Nortel's HDX: The Future Under Fire

Light Reading
OFC/NFOEC News Analysis
Light Reading
2/27/2002



As the carrier spending environment chills to the bone, optical equipment makers look to use the downtime to prepare their next-generation strategies.

In the case of Nortel Networks Corp. (NYSE/Toronto: NT), this raises the question: What's up with the HDX optical switch, the company's marquee next-generation product?

Last week, news leaked out that Cisco Systems Inc. (Nasdaq: CSCO) was preparing an STS1 grooming switch; and, just last month, Lucent Technologies Inc. (NYSE: LU) announced plans for its LambdaUnite, an OEO grooming switch (see Cisco Preps Stealth Switch and Lucent's LambdaUnite Busts Out). Meanwhile, Nortel's OpteraConnect HDX platform, which has been in development for over two years now, still hasn't been officially launched.

There are two possible explanations for the delay. One: The product just isn't ready for prime time. Two: It's ready to sell, but the carriers don't like it and the company hasn't found the "launch" customer.

According to analysts covering the company, Nortel said last summer that the HDX would be in customer trials by the third quarter of 2001 and would be generally available in the first quarter of 2002.

So far, Nortel has announced that Genuity Inc. (Nasdaq: GENU) is one of the trial customers. But it hasn't announced that the product is generally available.

Carrie Kasten, a spokesperson for the company, claims that Nortel never specifically stated when the product would be generally available; instead, when the company referred to delivery dates, it was talking about customer or testing availability and not general commercial availability.

"I know, it's very confusing," she says.

Kasten says the product will be "showcased" at the Optical Fiber Communication Conference and Exhibit (OFC) set for Anaheim, Calif. the week of March 17.

"It is available now and in customer trials," Kasten asserts. "[Furthermore], we have been consistent with our expectations on delivery dates for the HDX for the past year, meeting the commercial availability projection of end of year 2001 as it was placed into two North American customer trials."

In any case, the HDX appears to have lost credibility with Wall Street, which grumbles that the company isn't handling the product launch particularly well. That's not good, because it is seen by many as the key to the company's future.

Some analysts say the delay might be the result of lackluster support from customers. UBS Warburg analysts Nikos Theodosopoulos and Michael Urlocker stated their concern over the product in a note they published late last year.

"Based on recent feedback from several major U.S. carriers, we believe that Nortel’s new HDX optical crossconnect may be poised for a weak reception by U.S. carriers," they wrote. "In our informal survey of eight major U.S. carriers, not one has indicated a strong interest in deploying or putting into trial the HDX."

Contacted this week, Theodosopoulos and Urlocker declined to add any comment on the HDX.

Market research analyst Mark Lutkowitz, vice president of optical networking research at Communications Industry Researchers Inc. (CIR), says he has heard similar grumblings: "Service providers I’ve talked to say there is a huge problem with the cost and size of the box. I don’t see any of them deploying it in any big way."

The UBS Warburg analysts listed four main problems with the HDX box. First, it may be too big. The OperaConnect HDX has four times the capacity of the CoreDirector, a hot-selling switch from Ciena Corp. (Nasdaq: CIEN). HDX supports 7.68 Tbit/s per bay with scaleability to 40 Tbit/s per system. This makes for a high startup cost and is currently viewed as overkill. The product itself is rather large and consumes more power than some service providers can justify.

But Nortel's biggest problem may be in committing to and selling a new architecture. For this reason, Nortel appears to be hedging its bets between a ring-based or mesh-based optical network, and that may have caused part of the delay on the HDX.

It all adds up to a puzzle for the company, which will likely try to spin the product's delay, if it happens there are no willing buyers of the current product. That could force Nortel to rework the product to fit customer needs.

"Without the HDX, I don’t know where Nortel will go optically," says CIR's Lutkowitz. "They’re already late to the market, so you have to figure it will be a problem for at least a few years."

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

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