Nortel Exits Optical, End of an Era

11 Comments

For those of us who’ve been following the rise of optical networks, today will go down as a red-letter day for the industry. Nortel (s NT), whose name has long been synonymous with optical networking gear, has announced it will sell off its Metro Ethernet Networks (optical and 40G) business, as a way to shore up rest of the company and focus on 4G and related technologies.

The news of the divestiture of the optical unit came along with news of lower revenues for the third quarter of 2008. Nortel blamed a slowdown in capital spending at the carriers for this revenue shortfall. Sprint and Verizon are two key customers of Nortel. The optical networking unit may have come under pressure because of British Telecom which has been retweaking their capital spending as well.

Back in the mid-90s, long before Ciena became the darling of long-distance providers, Nortel sold optical gear by the billions to carriers such as Qwest. It was a company that, alongside Lucent, controlled the demand for gear from incumbent phone companies as well. As the bubble rose so did the fortunes of Nortel. Like many telecom industry players, Nortel got drunk on success and made a series of stupid mistakes that led to the slow-motion decline in its fortunes since then. I wrote about the company’s fall in my book, Broadbandits: Inside the $750 Billion Telecom Heist.

Nortel, like many other telecom equipment makers, has suffered because of carrier consolidation that has taken profits out of the gear business. The rise of Chinese vendors such as Huawei has put further deflationary pressure on companies like Nortel, Alcatel-Lucent (s ALA) and Siemens. That said, Nortel’s business unit is a good one for anyone looking to buy.

According to RBC Capital Markets estimates, the Metro Ethernet-40G optical business is estimated to be about $1.7 billion in sales 2009. It is one of the faster growing parts of the company with the annual growth rate of about 10 percent. Despite all its problems, Nortel’s optical division still has one of the best teams, products and of course new technologies.

Nokia Seimens Networks could be a good candidate to snap up this business. Apart from that, there aren’t many takers. Ciena (s CIEN) doesn’t have the market capitalization. Some Asian vendor might be interested in this business, but the buyers are far and few. It is a damn shame that the company that should buy this company — Juniper Networks (s JNPR) — has not been aggressive in bulking up. Nortel’s optical business unit could give it enough oomph to make Cisco (s CSCO) pause. Of course, a combination with Tellabs would make sense too, but I would make that a long shot.

11 Comments

Mike

“In the long run every race is a two or three horse race”
The winning horses for the telecom equipment vendors:

Wireless networks: Ericsson, Nokia-Siemens, Huawei
Optics: Alcatel-Lucent, Huawei
Broadband fixed access: Alcatel-Lucent, Huawei
IP Core: Cisco, Alcatel-Lucent
Submarine cables: NEC, Alcatel-Lucent
IPTV: Alcatel-Lucent, Thompson
IMS Core Network: Alcatel-Lucent, Ericsson
e2e Network Integration: Ericsson, Huawei (Mobile). Alcatel-Lucent (Fixed)

rohit

Carrier ethernet + optical seems to be a reasonable growth (10%?) business at 1.5B revenue and probably lots of fat to shed in the management ranks. Perhaps someone like silverlake needs to dig in here and see if they can turn it around. GM of <40% may be an issue

EdmontonOttawaSiliconValley

sad day for optical engineers…. nortel (BNR) was instrumental in creating the field of fibre optic communications. a case study for b-schools in how a company that made the first x.25 switch, dominated digital voice switching with DMS100, and lit the world’s first commercial fibre optic link (Sasketchewan in 1980) will now disappear in pieces.

Omkar

Very unfortunate. Yes, Nortel has (or had) it all. I have had the chance to visit their main engineering campus of MEN (Metro Ethernet Network) Group, Ottawa and the atmosphere was too poullted due to job losses. Some heads are used to roll almost every month. However, I did not see the change in work culture ever in my entire stay – hard work, dedication, real leadership, thinking out of the box, going all out, putting it all – it was not at all there. It was like Nero’s group at Rome who made fun when Rome was burning!

I wonder what will happen to the other side, i.e., outsourcers. I mean you will see almost all of them there – Infosys, Wipro, HCL, TCS, Sasken, i2, Flextronics et al from India and Canada are there. And I guess the tune of the employees will be in thousands – which is very very huge. I really wonder where these guys will go? MEN of Nortel is itself a strong group and added to its all the people who are outsourced by various companies – Good God!

Om,

Any idea what will happen to these folks?

Will appreciate your thoughts on it.

Aaron deMello

I love Nortel dearly, they gave me my first huge contract as a custom software developer back in 1998 or so. However, the company today is nothing but a miserable shell of what it used to be. Its a classic example of doing almost everything completely wrong. I remember when Nortel passed on buying Juniper… and now Juniper will do the same to them.

In the meantime, billions of dollars in Canadian wealth have been wiped out since every granny had their retirement dollars at least partially in ever-green Northern Telecom.

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