Nortel Extends Optical Lead

New evidence that Nortel Networks http://www.nortel.com (NYSE:NT) is growing its market share of optical transport systems may serve as a warning sign for investors speculating in startup optical plays such as http://www.sycamorenet.com (Nasdaq: SCMR) and ONI Systems http://www.oni.com (Nasdaq: ONIS).

At a time when startups in the optical space are receiving multi-billion dollar valuations, Nortel grew its market share in the optical transport market from 28 percent to 37 percent in a period of a year and shipped billions of dollars worth of products, according to recent research from the Dell'Oro Group http://www.delloro.com that is expected to be announced publicly in the next week.

"There's a lot of noise," says Shin Umeda, research analyst with Dell'Oro. "Sycamore is small. Then you hear about companies like Corvis and Tellium, but there's no revenue yet, so in market share they don't even show up."

Nortel's revenues from the optical transport market--derived from sales of DWDM (dense wave division multiplexing) and Sonet/SDH equipment--grew 23 percent in the first quarter of 2000. The company has shipped over $5 billion worth of optical transport products in the last 12 months.

Compare that to the next biggest optical transport player -- Lucent -- whose revenues in the space declined 8 percent in the first quarter of 2000. Meanwhile, less-hyped companies such as Alcatel http://www.alcatel.com (NYSE: ALA), Fujitsu http://www.fujitsu.com (OTC: FJTSY), and Marconi http://www.marconi.com (LS: MNI) are still in the running among the top five spots, with Sycamore and Cisco Systems Inc. http://www.cisco.com (Nasdaq: CSCO) barely even showing up on the screen.

As of the end of the first quarter of 2000, Dell'Oro estimates Nortel's market share at 37 percent. That's up from 28 percent a year ago. The optical transport market overall is expected to reach $25 billion in 2000, that's up from $15.3 billion in 1999, according to Dell'Oro.

After Nortel and Lucent, the quarterly revenue growth of the next three largest optical transport players, in order of market share, is as follows: Fujitsu, up 3 percent; Alcatel, down 19 percent; and Marconi, up 10 percent. Marconi's 10 percent growth came on top of 50 percent revenue growth in the fourth quarter of 1999, while Alcatel failed to follow up on its blockbuster growth of 68 percent in the fourth quarter of 1999.

Some new entrants do not show up in the survey because they have just started shipping products. For example, Umeda said that Sycamore Networks asked not to be included in the survey until it begins shipping significant amounts of its optical transport products, and Cisco shipped only $70 million worth of optical transport products in the first quarter. Ciena http://www.ciena.com (Nasdaq: CIEN), on the other hand, showed strong growth, but is still "small" compared to the market leaders, according to Umeda.

--by R. Scott Raynovich, Executive Editor, Light Reading (http://www.lightreading.com)
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