Lucent catches metro fever

While Nortel Networks and Cisco Systems have made it an almost weekly habit to snatch up optical companies, Lucent Technologies has stood quietly on the sidelines, depending on internal development and the March acquisition of Ignitus Communications. That is until last week when the company acquired Chromatis Networks, maker of an optical metro solution that allows service providers to migrate from Sonet to wave division multiplexing.

While the value of the acquisition was not as high as last week's original $5.7 billion speculation, the final amount rang in at$4.5 billion in Lucent stock, based on the stock's closing price on May 30. However, the final number does not include the 7% stake in Chromatis that Lucent already owns, plus an additional $2.5 million that some Chromatis employees could receive if the company meets performance goals set during the deal. When completed, the acquisition could cost Lucent $4.75 billion.

The Chromatis Metropolis solution lets service providers migrate from Sonet to WDM. "On the same fiber you can have Sonet, as well as high-capacity WDM running simultaneously with ATM or IP on top," said Steve Korn, vice president of marketing and business development for Chromatis. "[Service providers] can gradually migrate from Sonet to the WDM world on a site-by-site basis."

Between the optical solutions from Chromatis and Ignitus, Lucent hopes to offer an end-to-end networking solution from the long haul to the metro to the networking edge. Lucent already offers two metro-oriented products - the All-Metro, a pure dense WDM system for regional networks, and MetroPoint, used for simple fiber relief in a point-to-point architecture. "These applications are not meant to go to the business customer location, which is what Chromatis is meant to do," said Kathy Szelag, vice president of marketing for Lucent.

"It's clear that the marketplace, especially in the U.S., is going to hybrid packet optical," Szelag added. Lucent already has been working on an ATM passive optical networking product for small business customers, but it lacked a product for other customer segments, she said. "Ignitus is a high-end product for big business customers. Chromatis is ideal for basic business customers."

For Chromatis, the acquisition provides manufacturing support and a big sales and service organization, said Chris Nicoll, director of optical infrastructure for Current Analysis. "Lucent gets early entry into the market, but Chromatis gets immortality," he said.

That access comes at a price when viewed against Cisco's$6.9 billion acquisition of Cerent in August 1999. Cisco expects to ship $1 billion worth of Cerent products this year, Nicoll said.

From a pure revenue stance, the $4.75 billion for Chromatis will be a good price if Lucent can ship an equal amount of Chromatis products, he said. "This puts Lucent into a new market. With Chromatis, they'll be better able to address the needs of carriers where they did not have a strong product before."

It's also a market that's poised to take off, Nicoll said. "Lucent is not late to the party. They are early. But they need to catch up to Ciena. And they need to compete with Cisco's Qeyton product," he added. "Nortel will make a move in this space, too. Their OPTera metro product has not been well-received by the marketplace.

"Cisco sees the competition as a validation of the size and opportunity in the optical infrastructure market, said Roger Farnsworth, director of marketing for the optical networking group at Cisco. "As the market grows, there is increased competition in this space," he said. "That competition is healthy. It's a great market to be in."