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Nortel & Huawei: Broadband Buddies

Ray Le Maistre
2/1/2006
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Nortel Networks Ltd. and Huawei Technologies Co. Ltd. are forming a joint venture company to develop "ultra broadband access solutions" for the global service provider market, the duo announced today.

The new company, which will be based in Ottawa, will be majority-owned by Nortel and is expected to be in operation in the third quarter of 2006. Nortel is already marketing Huawei's broadband access gear to carriers, and the two firms have already started joint product development.

The move follows Nortel's joint venture engagement with LG Electronics Inc. (London: LGLD; Korea: 6657.KS) , though that is more specifically focused on wireless developments and Korean market opportunities. And Huawei already has an OEM deal in North America with 3Com Corp. (Nasdaq: COMS), but that is targeted at the enterprise switching market. (See Nortel's Owens: Krazy About Korea, Nortel, LG Seal Deal, and 3Com & Huawei Launch Switch in US.)

The yet-to-be-named JV -- Norwei, Huatel? -- is to develop a next-generation multiservice access platform designed specifically to enable carriers to converge their voice, data, video, fixed wireless (such as WiMax), and, down the road, even mobile network traffic onto a single IP network, says Nortel's VP and general manager of broadband networks, Walt Megura. The resulting products will then be marketed by the two vendors around the world.

He says Nortel will bring its voice and optical networking experience together with Huawei's broadband technology to create new products for Tier 1 and Tier 2 carriers in all markets. "You'd be hard pushed to find a market where there wouldn't be demand for such products," reckons Megura.

"Convergence is really taking off -- this is a big opportunity for us and our partner, and will allow us to participate in a meaningful way. This shows our focus and commitment to this space."

So, how big a deal is this for the new partners? "At first glance, this looks like a great move for both -- access to important markets and working together to develop a real fixed/mobile convergence solution. It gives Huawei better access to North America and gets Nortel into the access game in a huge way," says Scott Clavenna, Chief Analyst at Heavy Reading. "But I would always look on major joint ventures with some real skepticism and concern about just how well these companies can work together and co-develop products across such a gulf. History hasn't been terribly kind to ambitious joint ventures." (See AT&T and BT to Unwind JV.)

The partnership fills a massive hole in Nortel's portfolio, as the company pulled out of the fixed-broadband access market a few years ago, a move it has come to regret. (See Nortel CEO: We Blew It on DSL.)

Huawei, conversely, has registered significant success in the DSLAM and multiservice access market and is one of the access vendors in BT Group plc (NYSE: BT; London: BTA)'s high-profile 21CN next-generation network project. (See Huawei Deepens DSLAM Penetration, Huawei, ZTE Ramp Up IP Access, IP DSLAM Revenues Jump 20%, and Vendors Sign BT 21CN Contracts.)

And while broadband port prices have been dropping sharply every year, there's still a lot of money to be made by the equipment vendors. According to market projections by the Dell'Oro Group , the broadband access market was worth nearly $9 billion in 2005, with IP DSLAMs accounting for $1 billion. The research firm predicts the IP DSLAM market will be worth $2 billion in 2008.

But it's not as if Nortel hasn't already tried to plug its broadband gap, as it has previously struck partnerships with ECI Telecom Ltd. , Calix Inc. (NYSE: CALX), and Keymile AG in an effort to keep its name in the frame -- though there have been very few signs of any market traction as a result, with Sprint Corp. (NYSE: S) the only significant scalp. (See Nortel Gets Back Into Broadband, Nortel, Calix Get Access at Sprint, and ECI Gets Euro FTTH Deal.)

While the Huawei JV looks like negative news for those partners, Megura insists those partnerships will be maintained: "I see the joint venture as an adjunct [to those relationships] for next-generation technology, and I see a time when we have a technology option to bring to them. It will be up to the customer to decide."

Nortel says details about what portion of the company each partner will own, and who will manage the JV, have yet to be decided.

The news is the latest big splash for Nortel's new CEO, Mike Zafirovski, who has been stamping his authority on the vendor since he took over in November last year, though Megura says the talks with Huawei were initiated before the new skipper took the helm. (See Nortel's New Faces Face Tough Task and Nortel's Clent Came & Went.)

— Ray Le Maistre, International News Editor, Light Reading

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stephencooke
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stephencooke,
User Rank: Light Beer
12/5/2012 | 4:07:41 AM
re: Nortel & Huawei: Broadband Buddies
I think this is a great idea and, if blessed with good execution, should do well for both parties.

One of the biggest difficulties that I see, that is generally not obvious to those with a purely business focus, is language. Time-to-market will be negatively affected as products are adapted for new opportunities do to the fact that the Huawei design documentation is likely in Chinese (Mandarin?) and any Nortel designers who try to make changes, unless their grasp of Mandarin is excellent, will have difficulty. This is a low-level difficlty that can have serious impact on high-level deliverables.

The point here is that this will be an interesting exercise in design politics. At a high level this looks like it makes good sense to me. I hope they can pull it together and make it work.

Steve.
futureisbright
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futureisbright,
User Rank: Light Beer
12/5/2012 | 4:07:41 AM
re: Nortel & Huawei: Broadband Buddies
common set of objectives.

The issue with most JVs is that the particpants have different objectives, and asymetric power.

In this case, Nortel wants access to low cost products, Huawei to the NA market. Who is this a temporary arrangement for, Nortel or Huawei? Who will be the first out, Nortel or Huawei?

In my external view, Huawei is in the driver seat. In the process they will gain exposure for their products in the NA market. If the JV collapses, they will address the customers directly. If it does not, they will want to acquire it completely.

Nortel offers a sales infrastructure to the market. To be successful, the JV will need a dedicated sales force for the product line. If the JV collapses, how long willt he sales force stick?

Interestingly, Nortel is the majority owner of the JV, basically balancing out Huawei's leverage. Maybe they'll become a distributor of other companies' products, just like Lucent.


digits
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digits,
User Rank: Light Beer
12/5/2012 | 4:07:41 AM
re: Nortel & Huawei: Broadband Buddies
Scott Clavenna at Heavy Reading has doubts whether any JV can work, so what would it take to make this partnership deliver some useful, competitive goods?
paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 4:07:41 AM
re: Nortel & Huawei: Broadband Buddies

Generally, I think either a major customer opportunity or a specific market opportunity drives that common set of objectives.

Take a look a the Access section of the Huawei website. They have:

- A BLC: Hmmmm Ciena (Catena) can't make a dent, where will that be sold? The IOCs? Nortel is going back to the DLC market in the IOCs? That will go over like a fart in church. They have to completely rework the CO Voice Interfaces before they have a product.

- An IP DSLAM: Okay, who are they displacing and in what customers? The big guys have all picked their access architecture for the some time. Anybody see any major RFPs coming?

- A BRAS: Going after whom again? The major customers have their choices.

- An IP Voice Gateway: See the MG9000. Nortel has a product in this space for sale with the CS2000.

- An Active FTTH Product: Go after the municipalities? There is an EPON variant? Again, to whom? Bell Canada and Telus?

The biggest news out of this is the death of the Calix/Nortel relationship is in the public domain.

seven
paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 4:07:40 AM
re: Nortel & Huawei: Broadband Buddies

Stephen,

Take a look around. Requirements change and the vendors stay. Take a look at Alcatel. There is simply no way that they are getting booted out of the AT&T business. They are in too deep.

The position you are taking are the way things used to work. Things are different now. The winners are in at the beginning and it is basically winner take all. There are very few times that vendors get replaced and even second sourced nowadays.

seven
paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 4:07:40 AM
re: Nortel & Huawei: Broadband Buddies

That is if the GPON product from the yet to be made from the yet to be completely formed JV is available 1st half of this year. After that, products are selected and the JV need not apply.

seven
stephencooke
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stephencooke,
User Rank: Light Beer
12/5/2012 | 4:07:40 AM
re: Nortel & Huawei: Broadband Buddies
Seven,

What makes you think that all the vendor selections will be completed by the first half of this year? RFPs aren't the end of the ballgame as I am sure you know. This is not to mention that requirements change, often during the RFP and implementation process.

I wouldn't write them off so easily. On another note, the article seems to have a more international flavour as if their main targets are outside of NA.

Steve.
bw
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bw,
User Rank: Light Beer
12/5/2012 | 4:07:40 AM
re: Nortel & Huawei: Broadband Buddies
All know that there are significant activities in GPON push in NA ROBCS, such as Verizon, SBC, etc., potentially worth billions of dollars in equipment deployment spending., over coming years. Neither Nortel, nor Huawei are at a short list now, not yet any way. This JV may aim to push into the short list now include Alcatel, Mot, Tellabs.. as top tier player..
ozip
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ozip,
User Rank: Light Beer
12/5/2012 | 4:07:39 AM
re: Nortel & Huawei: Broadband Buddies
I have been lucky (or unlucky) to have multiple engagements with Huawei in a couple of deals. I guess I would point to the latest 3Com quartely report. In case you didnt know, 3Com breaks out the Huawei products. After almost 2 years, $20M in the switching/routing market, does that even cross the 1% share threshold?

I wish the Canadians luck but I fear they will be eaten alive.....

OZIP

------------------------------------------------
Revenue from Huawei-3Com-sourced products sold by 3Com grew by 37 percent sequentially to more than $20 million. This growth resulted from continued traction with the 5500 line of Layer 3 switches, particularly the successful introduction of the Gigabit and Power over Ethernet models. Revenue from the joint venture-sourced products quadrupled on a year-over-year basis.
paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 4:07:39 AM
re: Nortel & Huawei: Broadband Buddies

Stephen,

Actually in the RBOC world there was an RFP for all product categories every 3 years. Now basically there is an allocation at the start of the program. Then they do the next program.

Unless a startup has unique technology that is mandatory for an RBOC (read Redback and Pairgain as examples), there is no point in them showing up without "a big partner". Even then its a crapshoot.

seven
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