Summary
One prominent industry analyst believes that Ciena purchasing Nortel’s optical business would help its position at AT&T. We agree with the analyst in the source article that “such a move would not be a good use of Ciena's cash.” We also argue that it would not do much to strengthen its position at AT&T or anywhere else.
Analysis
Whether AT&T likes it or not, Ciena will maintain a virtually monopolistic position in the optical cross-connect space with its CoreDirector indefinitely. The vendor’s huge amount of penetration in networks with its switch is the most compelling reason. A cross-connect is a network element in which large service providers are not going to play around with because if anything goes wrong, thousands of customers are taken out. The tendency is also that the carriers do not want more than one vendor’s cross-connect product in their networks. If there is just a slight bit of difference between such solutions, bigger problems can arise, as technicians can mistakenly get confused between the two of them. One of the key reasons that Tellabs was so successful in the wideband cross-connect space with its 5500 is that the telcos wanted to stick with the same manufacturer. As Ciena’s installed base of switches continues to increase, the less inclined the service providers, including AT&T, will be to believe that they can afford to go with a second supplier. Of course, Nortel never really had a cross-connect.
Ciena’s other star product, the CN 4200, is the state-of-the-art solution in the space. The Nortel products do very little in bolstering its position with the 4200. Owning an installed base of optical transport gear is not the same as possessing a central office base of equipment, such as Nortel’s DMS. Ciena would pretty much be selling just additions to Nortel’s customers anyway.
We have agreed in the past that Nortel has "some neat technology" in its 40-Gbit/s and 100-Gbit/s portfolio. However, the 100G market is still evolving in terms of technology. In the final analysis, Ciena would not want to take on the huge development costs in becoming a principal player in driving 100G forward.
Ciena must also avoid the temptation of buying Nortel’s optical business because the Canadian company’s image has been so tarnished. In effect, Ciena would be taking on all of the negative associations with the Nortel gear. There is no aura there at all anymore.
AT&T has not that much to lose in encouraging a solid company like Ciena to take care of its Nortel installed base. Ciena needs to realize that its strong position with the CoreDirector alone will make it a de facto domain supplier to the carrier. The optical cross-connect has been developed to have a greater direct connection with the 4200. Ciena’s base of CoreDirectors will drive the 4200 a lot more than Nortel’s products could ever accomplish.
The analyst that is kind of promoting the idea of Nortel has had a tendency to be overly bullish about the vendor’s products in the market over the years. However, he is correct that Fujitsu will be one of the optical domain winners at AT&T. Fujitsu’s ROADMs in particular are used heavily at AT&T. Although everyone has essentially caught up on ROADM technology, its very strong incumbent position in general at large telcos gives the vendor a major advantage.
Samuel Greenholtz consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
