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Optical/IP

Will AT&T Value BellSouth's Vendors?

If the future of the U.S. telecom scene calls for one fewer RBOC, some equipment vendors will face a challenge in trying to cope while one of their name-brand customers is overtaken.

Analysts believe that AT&T Inc. (NYSE: T), being the dominant player and the initiator of the $67 billion merger with BellSouth Corp. (NYSE: BLS), is likely to impose its strategy and vendor relationships when the two carriers combine. Analysts say this raises questions about Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Redback Networks Inc. , and other BellSouth vendors. (See AT&T Deal Could Spur Cable Buys.)

Vendors already “in” with AT&T and its Project Lightspeed fiber initiative include Alcatel (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO)/(Scientific Atlanta), Ciena Corp. (NYSE: CIEN), Motorola Inc. (NYSE: MOT), and Siemens AG (NYSE: SI; Frankfurt: SIE). (See AT&T Shines a Light on Lightspeed and SBC, Microsoft Defend Lightspeed.)

AT&T also said recently it will be upgrading its optical backbone to OC768 throughout 2006. “This should work out well for folks providing equipment for that AT&T IP/MPLS and optical backbone, because the goal is to move the traffic from the three combined companies to a single network that will support a whopping huge amount of traffic,” says Heavy Reading analyst Stan Hubbard.

Siemens, Cisco, and Ciena could each benefit if AT&T extends its backbone upgrade into BellSouth territory. Siemens would provide long-haul DWDM equipment, Ciena would provide its Coredirector and optical switches, and Cisco would provide its IP/MPLS technology.

But some equipment vendors may not have such a well defined future inside the AT&T/BellSouth combo. Tellabs and Redback, for instance, are two names analysts are batting around as ones to watch as this merger commences.

Tellabs won a contract to provide BellSouth’s fiber to the curb (FTTC) equipment roughly a year ago, at which time analysts said the FTTC business could yield the company $150 million in sales during 2005. (See Analysts See Tellabs Win at BellSouth.) AT&T uses a fiber-to-the-node strategy (FTTN), which it says is complementary to BellSouth's access efforts. But, still, the option to go with FTTN all over does exist. And if AT&T does go with FTTN everywhere, Tellabs will have a tough time holding on to its place in the network, writes UBS AG analyst Nikos Theodosopoulos in a research brief.

AT&T said Monday it would continue apace with the fiber rollouts of both companies, but made no specific comments on the technologies that would be used.

"All I can say is that we have close relationships with both companies and we have for years," says Tellabs spokeswoman Ariana Nikitas. "We sell a range of products that address both transport data and fiber access needs."

For Redback, too, the AT&T/BellSouth merger brings some anxiety over future business. “People are wondering just what happens to Redback if the combined company decides to leverage its R&D progress on the Lightspeed Project across the BellSouth territory,” Heavy Reading’s Hubbard says.

BellSouth has been using Redback’s SmartEdge B-RAS device for Ethernet aggregation, subscriber management, and edge routing in its own triple-play build. (See Alcatel Names Its 21CN Partners.) Redback investors were worried too, apparently, as the company's shares fell $3.35 (15.40%) to $18.40 in trading on Monday.

Redback did not immediately return calls seeking comment.

For suppliers to Cingular Wireless , Prudential Equity Group LLC analyst Inder Singh sees the AT&T/BellSouth merger as neutral in the near term. (See Cingular's Converged Future.) “We do not expect any slowdown in spending on 3G upgrades at Cingular, with Ericsson AB (Nasdaq: ERIC) representing the largest vendor in this network,” Singh writes in a brief Monday (See Ericsson Expands Cingular.)

Lucent Technologies Inc. (NYSE: LU) should also benefit from this spending, though it may be offset to some degree by slower spending on the AT&T/BellSouth wireline network,” Singh adds. (See Lucent Expands Cingular.)

In terms of the overall effect of the merger on capex, analysts’ views are mixed. “It would create even more customer concentration for equipment suppliers, and a combined T/BLS would likely pursue even more discounts,” writes UBS's Theodosopoulos.

On the other hand, Theodosopoulos suggests, the wireline networks of AT&T and BellSouth do not overlap, so no basic capex “synergies” will happen there.

Prudential's Singh stresses that because the merger will speed the movement of the BellSouth network toward next-generation IP technology, it can only be seen as positive for overall equipment spending.

— Mark Sullivan, Reporter, Light Reading

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uguess 12/5/2012 | 4:03:26 AM
re: Will AT&T Value BellSouth's Vendors? To databoy12:

I heard that Alcatel's solution worked well too. Juniper has good products, but Cisco's CRS-1 has a more advanced architecture than T-series.

uguess
databoy12 12/5/2012 | 4:03:26 AM
re: Will AT&T Value BellSouth's Vendors? Speaking as one who has tested pretty much all the edge routers that are being offered by various manufacturers today, Redback's SE800 is definitely head and shoulders more advanced than the rest. Does this mean value for ATT? Who knows. How far have they gone with the Alcatel solution? The term "Value" is a very subjective term. I do know that if ATT plans on offering new complicated services like IPTV, I would use the product that demonstrates the ability to handle such services rather than go with who promises to do so. My experience suggests that Alcatel does a lot of promising with no real results. The SE800 has demonstrated that it can do what Redback says it can do...to me, that is real value. Maybe BellSouth knew what they were doing and can teach ATT a few things. Also, why is Juniper not in ATT's core? The T series is definitely a more advanced product than anything Cisco has to offer. Seems to me politics play a major role in ATT's network decisions.
reoptic 12/5/2012 | 4:03:25 AM
re: Will AT&T Value BellSouth's Vendors? Analysts who say market will grow from such mergers are whistling past graveyard. Billions in cuts will not just come from layoffs but also from capex cuts as consolidate networks and POPs.
ozip 12/5/2012 | 4:03:25 AM
re: Will AT&T Value BellSouth's Vendors? This round of mergers will most certainly have a long term negative impact on technology innovation in the US. This willcreate market concentration of prospective customers that will scare any Venture Capitalist away from investing in the telecom industry.

The brightest minds will follow the work/opportunity. Add a foreign language to your curriculum.

Got me thinking of returning to whenst I came.. Guess where that is...



OZip
douggreen 12/5/2012 | 4:03:24 AM
re: Will AT&T Value BellSouth's Vendors? Regardless of all of the discussion of whose equipment or network is best, plays out will have very little to do with technology and everything to do with a struggle to maintain power and empires within the new organization.

Give that tens of thousands will be laid off and many organizations will disappear, do you think that any individual at either company is thinking about who's edge router or DWDM equipment will win out?

The working level guys are worried about keeping their jobs, and the executives are worried about keeping as much of their empires as possible to justify their salary and position.

The way that an AT&T employee ensures that he or she keeps his or her job is to ensure that their strategy/equipment/network architecture wins out, and to ensure that any competing Bellsouth strategy/equipment/network architecture gets squashed as soon as possible.

This kind of fear and power struggle will dominate the decision making in the near term, at least until the majority of the layoffs/consolidations are complete.
stephencooke 12/5/2012 | 4:03:23 AM
re: Will AT&T Value BellSouth's Vendors? Doug,

I feel that you have put your finger on the most important area to analyze. As change is an opportunity and big change is a big opportunity, how would a vendor, of any size, make the most of this opportunity? Given the fear for one's job mentality that will exist in the converged AT&T for some time, how would you, as a vendor, attempt to shoehorn your way in at this time?

Displacing incumbent vendors is incredibly difficult during normal 'business as usual' due to the time and money spent on the process of doing that business by the carrier personnel(RFI's, RFP's, vendor screening, etc.). As the people who made that investment in the internal business process and had skin on the line are now worried about their jobs/empires is this a way to bypass the process before it gets solidified once again?

I understand that during mergers some companies basically freeze their equipment & services purchasing until the decision-making infrastructure is somewhat solid again. However, given that these guys are hemorrhaging marketshare on a daily basis can they afford to wait until things are more internally stable?

Steve.
Mark Sullivan 12/5/2012 | 4:03:17 AM
re: Will AT&T Value BellSouth's Vendors? As for layoffs, the number will be around 10K, according to AT&T.
Mark Sullivan 12/5/2012 | 4:03:14 AM
re: Will AT&T Value BellSouth's Vendors? The analysts say AT&T will impose its network strategy and vendor choices on the BellSouth network. Your post describes how that happens at a personal level. Organizations are made of people. People are driven by greed and fear, among other things.
Mark Sullivan 12/5/2012 | 4:03:13 AM
re: Will AT&T Value BellSouth's Vendors? I doubt the FCC will agree with you. This merger is driven by competition from Internet companies and cable triple-play. And the FCC will OK it.
douggreen 12/5/2012 | 4:02:54 AM
re: Will AT&T Value BellSouth's Vendors? Mark,

Yes, the merger seems to be driven by competition from cable companies. The merger, however, will do little to help them become more competitive. What it will do is to help them maintain profitability in the face of shrinking revenues by reducing their combined cost structure. Since efficiency, not new services, will be the first objective, the effect on the equipment market will not be positive.
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