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DWDM

Nortel: Top Dog, but for How Long?

For the second time in two weeks, Nortel Networks Corp. (NYSE/Toronto: NT) has issued a press release claiming the leading market position in sales of "optical Internet" gear.

But scratching the surface of both announcements reveals that Nortel's boasts, while valid, gloss over its continuing small share of the high-channel-count DWDM market. Further, analysts say Nortel must act vigorously to keep its overall place.

Let's take it from the top: In last week's announcement, dated February 19, Nortel says market research firm Ryan Hankin Kent Inc. (RHK) reported Nortel to have a 61.4 percent share of the North American long-haul DWDM market -- double the share that RHK gave it one year ago.

The overall North American market for DWDM in 2000 was $7.7 billion, according to RHK. The firm divides up the DWDM market into two segments, however, and Nortel doesn't dominate them both.

The first segment in RHK's taxonomy for 2000 devotes $6.1 billion of the overall DWDM market to systems with channel counts lower than 40 -- a segment that Nortel led with a 72 percent market share, according to RHK's research.

Low Channel Count DWDM Systems RHK's second segment includes so-called high-channel-count systems, with more than 40 channels -- a market RHK sizes to have been $1.6 billion in 2000. Nortel has just 10 percent of this chunk, which is led by Ciena Corp. (Nasdaq: CIEN) and NEC Corp. (Nasdaq: NIPNY).

High Channel Count DWDM Systems Nortel's lack of presence in this division could be cause for concern, since that area is slated to be among the fastest growing in optical networking. For example, in publicity for a separate report on optical components, RHK cites "performance improvements -- such as higher channel counts" -- as drivers for triple-digit growth in DWDM systems over the next three years.

It's also worth noting that Nortel's share of the high-channel-count DWDM market didn't increase from 1999 to 2000 (see Nortel Spins Past Ciena).

The conclusion? Nortel must hustle if it means to keep its top spot in DWDM. It could lose out to other players quickly if high-channel-count systems start to predominate.

This analysis is borne out by research touted in this week's market share announcement from Nortel. On Tuesday, the company announced that research from The Dell'Oro Group shows Nortel to be top dog all 'round.

DWDM Long Haul Market DWDM Metro Market Sonet/SDH Market But report author Shin Umeda issues some caveats.

First, Dell'Oro does not use the same type of breakdown in its figures that RHK does. Instead, the firm sticks to sales counts it gets directly from the vendors in making its tallies. In the case of Nortel's long-haul DWDM figures, the vendor gloms together sales of its S/DMS Transport Node, an older product that works only with Nortel's Sonet add/drop multiplexers, and its newer Optera LH 1600, which isn't dependent on those ADMs.

It's an important distinction, some say. Nortel's products based on legacy Sonet and SDH (which Umeda estimates account for over half of all Nortel's optical revenues) are predicted to start phasing out as carriers demand next-generation gear with multivendor compatibility and higher channel counts.

Umeda says Nortel refuses to divulge which percentage of its long-haul DWDM revenues come from which products. Nortel confirms this. But a Nortel spokesperson says, "Optera LH definitely makes up the majority of our revenues in this space, and even without [the older products being included] we'd still have the number one spot."

For the record, Umeda says Dell'Oro has included only revenue from equipment in its reporting; no service and support is included. Also, he asserts that he's not double-counting DWDM equipment; what's counted in long haul does not appear in metro.

Other analysts confirm that Nortel needs to avoid complacency about its market position, in light of the changing nature of the DWDM market. "Nortel has a lot of old equipment that's intimately linked to its old-style ADMs," says Mark Storm, optical networking program leader at research firm Frost and Sullivan. "The [S/DMS] is where the bulk of the revenue is, and they're challenged to make the transition [to next-generation gear]."

He also says market researchers themselves need to revamp their taxonomies. "There's a key transition going on from Sonet/SDH to next-generation gear. It takes a while to slice and dice it all." He says researchers must avoid inflating the numbers by counting too much, while making sure not to miss the key trends by forcing new gear into old categories.

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

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Peter Heywood 12/4/2012 | 8:50:01 PM
re: Nortel: Top Dog, but for How Long? How big is Nortel's share of Sonet/SDH cross connects?

I think I'm right in saying that it doesn't have a big Sonet cross-connect - Tellabs is the market leader - and resells Marconi's SDH cross-connect.

I guess this particular market is heading for some turmoil as optical switches replace traditional cross-connects, but there again, Nortel has yet to ship the product that will compete with Ciena's CoreDirector.

Comments?
hooflungpoo 12/4/2012 | 8:49:58 PM
re: Nortel: Top Dog, but for How Long? Considering what's been installed, its probably fair to say that a 40 channel Nortel DWDM system has similar capacity to a 160 channel Cienna DWDM system . I'd say the channel number metric is misleading. In fact from the point of view of system cost per bit-km it may even be fair to say that to be forced to use 160 channel rather than 40 for the same capacity is a weakness.
MW 12/4/2012 | 8:49:58 PM
re: Nortel: Top Dog, but for How Long?
Peter,

Nortel resells Marconi's SDH cross-connect, that's right. Don't know how big the market share is....

MW
Rex M 12/4/2012 | 8:49:57 PM
re: Nortel: Top Dog, but for How Long? Over 60% market share and that is bad news? Must not have paid their bills to LR this month

Rex
optinuts 12/4/2012 | 8:49:57 PM
re: Nortel: Top Dog, but for How Long? peter, you've got a blind spot where lucent and alcatel are concerned. the tellabs crossconnect that sells is a ds1 system, a wideband x-conn. marconi has a wideband sdh system that is similar to lucents wideband sdh crossconnect. lucent's and alcatels broadband crossconnects sell more than ciena's core director, but they never get mention. why? you don't know, or don't bother?
given lucent still has a 25% market share of optical, they should deserve some mention on these pages, or are you doomed to follow the startups into non-existence?
y2k 12/4/2012 | 8:49:56 PM
re: Nortel: Top Dog, but for How Long? Peter:

Great story, very timely. This data has been out there for a while, that Nortel has been very clever in using the market data and it is catching up to them.

Both Ciena and Nortel ships OC-192 (10 GHz) products but Ciena has much higher channel counts even though overall Ciena has a smaller total market share in terms of dollar value.

This is obviously significant because it takes a lot of technology to ship products with more than 40 channels. Ciena and NEC dominate that market because they have a monopoly over the FBG (fiber bragg grating) technology.

FBG is the only game in town. AWG (Array Wave Guides) doesn't cut it. Why do you think the Japanese sold PIRI to SDL? When was the last time that Japanese got out of the component business, especially something as important as optics, unless it is a real dog.

In any case, the DWDM landscape should change soon as the industry adjusting to a new paradigm. SONET will be around a little while more yet but it will become purely an interface and a service aggregation tool.

Most of the functionalities (add-drop and cross-connect) will be taken up by optical switches. Whoever controls optical switch will control the deployment of DWDM. For that matter, whoever controls optical switch will control the deployment of IP routers.

Pay attention to where Juniper is putting their money and you will see the future. Take a look at Calient's Board, not only do you find CEO of Juniper, you also find former executives of Lightera who invented the entire product catagory of optical switch.

These guys are real visionary. They are now talking about "photonic" switch and not just optical-layer switching. Grooming is an important transitional feature but at the end of road, SONET will completely disappear and we will arrive at "IP-over-Photons."

Anyway, back to Nortel, they don't have a next-generation SONET box to compete with Cisco/Cerent and they don't have a product to compete with Ciena/Lightera's CoreDirector. They are definitely in a bind, things are not looking good for them.

Nortel is also not executing on their Xros acquisition and even if they did, their Xros box does not compete directly since it is not a grooming switch and it switches at the Lambda level. Xros is a 2002 product, not 2001.

It will be an interesting year to watch. My guess is that CIEN will do to NT in 2001 what NT did to LU in 2000. Ciena will be the king of the hill for a while until John Chamber figures out what to do.

Anyway, great article. Thanks.


--y2k--
y2k 12/4/2012 | 8:49:55 PM
re: Nortel: Top Dog, but for How Long? Opstar:

You're right. I over exaggerated. I think we are in agreement that this is an exciting market even with the current downturn, and there should be more than a handful of winners.

It's a target rich environment and as long as the company executives focus on their job, there is no reason to fail. Lucent is a great company with great people and great technology, they deserve better. A CEO sleeping on the job doing nothing but depreciating shareholder value is a crime.

Ciena has a great "meat before sizzle" CEO and Cisco has a great "meat and sizzle" CEO. In the long run, they should all do well.

On the Photonic X-connect front, the rumer is that Nortel is partnering with Corning which has put lots of resources behind MEMS (Intellisense etc.). If that were true, I would agree with your "long term" success assessment.


--y2k--
opstar 12/4/2012 | 8:49:55 PM
re: Nortel: Top Dog, but for How Long? y2k,

Good insight! But it's too early to say, Ciena is going to be the king of the hill.

In short term, NT is having its HDX coming on the way, which has better attributes against CoreDirector, from its PR.

In long term, NT will have its Photonic X-connect (PX). From your reasoning, that's the key to everything in the next generation network. By the way, NT is putting big bucks in 40/80G. You'd believe that helps in LH.

I agree it's going to be interesting to watch out the game for the year. But it is hard to say who lunchs anybody else's share at this time.

Thanks!
///opstar
twistedcopper 12/4/2012 | 8:49:54 PM
re: Nortel: Top Dog, but for How Long? mary-
one thing you failed to mention is that RHK recently sent out an addendum to their 2001 low channel count DWDM systems. they lowered the total by 5-10%, or about $900 million. this is in large part to 40-50% price erosion that they learned about through large carrier interviews, which they claim is only affecting the low channel count systems and no other market segment. this means that nortel, owning the bulk of this market, will be hit the hardest by price erosion. it seems that this would be an interesting addition to the story. did you contact anyone at rhk for comment?
-twisted
biatcher 12/4/2012 | 8:49:52 PM
re: Nortel: Top Dog, but for How Long? RHK? Do you really think that those people are going to say anything bad about their big cash cow customer? These people are some of the biggest offenders when it comes to fluffing the market and setting unrealistic expectations. (Wonder if they are still sticking to their story about the DWDM components markets being worth $24 Billion in a few years...and not that their clients would not be the beneficiary of such hype)

The problem with these analyst firms is that they are collecting fat consulting fees or even taking equity positions in return for putting these things out. Wall St, loves RHK because the research people could point to the RHK numbers as the reason that we should expect huge growth. They endorse companies and their products and are good at playing favorites with companies who buy their services. It is widely rumored that the PR firms and Venture Capitalists tell their clients to use them because of their willingness to say nice things.

I know people who work in the VC, Analyst and PR aspects of the market and it seems that the rule is, "Say nice things about us and we will buy your services" or PR agencies will imply "We will tell our client that they should work with you based on what you say about them".

Say anything critical and you can kiss the relationship goodbye.

Maybe people should start asking these cheerleaders what their financial interest in these firms are? How much money is Nortel paying RHK every year? Think the fees that they are getting might have something to do with the results?

And for the PR and Analyst Relations Managers who are virtually bribing those companies or at the very least shelling out tens of thousands of dollars to have them kiss your ass and endorse your products...you will get what you deserve when you wind up out on the street because you would not pay for the truth. (See Lucent for a good case in point)

And, yes, I am a disgruntled investor.......
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