Optical/IP Networks

C&W Bets $1.4 Billion on VOIP

Cable and Wireless (NYSE: CWP) announced today that it will pay Nortel Networks Corp. (NYSE/Toronto: NT) $1.4 billion to move C&W's circuit-switched voice network to IP.

The contract is notable in several ways. From a business standpoint, it highlights a trend among carriers and key networking vendors to support voice-over-IP (VOIP) technology as a means of unifying voice and data on one network and building up a roster of services that combine both. On Friday, for instance, Cisco Systems Inc. (Nasdaq: CSCO) acquired two companies that specialize in this area (see Cisco Turns Up Voice Signal).

The deal also gives Nortel a good edge over its competition. The process of managing C&W's network calls for Nortel to rip and replace existing IP and time-division multiplexing gear, including products from Ericsson (Nasdaq: ERICY), Marconi Communications PLC (London: MNI), and Nokia Corp. (NYSE: NOK). Overall, C&W spokespeople say, Nortel will reassign 80 percent of its existing network traffic.

C&W stipulates, however, that a range of contracts won't be affected by this agreement -- in particular, those with Juniper Networks Inc. (Nasdaq: JNPR) and Tellium Inc. (see Tellium's Big Score ). "This agreement helps us build an application services and gateway layer," says Mike McTighe, CEO of global operations at C&W. "We are investing in other vendors such as Juniper at the core and in the optical infrastructure."

C&W says today's deal will enable the carrier to sell a range of new voice and data services from a single network, at roughly a quarter of what it would cost to expand its voice network alone.

Specific terms of the contract, which encompasses C&W's network in the U.S., U.K., and Europe, call for Nortel to create a customized integrated voice and data platform for C&W for approximately $450 million over the next three years. Nortel will make an additional $1 billion by migrating the carrier's voice circuits onto the new switches within the same period of time. Nortel will continue to manage C&W's IP network at specified service levels over the next decade. In addition to using its own staff, Nortel will be helped by 290 C&W employees, who will move to Nortel for the project.

"This is very positive for Nortel," says Lawrence Harris, VP at investment bank Josephthal & Co. "It's also a good move for Cable & Wireless and gives them significant cost reductions and service leverage."

While Nortel refused to say exactly how the contract will affect its earnings results, Harris says his firm expects it to be "very positive": "We estimated their earnings to be 73 cents a share for 2000 and 99 cents for 2001, but now we believe the company can probably exceed those expectations."

The win also highlights Nortel's role as a provider of services like outsourcing and software development -- services that up to now haven't been stressed in its marketing. According to Mike McTighe, Nortel beat its rivals in part because it was able to demonstrate that it could perform the required services.

The deal will no doubt burn at least some bridges between C&W and other vendors. That could be a risky strategy in a time when the market for carrier equipment seems to be in a state of flux and some carriers are struggling to stay afloat (see ICG's Sinking Ship and Report Downgrades Cisco and Nortel ).

The market seems to be cautious about the impact of the contract on C&W's future: At midday, the carrier's shares had dropped a fraction of a point to $42.44.

Nortel's stock rose 1.69 points by midday, to trade at $62.06.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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