AT&T Corp. (NYSE: T)may be putting another optical networking trial on hold, say industry sources (see AT&T DWDM Hope Dwindles).

Last week, Merrill Lynch & Co. Inc. said in a research note, Optical Systems – Terminal Velocity, that an AT&T request for proposal (RFP) focused on bandwidth grooming had been put on hold. This grooming initiative was focused on devices grooming traffic at the VT1.5 level. The carrier is already using the CoreDirector from Ciena Corp. (Nasdaq: CIEN) to groom traffic at STS1.

A spokesman for AT&T Research Labs denies that there has been any change in the RFP plans. But he would not elaborate on the vendor selection process.

Polaris Networks and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) have both been in contention for this contract. The purpose of the N3/1 or Next Generation 3-1 Digital Cross Connect RFP was to find a device to automate the provisioning of circuits at the VT1.5 (1.7 Mbit/s) level just as the CoreDirector had done for the STS1 (51.84 Mbit/s) circuit provisioning.

Exactly why the RFP would be shelved is not known. Some in the industry say that neither Polaris nor Tellabs were able to meet all of the requirements. Others say it has more to do with timing.

“There’s not as much pressure to test something like this in the current market environment,” says Rick Thompson, an analyst with PointEast Research LLC.

Thompson notes that the cost of adding a new vendor could be more than the savings AT&T might get by implementing the gear. Whatever the reason, AT&T is supposedly adding more devices from its current crossconnect supplier, Alcatel SA (NYSE: ALA; Paris: CGEP:PA).

The news of a possible delay in the project is an especially hard blow to startup Polaris. The 80-person company says it has had products in a number of carrier trials. But many in the industry have said that the AT&T contract was the most promising. Without naming names, Surya Panditi, the company’s new CEO, told Light Reading in January that he expected to recognize revenue from one customer by the end of the year (see Panditi Puts Spurs to Polaris). When reached by telephone today, Panditi would not comment on the specifics of the AT&T RFP.

“If they don’t get this contract they are in really big trouble,” opines Sam Greenholtz, an analyst with Communications Industry Researchers Inc. “They were really counting on AT&T and didn’t seem to have anything else lined up. It’s got to be a painful rejection for them.”

Polaris isn’t the first startup to suffer at the hands of AT&T’s long approval process. Celox Networks, which was developing an IP service switch, was another startup that had been counting on a contract with AT&T. The company had raised $155 million in funding, and had spent quite a lot of it trying to win an AT&T contract. But the contract win never came, and the company closed its doors in December last year (see Is Celox Farewell an Omen?).

Polaris has raised $77 million so far, a little over half of what Celox had raised. But PointEast's Thompson says he is more optimistic about Polaris’s chances for success. Unlike Celox, there are fewer competitors addressing the VT1.5 market. Aside from Polaris, few companies offer VT1.5 grooming. Tellabs offers a comparable product, which it acquired from Ocular in late 2001. Metro-Optix Inc. also offers a product.

Celox had been competing with edge routing vendors including Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR), as well as a number of smaller companies like CoSine Communications Inc. (Nasdaq: COSN) and Network Equipment Technologies Inc. (net.com) (NYSE: NWK).

“It’s really a question of whether or not they have enough cash to hold on,” says Thompson. "At least on paper, the product looks compelling."

He warns that getting close to an AT&T contract can be both a blessing and a danger [ed. note: a blanger?]. In some circles AT&T is known as a startup killer, because of its rigorous testing program that can often take much longer to get through than some of the testing in the regional Bell operating companies (RBOCs).

“You really have to weigh how much money and time you are willing to spend to win the deal,” he says. “It’s not smart for any startup to put all of its eggs in the AT&T basket.”

But some startups and smaller companies have made it through the grueling process. Core IP routing vendor Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) is one of them. CEO Panditi actually had been CEO of Avici when the company first started doing business with AT&T; he is still Avici’s chairman. Like Celox and Polaris, Avici spent a lot of cash to win the deal. Some would argue that the carrier never ended up spending much on the Avici routers. But it was enough to help sustain the company in its early days.

“Even if AT&T doesn’t spend much with you, they are still a good customer to have on your corporate resumé,” says Simon Leopold, an analyst with Merrill Lynch. “It might help with the next sale. It’s a big endorsement, because everyone knows that they scrutinize the product and pick it apart.”

What’s next for Polaris? The company is likely looking for a partner (see Who Will Pick Up Polaris? ). Most carriers today are not willing to bet the farm on a startup and would like to see a Big Brother figure to help ensure that someone will be around to service the product. A number of companies that do not already support VT1.5 grooming could be likely candidates, including: Alcatel, Cisco, Ciena, Lucent Technologies Inc. (NYSE: LU), Marconi plc (Nasdaq/London: MONI), Nortel Networks Corp. (NYSE/Toronto: NT), and Siemens AG (NYSE: SI; Frankfurt: SIE).

— Marguerite Reardon, Senior Editor, Light Reading