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Alcatel Joins Verizon PON Party

Craig Matsumoto
7/27/2006

The incumbents came out winners in the Verizon Communications Inc. (NYSE: VZ) GPON buildout, with Alcatel (NYSE: ALA; Paris: CGEP:PA) getting its foot in the door alongside Motorola Inc. (NYSE: MOT) and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA).

Early this afternoon, Verizon announced its selection of the three vendors for a closely watched request for proposals (RFP) for GPON, an upgrade to the fiber-to-the-home (FTTH) technology that carries Verizon's FiOS service. The RFP was jointly issued by AT&T Inc. (NYSE: T), BellSouth Corp. (NYSE: BLS), and Verizon in November. (See RBOCs Aim for 10M GPON Subs.)

Verizon will start by deploying Alcatel equipment by the end of the year. Motorola and Tellabs are to follow, in that order. Verizon isn't specifying a timetable for using those two vendors, but 2007 looks likely.

That doesn't mean Tellabs is a third-place finisher. Rather, Alcatel's equipment just happens to be the first available -- therefore, it's getting installed first, a Verizon spokesman says.

Verizon isn't disclosing details of the contract, including the proportion of business to be doled out to each of the three. It won't be an even 33/33/33 split, the spokesman says.

The three vendors are the incumbent passive optical networking (PON) players for the large North American carriers and were the favorites to win the job despite a host of new GPON competitors jumping in. (See GPON RFP Weighs In and Nortel, Huawei Bid on GPON.)

Tellabs was the incumbent in Verizon's deployment of broadband passive optical network (BPON) technology, with Motorola a second source. (See Moto Gets a Piece of Verizon FTTP.)

In that sense, Alcatel -- already a factor in the AT&T and BellSouth PON deployments -- is the big winner here.

Tellabs arguably had the most to lose here, given its standing with Verizon. Analysts have noted for some time that Verizon's shift to GPON could be a threat to Tellabs, allowing other vendors to get a foot in the door.

The problem is that PON margins aren't great, leading to a "damned if you do, damned if you don't" scenario, says Simon Leopold, an analyst with Morgan Keegan & Company Inc. : Losing the RFP would mean lost PON revenue, but winning it could depress margins.

"We came to the conclusion that it's better for Tellabs to be winner and be a participant. This is good news for them," Leopold says.

By the time of the announcement, Tellabs stock was already down 15 percent, as the company issued disappointing forecasts alongside its earnings today.

— Craig Matsumoto, Senior Editor, Light Reading

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