Optical/IP Networks

Avici's Qwest for a Contract

Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) today announced that Qwest Communications International Corp. (NYSE:Q) will deploy its Terabit Switch Router (TSR) in field trials in four cities beginning in the fourth quarter of 2000.

The deal is significant in that it puts Avici's high-speed routing device in the hands of a major customer. A closer examination of the deal, however, leaves some questions. For one, the deal is a field trial only, and the amount of the proposed purchase hasn’t yet been disclosed. Secondly, Qwest owns a minor stake in Avici, giving it an interest in the company's performance.

The trials are expected to last several months, and upon successful completion Qwest has agreed to purchase an undisclosed amount of equipment from Avici.

While investors seemed to like what they saw early on in the day, bumping the price of Avici shares up by 12.4 percent the stock fell from that daily high and closed at $84, up only 4.6 percent, or $3.69, on the day.

In addition to Qwest, Avici has listed three potential customers in the S-1 filed with the Securities and Exchange Commission. Enron Corp. (NYSE: ENR) and Williams Communications Group (NYSE: WCG) both of which are also investors in the company, have agreed to deploy equipment, and AT&T Corp. (NYSE: AWE) is still testing the TSR for deployment in its network (see Avici IPO Heats Up).

Some industry observers have become skeptical of deals mixing investment with product contracts.

"You’re almost obligated to buy the stuff when you take stock in the company,” says Dave Schaeffer, CEO of Cogent Communications. Shaeffer, whose company is building a national fiber-optic-based data network, says his company avoids deals in which investments are mixed with customer contracts because "investing and buying equipment are two different things."

Avici officials said that Qwest holds a minor stake in Avici -- less than 1 percent -- and that the stock was purchased after the company's IPO. At least one analyst believes that the announcement lends the company credibility.

“This is definitely a strategic win for them,” says Muayyad Al-Chalabi, director of core switching and routing for industry analyst RHK Inc.. “Adding one more large backbone carrier to the customer portfolio is significant. And it shows that they have delivered what they have promised.”

Al-Chalabi says the news lends credence to the entire terabit market in general. Currently, Avici is the only vendor shipping a terabit-scale product. Cisco Systems Inc. (Nasdaq: CSCO) has announced plans for a terabit core product and a slew of startups have also announced plans. And while Nexabit Networks, acquired by Lucent Technologies Inc. (NYSE: LU) last year, is also supposedly shipping a terabit product, most analysts agree that Avici is the only vendor making substantial headway.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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