Nortel picks Avici for IP core

Nortel Networks added a core IP router to its portfolio today by forging a three-year preferred partner agreement with Avici Networks wherein Nortel will integrate, sell and support Avici’s three routers worldwide. The partnership isn’t unusual, since Nortel lacked an IP core router and Avici has highly scalable gear currently running some of the largest IP backbones in the world, including those of Qwest Communications and AT&T.

"They have the carrier grade and reliability that our customers expect, they have the scalability of the product that we need, and they have the demonstrable ability to reach into the customer base and deliver the services that we want for our voice-over-IP solutions as well as our wireless and wireline products," said Sue Spradley, president of Nortel’s wireline networks group.

But Avici occupies a distant third place in the $1.3-billion global core router market. Whereas market leaders Cisco Systems and Juniper Networks took 71% and 25% of the market, respectively, in the first half of 2003, Avici captured just 2.3%, according to the Yankee Group. Nortel has been reselling Juniper’s edge routers for years but not its core routers. And Nortel’s decision to ally with Juniper’s rival may have been guided at least in part by Juniper’s apparent distaste for monogamy. Juniper has reseller partnerships with Nortel competitors Siemens, Ericsson and Lucent. Avici, in contrast, has a non-exclusive agreement with Asian vendor Huawei, which resells Avici’s routers in China, though the overlap shouldn’t cause serious conflict, according to Yankee Group analyst Mark Bieberich.

"I think [Nortel executives] were looking for a closer alliance with a core router vendor, and they weren’t going to get anything more than a resale agreement from Juniper," said Bieberich.

Nortel is working toward an operations, administration and maintenance agreement with Avici, integrating its products with Nortel’s management software for a more seamless, unified solution that will allow Nortel to more fully address applications such as voice over IP and IP/MPLS convergence. Spradley would not comment on whether the two vendors would ever develop products jointly together other than to say, "I’m sure the combination will give us the one-plus-one-equals-three."

Nortel also has a long-held equity stake in Avici (less than 5%, according to Avici) that could deepen through the new partnership. Part of the deal grants Nortel a warrant to purchase 800,000 shares of Avici common stock at approximately $8 per share after seven years. Nortel may be able to exercise the warrant sooner if it meets undisclosed revenue targets for Avici. After exercising the warrants, Nortel will still own less than 10% of Avici, according to Avici’s director of marketing Esmerelda Swartz.

As Nortel will bring Avici’s products to far more customers than Avici (with less than 250 employees) could reach and support itself, the deal strengthens Avici’s third-place position in the sector. And it puts even more pressure on other startups in the space—including Caspian Networks, Chiaro Networks, Procket Networks and Hyperchip—to find large vendor partners.

"This is a market for probably no more than four vendors," Bieberich said. "There are very few if any large telecom equipment vendors without a partner for a core router. It requires these companies to develop more partnerships instead of relying on just a couple of very key strategic partnerships."

Procket Networks has made resellers of Japanese service providers and a U.S. government contractor. The other startups have made no similar announcements, though Bieberich said they could still try to approach (if they haven’t already) companies such as Ciena, Tellabs and Alcatel, which halted development of its own IP core router, the 7770 OBX, after it acquired edge router vendor TiMetra in May 2003.

"Our experience with startups in the past has been frankly very challenging," said Jim Dondero, Nortel’s vice president of marketing. "[Avici is] not a startup, and that’s critical. It’s a proven solution. When you’re a major vendor with AT&T, that’s not for the faint of heart."