Is a metropolitan optical battle brewing on the right side of the Atlantic?

In a bid to enter a market that it's so far largely ignored, Siemens AG (NYSE: SI; Frankfurt: SIE) today agreed to resell equipment made by ADVA AG Optical Networking (Frankfurt: ADV) in an effort to increase its presence in the metropolitan optical networking market. It looks like both companies could wind up achieving more together than they could individually (see Siemens Employs ADVA DWDM).

The nonexclusive deal calls for ADVA to sell its DWDM systems to Siemens Information and Communications Network (ICN) unit, which in turn will outfit the systems with its own optical transponder and sell them to metro customers, primarily in Europe, Asia, and Latin America.

Terms of the agreement were undisclosed. It is the first metro DWDM reseller agreement that Siemens has signed. ADVA has limited reseller arrangements in place with Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO), Inrange Technologies Corp. (Nasdaq: INRG), and StorageTek (NYSE: STK).

The move should help both ADVA and Siemens broaden their scope and get into market segments they've missed so far. ADVA, still a relatively small company, could widen its customer base. And Siemens hopes to make inroads in the metro DWDM space, a market it's had trouble penetrating.

"The agreement is a good endorsement of ADVA's product range... and Siemens is facing competition from Nortel, ONI, and Ciena and needs to have an offering in the metro space," says Douglas Smith of Credit Suisse First Boston in London. He feels ADVA offers a significant cost advantage and European focus compared to these competitors.

Since June 2000, Siemens has resold ADVA's FSP-I and FSP-II optical DWDM systems to customers on a standalone basis. Now, Siemens will actually modify ADVA's products, while tapping its full range of gear, including ADVA's higher-end product, the FSP (Fiber Service Platform) 3000. This optical networking product offers 160 Gbit/s of capacity over 64 protected wavelengths at distances up to 300 kilometers. It handles a range of interfaces, including Sonet/SDH, gigabit Ethernet, ESCON, and Fibre Channel.

Until now, Siemens has held fast to its claims on the long-haul DWDM space, while watching the metro market sail past. It hasn't had a metropolitan optical product of its own in general shipment, though it claims to be developing one.

Siemens says it will use the ADVA deal to augment its product line, instead of halting development of its own metro prototype. But it's clear the company is looking to ADVA to solve some of its problems and possibly speed up development. For one thing, the transponder that Siemens plans to install in the ADVA gear was the same component being developed with its own metro prototypes.

"We want to combine this [component] with ADVA's DWDM gear, which has support for ESCON, SANs, and Ethernet for the metro space," says a Siemens spokesperson.

CSFB's Smith thinks there is little threat that Siemens will later develop its own product and ditch ADVA. "We had been concerned that Siemens would focus on its own internal development [to the exclusion of ADVA]," he says, "but today's announcement suggests Siemens wants to extend the OEM relationship."

In its quarterly financials released today (see ADVA Reports Contract, Q2 Results), ADVA painted the portrait of a firm that could use a shot in the arm, despite quarterly improvements in sales and gross margins. For its part, Siemens ICN has been struggling to restructure in the wake of the current market downturn (see Siemens Weighs Optisphere Options).

ADVA has approximately 500 customers today, nearly all of those are enterprise businesses. Siemens ICN, in contrast, does roughly 70 percent of its worldwide business with carriers like Deutsche Telekom AG (NYSE: DT). And it's seeking to mine the lucrative enterprise market in the metro space.

Nothing is guaranteed in the contract. For one thing, ADVA's deal with Siemens isn't exclusive in any way. What's more, competition in the metro market is fierce, and companies such as Ciena Corp. (Nasdaq: CIEN), Nortel Networks Corp. (NYSE/Toronto: NT), and ONI Systems Inc. (Nasdaq: ONIS) have momentum. They've also earmarked international markets as a key to survival.

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com