The Big Picture

The market for carrier Ethernet technology, while driven fundamentally by the favorable cost-per-bit of Ethernet economics, is nonetheless, like other sectors, exposed to and affected by the macroeconomy to some degree.

Having paid over $300 million to acquire carrier Ethernet equipment vendor World Wide Packets earlier this year, Ciena is eager to ramp up sales of that technology. But, citing the macroeconomy and a particular hesitancy among Tier 2 and Tier 3 carriers to spend much on next-generation networking gear in this climate, Ciena reported sales of WWP's gear dropped from $18 million to $4 million in the most recent fiscal quarter ending Oct. 31, 2008. And while Hatteras Networks, which makes Ethernet-over-copper gear, reported its best performance ever in the fourth quarter, it slashed 25% of its work force in mid-November in anticipation of an inhospitable year ahead.

While small carrier Ethernet vendors such as Actelis, Anda Networks and Hatteras have thus far found success by partnering with larger vendors, consolidation in the space is starting to accelerate. Following Ciena's high-priced acquisition of WWP last year, Overture Networks acquired Ceterus Networks, combining specialists in the business services and mobile backhaul markets, respectively. Though the two moved in largely different circles before the merger, they began to meet as they crept upstream in carrier networks to aggregation points. And as one company, they believe they'll be able to cross-sell into each other's markets. However, it's unknown what this will mean for Tellabs, which sells Overture's gear and also has its own carrier Ethernet gear for wireless backhaul.

Perhaps the biggest impact of the macroeconomy on the carrier Ethernet space is the (as of this writing) ongoing effort by Nortel Networks to sell its metro Ethernet division. That transaction, if and when it occurs, is likely to result in a reduction of the number of products in the market, as acquirers (analysts say Cisco, Huawei Technologies and Nokia Siemens Networks are likely bidders) will have their own products matching Nortel's — meaning somebody's gear will have to go.

“Part of the sale would involve considerations for the value of the customer base and related service contracts and not necessarily the technology itself because there's a lot of vendors that have fairly current next-gen carrier Ethernet products,” said Glen Hunt, principal analyst for Current Analysis.

Another factor at play is that the linchpin of Nortel's carrier Ethernet strategy for the past two years has been a focus on provider backbone bridging-traffic engineering (PBB-TE, which Nortel has called PBT), a connection-oriented Ethernet transport technology designed to allow the creation of “tunnels” of dedicated bandwidth for Ethernet traffic. Despite months of industry chatter and a quickly growing roster of equipment vendor torchbearers, PBB-TE drew less excitement in 2008 after its showcase customer, BT Group, adopted a more marginal view of it.