D and service programs will suffer the most. If layoffs occur at one of these suppliers, instead of getting rid of the most experienced employees, the company should try as much as possible to retain its in-house expertise. 

Analysis:  During times of free spending and really good income, many service providers may be a little more willing to take a chance on new suppliers.  When times are tough, the carriers invariably turn to their most trusted partners – the incumbents.  These buyers have greater expectations with established manufacturers to get the best product for the cost.  They can also anticipate the most help when problems occur.  Smaller and less-known companies cannot be counted on to survive a market slowdown.  In addition, it is becoming extremely difficult for less significant companies to borrow money that is needed to keep pace with the development of new products and feature/functionality being demanded by the carriers -- and by the enterprise space as well.  

The interesting twist this time, in comparison to the past, is that the situation does not look very promising for the traditionally largest systems integrators – Alcatel-Lucent and Nortel – both of which have been struggling financially for quite a while.  Vendors that target particular portions of the network including ADC, Adtran, Ciena, Cisco Systems, Corning, Fujitsu, and Juniper – and perhaps even Tellabs – will be in the best position to find opportunities available to them.  However, these suppliers will need to be ready when the market comes back to full health.  They must do whatever they can to keep their finest people – particularly in the areas of R&D and maintenance.

Implications: 1.      A very long time ago, Nortel was considered one of the premier corporations in the world. 2.      The company was able to coast along just on its reputation and presence despite a record of limited innovation. 3.      The notion that it is now heeding the advice of analysts that participating in multiple areas has been a mistake – only when forced into a corner with that reality – is now hard to swallow.

Analysis:  Especially in the public telecom space, Nortel has been considered by many people in the industry to be a dog for a lengthy period of time.  The adamant stance by major service providers not to even consider the supplier in many cases has become very evident.  Nortel’s woes are indeed specific to its competitive position in the market – and play a much greater role than any perceived slowdown in spending by the carriers.  

The level of desperation can be found with Nortel actually telegraphing its intentions to divest certain assets.  How can it expect to get the full value of particular divisions by demonstrating how anxious it is to get rid of them?  It is not much of a leap to believe that Nortel has not been successful in enticing other vendors to buy its businesses before this major announcement.  In fact, there has been a long-term reluctance by many corporations to have any dealings with the supplier – whether they are alliances or purchases or divestments of particular product lines.  In recent years, it has been nothing short of embarrassing that roadblocks were put in its way even after Nortel had made it clear in the past it was looking for major acquisitions.  

Implications: 1.      In its revised outlook, the term “DMS” was not mentioned one time. 2.      At least there was recognition by Nortel that carrier VoIP is closely related to its heritage. 3.      It is reasonable to assume that wireless carriers have not shown a lot of interest in working with Nortel on 4G.

Analysis:  Whether Nortel ultimately retains its extensive DMS central office base or sells it off – it by far has the most worth of any of its properties.  Whoever controls that footprint – will potentially have a major influence on the telcos’ movement to VoIP.  The transition from digital Class 5 offices to IP-based ones will continue to be incremental in nature.  Given the important role CO switches plays in service provider networks, any supplier that is not a traditional incumbent is at a big disadvantage.  

While the plans to divest itself of its metro enterprise and optical businesses may indicate more of a shift to the private enterprise space, as long as Nortel has in its possession a very large portion of the CO infrastructure, it remains a critical public network participant.  And this current arrangement might be pivotal, as the supplier will be placing more of its emphasis on going head to head with the very powerful Cisco Systems.  

Concerning 4G/LTE, it is likely that Nortel is receiving the cold shoulder treatment from several major wireless service providers.  Certainly, the vendor is not at the top of the list in terms of the confidence level by carriers in choosing it as a strategic partner in going to a next-generation technology.  

Implications: 1.      Everything indicated that CommScope was poised to totally take over AT&T’s connector business. 2.      It seemed only a matter of time when ADC was going to lose the entire account. 3.      To its credit, ADC, made the necessary changes and will wind up getting a higher share of the RBOC’s expenditures at AT&T in 2008 than originally estimated.

Analysis:  It seemed like an increase close to 40 percent over last year in terms of sales to AT&T by CommScope was in the bag.  Now that projected rise at the RBOC for 2008 appears to cut down to almost a third of the initial estimate.  While the reaction to the decrease in growth will likely center on the weakening economy, much of the change has to do with ADC making critical adjustments in fighting to keep a major customer.  

ADC made some key changes in the top leadership to put veteran talent in overseeing its critical business with the RBOCs.  And a short time ago, the supplier started to make a concerted effort to really listen to the needs of these customers.  The efforts have paid off with a noticeable increase in sales to AT&T in recent weeks.  

It is a blow to CommScope, which was hoping to build on what was perceived to be a dominant position at AT&T to make further inroads into the overall RBOC space.  Now the stakes will be higher in as the supplier attempts to take advantage of its impressive development of new cabinets to get the Bellheads to buy more of its products.   

The real reminder with all of these developments is to never – ever – count out an incumbent supplier in the public telecom equipment market.

Implications: 1.      The number of people actually attending the just concluded FTTH Conference was at least 40 percent lower than the original estimates. 2.      Perhaps a big part of the problem is that there really have not been any dramatic changes in the fiber to the home market for a while. 3.      Once it becomes clear, as has been expected, that “AT&T...[will no longer] remain committed to [its] fiber-to-the-node networks indefinitely,” there will be a new surge of interest in the technology.

Analysis:  Most of the panel sessions at the last FTTH Conference centered on topics that seemed to be old hat.  There were the standard discussions on IPTV, monitoring networks, regulatory obstacles, and MDU optimization.  But there was nothing too exciting in terms of new developments.  The scant amount of press coverage at the show was an indication of the state of affairs.  Even the usual cheerleaders in the market research crowd have tempered their enthusiasm.   

Unfortunately, it has taken much longer for AT&T’s new leadership to make its intended shift away from FTTN.  They are still fighting off the outmoded way of thinking by some executives that widespread deployment of video, including HDTV, can still be pulled off over copper.  In fact, there was one attendee at the conference who complained that after AT&T dismantled his satellite connection and installed U-verse, the technician came to the conclusion only at the end of the process that the length of the copper made it impossible to work – and then the tech was unable to reconnect the customer back to satellite.  

The good news is that the opportunities for carriers overbuilding with FTTH in the US still appear to be bright.  And Verizon appears to be planning to go on another tear to sell more FiOS services in the first quarter of 2009 as they did in the 1st quarter of 2008.

Implications: 1.      Fundamental “values” must be place in order to ensure a “value play.” 2.      Totally straight-shooting from the top leadership at Ciena has been lacking for a good number of years. 3.      A much higher level of trust must be in place, especially for the long-term needs of the large service providers.

Analysis:  The high level of dependency on Ciena’s CN 4200 and on CoreDirector products is the key concern.  The final straw for both industry analysts as well as the carriers could wind up being the purchase of World Wide Packets based on an apparently half-baked rationale that a firm contract was in place with AT&T.  As a result, the valuation of Ciena was perceived to be lower well before Ciena had adjusted its anticipated performance estimates.   

The Barron’s piece alluded to in the original source is correct in stating: “[The] opportunity [is there] for those with a longer view, who understand there is robust long-term demand for [Ciena’s] expertise as telecom carriers strive to keep their services relevant and improve their profitability.”  However, it only remains true if there is an adequate amount of confidence in the top leadership.  One too many acquisitions in Ciena’s history have proven to be rolls of the dice.  Couple this with the overall propensity to lowball expectations in general,  the well-documented strengths of its product line for future applications will have a limited impact on the general impression of the company.  

Implications: 1.      While on paper, a Tellabs-Ciena merger would make a lot of sense, one problem is the deep cultural differences between the two suppliers. 2.      The earlier proposed merger between Tellabs and Ciena had a different CEO at the helm of the latter – one whose vision was more in line with the leadership of the former. 3.      With a long track record in proven reliability of product quality and service, Fujitsu could be the next best option for purchasing Ciena.

Analysis:  It could be argued that a takeover by Fujitsu of Ciena would actually offer the best of all worlds.  The Japanese company has given the US division a lot of autonomy, which has resulted in it becoming a staunch incumbent supplier to the service provider market in the States – and highly respondent to the requirements of these customers.  At the same time, in becoming part of a global conglomerate, Ciena’s operation would be sheltered and would be able to fully execute without as much concern over the impact of the ups and downs in the marketplace.  

Ciena would round out Fujitsu’s product portfolio in the transport sector and it would gain a couple of very attractive solutions to sell to its strong base in Japan – as well as other parts of Asia.  With a broader offering, the Japanese supplier would be less prone to take a hit on margins with its negotiations with the RBOCs.  An acquisition would also preempt any further dealings between arch rivals, Hitachi, and Ciena – the former perhaps looking to get higher up the optical food chain in a much bigger way in the US.  

In addition, Fujitsu has to be concerned about the further encroachment of Chinese vendors, such as Huawei, into the North American market – including the possibility of the latter picking up assets from Nortel on the cheap.  Acquiring Ciena would be an audacious defensive move in becoming an even higher premium equipment vendor – and being better able to fend off the deep undercutting on price by the Chinese suppliers.  

One last thought would be that this type of merger could be problematic for Fujitsu as far as government contracts are concerned. A foreign owned company may have difficulty gaining approval for deployment in the US Government agencies.

Implications: 1.      The concern level over the enterprise business has reached a higher level at Verizon as major financial firms are struggling. 2.      There is greater amount of concern over the possibility of a major crimp on commercial spending. 3.      A silver lining for manufacturers is that all of the bad news is coming towards the end of the year.

Analysis:  Despite a slowdown in the economy, there was optimism at Verizon in January of this year that the telecom market would pretty much hold up.  In particular, a lot of money was poured into the enterprise bucket.  In fact, the RBOC overspent its overall CAPEX budget by about 5% in the first half of 2008.  Therefore, it was cut back by about 3% in the second half.  In addition to the softness that Verizon has witnessed in recent weeks, some executives are fearful at the telco that the difficulties at financial firms could extensively pull down its current enterprise business model.    

The general reaction is mixed at Verizon about the anticipated demand for enterprise infrastructure in the short term.  In fact, it might turn out that there will ultimately be a bit of an overreaction.  Nevertheless, it would not be surprising if the CAPEX budget declines as much as 10 percent for the rest of the year.  The hits will primarily be felt on the equipment access side.  The core portion of the network will probably be solid for the remainder of 2008.  

The original intent at Verizon was to keep its CAPEX flat for 2009.  It might be decreased a little bit – a one or two percent decline appears reasonable at this time.  Equipment installations in the metro core could decrease a little bit.   

Typically, the RBOCs tend to finish the majority of their scheduled projects before the fourth quarter.  The last quarter tends to be a time for last-minute additions and more routine upgrades.  

While the news is not necessarily what the carriers want to hear, it is no where near the debacle of the early 2000's. While many investors are concerned of a repeat, there is absolutely no reason to believe that this going to occur again or that we are even near that point.