Nortel cuts investment in carrier Ethernet

Nortel Networks is “reducing its investment” in its carrier Ethernet switch and router products in order to focus more on packet optical platforms, a company spokesperson said in an email to Telephony today.

“Nortel has made the decision to refocus our investment from the carrier Ethernet switch/ router segment towards next-generation packet optical transport segments,” the spokesperson said. “This decision will allow us to focus investment on our leadership in packet optical platforms – reflecting the momentum and stability we are seeing in this market.”

In particular, Nortel said it is reducing investment in its 8600 Metro Ethernet Routing Switch, the lynchpin of the vendor’s focus, starting in 2006, on Provider Backbone Transport technology (also called PBB-TE), the connection-oriented carrier Ethernet transport technology proposed as a simpler alternative to MPLS in metro networks. Though the 8600 was Nortel’s PBT product, it also supported Provider Backbone Bridging (PBB), a non-connection-oriented technology that Nortel suggested be used side by side with PBT in the same box, where needed.

As interest in PBT cooled over the past year, interest in PBB grew. Last summer Verizon began lab testing the 8600, voicing much more interest in the product’s PBB capabilities for scaling multipoint Ethernet networks than in PBT.

“While we are reducing our investment in our carrier Ethernet portfolios ([including the] MERS 8600, [the Metro Ethernet Services Unit 1800 series and the Metro Ethernet Manager]), we have dedicated resources that will continue to work with all existing [carrier Ethernet] customers,” the Nortel spokesperson said today. “We will continue to service, support, and ship products to Nortel’s [carrier Ethernet] installed base of customers. This decision does not impact our Ethernet access and aggregation solutions, or our Enterprise ERS 8600 portfolio…We are not abandoning our carrier Ethernet technology innovation but simply focusing our carrier Ethernet investment away from the switch/router segment. This decision supports the goal to make Nortel a more focused company.”

On Ovum's Web site, vice president of network infrastructure Dana Cooperson called Nortel's decision "no doubt painful" but "the right move to improve MEN's post-bankruptcy chances for market success."

"The carrier switching/routing market remains highly concentrated," Cooperson wrote. "Cisco reigns supreme with 46% share, followed by Juniper at 16% and Alcatel-Lucent at 13%. Over the past four years, Nortel has seen its share of this market decline from 10% to 2% as spending shifted away from ATM toward IP, MPLS, and Ethernet...Between 2006 and 2008, Nortel tripled its share of the Ethernet transport and services segment, which includes CESRs, to 3%, but that's still only $132 million in revenue, a disappointing result given Nortel's aspirations and investment."

Meanwhile, Nortel has maintained its position as the third largest supplier in the optical networking space, though its revenue has been roughly flat as the market grew over the past two years, Cooperson said.

Though Nortel’s Metro Ethernet Networks division took in nearly $1.5 billion in revenue last year, the majority of it came from optical equipment rather than Ethernet switch/routers and was fueled by demand for 40 Gb/s network upgrades throughout last year. That optical business, Ovum analysts said in January, would be an attractive asset to “virtually all” of Nortel’s competitors as the company weighs its divestiture options in bankruptcy court.

"While too late to capture the largest initial 40G opportunities (e.g., at AT&T, which Nokia-Siemens won), Nortel's 40G solution, as we have written repeatedly over the past year, is highly differentiated; hit the market as it was moving beyond early adopters; and allows Nortel to muscle in to networks built with other vendors' gear," Cooperson wrote.

Last September, Nortel shocked the industry by announcing it would sell its MEN division but took those assets back off the market last month as it entered Chapter 11 bankruptcy. The company has until May 1 to submit a restructuring plan to the courts. In the mean time, all of its businesses are suffering as its customers lose certainty over Nortel’s future. Revenue from the MEN division was down 14% in the fourth quarter to $371 million. Of Nortel’s four main business units, only its enterprise group fared worse in the quarter, reporting a 30% revenue drop. But the MEN’s top line roughly matched the company’s overall revenue decline of 15% in the quarter.