Zhone Technologies Inc. said today that it is buying several assets in Nortel Networks Corp.'s (NYSE/Toronto: NT) AccessNode and Universal Edge 9000 product lines for an undisclosed sum. The equipment maker, based in Oakland, Calif., says it will also assume support for Nortel's existing AccessNode and AccessNode Express customers.

Nortel said in May that it was discontinuing its digital subscriber line (DSL) and access businesses and focusing on selling products in faster-growing markets with higher profit margins.

The digital loop carrier (DLC) market was worth $2.65 billion last year, and the gear Zhone is buying from Nortel makes up 15 percent of that pie -– about $397.5 million, according to market research firm RHK Inc.

Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Marconi Communications PLC (Nasdaq/London: MONI), and Advanced Fibre Communications Inc. (Nasdaq: AFCI) will be Zhone's biggest rivals in the DLC space. The customers Zhone will have to support include Verizon Communications Inc. (NYSE: VZ), Qwest Communications International Corp. (NYSE: Q), and WorldCom Inc. (Nasdaq: WCOM).

Nortel made $30 billion in revenues last year, so selling off the assets that provided roughly 1.2 percent of that sum won't cause it any anguish. For Zhone, however, Nortel's table scraps fit nicely with its portfolio of local access equipment for service providers.

"The deal makes sense for Zhone because it gives us market share and ingratiates us with some major carriers who already have this gear," says Tim Donovan, a spokesman for Zhone.

In this transaction, Zhone will get Nortel's DLC product, AccessNode, which uses high-speed lines to extend the reach of central office switches to remote neighborhoods. Zhone will also get Nortel's Universal Edge 9000, a product that sits between the carrier's central office and the customer location and can operate either as a digital subscriber line access multiplexer (DSLAM) or as a DLC.

Contrary to some news reports published this week, Zhone says it is not buying Nortel's entire Access Devices unit, nor is it buying the DSLAM products that Nortel acquired from Promatory Communications. Zhone is also not buying Nortel's Universal Edge 9000 DMS, which was an extension for Nortel's Class 5 switches.

Getting into the DSL equipment business could be a grim experience, considering the number of DSL-focused competitive local exchange carriers (CLECs) that have folded this year. However, by not going after DSLAMs, Zhone might have picked a wise battle. "If you want to get into the DSL business, selling remote terminals is a less risky proposition than dealing with central office equipment," says Jon Cordova, an analyst at Infonetics Research Inc.

- Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com