It is No Longer 1995 for Nortel High-End Optical Electronics

Implications: 1.      In the mid-1990s, Nortel leapfrogged the market with an aggressive launch of its OC-192 system – but really succeeded by the skin of its teeth. 2.      As more and more long-haul carriers came into existence, they naturally chose systems with the highest capacity.   3.      Despite hype to the contrary, Nortel now appears to be more of an also-ran as the industry moves to 40G.

Analysis:  Before the OC-192 revolution, Nortel was never considered a leader in fiber optic technology.  This was the company that came up with the infamous marketing scheme, called FiberWorld, which was based mainly on presentation-ware than anything else.  It also made the mistake of giving up on passive technology in the 1980’s – resulting in the very successful formation of JDS.  Moreover, Nortel tended to concentrate on lower-end fiber optic products that did not make any money.  

Nortel has to be given its due in being the first to offer a commercial OC-192 system. But it was almost by accident that it resulted in a multi-billion dollar business.  Nortel was initially at the bottom of MCI’s list for a 10-gig product.  However, as it happened, MCI – always looking for the latest and greatest technology – made a terrible mistake in going with dispersion-shifted fiber in a big way – which favored increasingly higher-speeds of TDM technology.  So, the carrier was willing to accept a barebones product from Nortel because it happened to be available for shipment.  Nortel was also helped by the fact that at about the time, Lucent and AT&T both agreed there was no reason to go beyond OC-48.  And Sprint, desperately needing rings, enabled Ciena’s existence.  Ultimately, with Qwest and other carriers coming into existence, because of the growth of the Internet as well as regulatory changes, Nortel became the dominant player in the high-end SONET market. 

In more recent times, former telecom equipment powerhouse, Nortel, has been struggling to keep its valuation above that of more of a niche player, Ciena.  It has focused on all kinds of new areas including WiMAX and IPTV and has been thwarted in its effort at major acquisitions including Avaya and World Wide Packets.  Many telecom customers simply do not look upon Nortel with a great deal of confidence.  

In turning more of its attention toward 40G now, Nortel shows a sense of desperation that would not have been the case had it put more emphasis on it several years ago.  While there is no doubt that its installed base at the top end will be an asset going forward, its ability to dominate the high-capacity optical space again appears doubtful.  It is a vastly different situation that when it was by itself at 10G, over more than a dozen years ago. 

  A good number of other competitors have been working to get the technology to operate effectively at a lower cost.  There are also not as many long-haul carriers anymore.  And Nortel arguably does not have the optical engineering talent it possessed in the 1990s.  In addition, DWDM has become a ubiquitous alternative to higher-speed TDM rates.