Nortel has shut down the development facility for its LH 4000. Does this spell curtains for the platform?

August 19, 2002

4 Min Read
Nortel to Cut Ultra Long Haul?

Rumors are flying that Nortel Networks Corp. (NYSE/Toronto: NT) has canned its Ultra Long Haul (ULH) transport product, the Optera Long Haul 4000 (LH 4000, not to be confused with the Optera Metro 4000 multiservice product).

Nortel has confirmed that it completely shut down the Boca Raton, Fla., facility where it developed the Optera LH 4000, by the end of the second quarter 2002. Officials claim the facility was part of Nortel’s real estate consolidation plan and that the product itself has not been officially cancelled. Development and support for the Optera LH 4000 has been moved to Ottawa and Richardson, Texas.

“We still have the LH 4000,” says Ann Fuller, a Nortel spokesperson. “We have customers and we continue development and investment.”

But some in the industry speculate that the product, which was acquired through Nortel's $3.25 billion acquisition of Qtera in 2000, and which cost the company $15.8 million in writedowns, has been shut down along with the development facility (see Nortel Buys: Reaping the Whirlwind?). These observers say closing down the Optera LH 4000 makes perfect sense, given the current market conditions and the reality of Nortel’s balance sheet.

Indeed, the once-hot optical transport business has completely died in the last 12 months. Once considered the next generation in optical transport, ultra long haul (ULH) dense wave division multiplexing (DWDM) products, which transmit signals up to 4,000 kilometers without electrical regeneration, have since died on the vine.

Corvis Corp. (Nasdaq: CORV), the biggest proponent of ULH switching and transport, is now focusing much of its attention on its switching products. Sycamore Networks Inc. (Nasdaq: SCMR) has canceled its transport products altogether (see Sycamore Switches Focus). And startups focusing on the technology, such as Ceyba Inc. and PhotonEx Corp., seem to be struggling to find customers (see Core Optical Startups Chill Out ).

These strategy shifts reflect market conditions. Carriers building nationwide and transcontinental networks were the ones most interested in ULH, because it reduced the need for expensive electrical regenerators. But many of these carriers overbuilt their long haul optical capacity during the boom years. Now they are filling those pipes with traffic. And those that need capacity have been relying on upgrades to existing platforms to get them by for now.

Many of these service providers also are in dire straits. WorldCom Inc. (OTC: WCOEQ), 360networks Inc., and Global Crossing have all filed for bankruptcy within the past year. As a result, Nortel’s Optera LH 4000 hasn’t gotten much traction. In fact, Global Crossing was its only named customer to date.

“It’s not that carriers don’t want or don’t need ultra long haul transport,” says Rick Schafer, an analyst with CIBC World Markets. “They just aren’t spending money there right now. Ultra long haul was the next generation in transport. Unfortunately, it emerged just as the bottom fell out of the industry.”

Another factor fueling speculation that the Optera LH 4000 has been cancelled is news that Nortel still needs to make more cuts in its business. On the company’s second quarter conference call back in July, CEO Frank Dunn said the company would consider more cuts to bring Nortel to profitability by next year (see Nortel Still Not Slim Enough).

In the past 18 months, Nortel has slashed over half its workforce and it has cut other products, such as the all-optical switch it acquired from Xros (see Nortel Shuts Optical Switch Effort). It's not alone in this regard, either: Lucent Technologies Inc. (NYSE: LU) has also been forced to shut down some of its product lines -- most recently its all-optical switch, the LamdbaRouter (see Lucent Terminates the LambdaRouter).

“It wouldn’t surprise me at all if Nortel cut something from its WDM line,” says Steven D. Levy, an analyst with Lehman Brothers.

But why the Optera Long Haul 4000? There are several reasons. For starters, some sources say that Qtera's technology, which was the basis for the Optera Long Haul 4000, has turned out to have problems. The company indicated in Securities and Exchange Commission (SEC) filings that in June of 2001 the acquisition had failed to meet specific business performance objectives that would have resulted in payouts to former stakeholders (see Whatever Happened to X?).

Nortel also may not need the LH 4000. It already has two other long haul transport products on the market: the Optera Long Haul 1600, its original long haul offering, and the Optera Long Haul 5000, which supports 40-Gbit/s transmission. While carriers won’t likely deploy 40-Gig technology for at least another two years, Schafer of CIBC says 40-Gbit/s capabilities are key to winning new business, which may shift emphasis onto the LH 5000 over other long-haul gear.

“Nortel has to make some tough decisions now," Schafer says. "And sometimes there isn’t enough room on the life boat for all your babies, so you have to cut some of them loose.”

— Marguerite Reardon, Senior Editor, Light Reading

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