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Nortel drops billions on optics

Once viewed as a stodgy provider of equipment to slow-footed phone companies, Nortel Networks has been on a multibillion-dollar-acquisition frenzy.

Nortel Networks, once viewed as a stodgy provider of equipment to slow-footed phone companies, has been on a multibillion-dollar-acquisition frenzy.

Nortel's latest move to acquire optical networking start-up Xros today for $3.25 billion in stock offers further evidence that the firm is attempting to shed its slow-moving image to better compete in the fast-moving age of the Net.

"It's all about speed," Maribel Lopez, an analyst with industry consultants Forrester Research, said. "You want to make sure you have it first and no one else has it."

Since last December, Nortel has spent $6.5 billion on two optical-related outfits, Xros and Qtera, which haven't sold any products yet. Both start-ups specialize in optical-based systems for the Internet's "core," or "backbone." Xros won't even launch its technology for tests until this summer.

The moves are indicative of a growing arms race in the networking industry as competitors build and acquire the components necessary to build faster networks for high-end communications companies.

The market for optical-based networking equipment will reach more than $15 billion by 2003 in North America alone, according to analyst estimates.

Xros specializes in high-end equipment that can essentially "switch" streams of light sent over a fiber-optic cable, speeding up a network. Traditionally, optical signals needed to be converted to electrical signals first. But Xros has developed technology that obviates this step. Lucent is in the process of developing similar equipment.

"It would be bad if Lucent has it, but it would be even worse if Cisco gets it," Lopez said.

Swiftness is of the essence in the high-end networking industry. Nortel is one of a number of firms--from traditional competitors like Cisco Systems and Lucent Technologies to start-ups like Juniper Networks and Sycamore Networks--that is duking it out in the market. All these firms are focused on providing the technology that telecommunications firms and Internet service providers (ISP) will need to upgrade their networks for high-speed communications.

The competition has spawned deals that may not appear, at first glance, to make much sense. For example: Nortel's $6.5 billion for two companies with no revenue, or Redback Networks' recent acquisition of Siara Systems, a start-up with a similar story.

However overvalued, these acquisitions exemplify a growing sense among networking firms that speed to market is worth a few billion here and there. And Nortel is jumping right into the fray.

"Everything we do is about time to market," Don Smith, Nortel's president of the optical Internet, said.

Cisco has been known as the expert in acquiring companies in the networking industry. Last summer it spent $7 billion on one company, Cerent, that had $10 million in revenue at the time of deal. But with rampant opportunity proving to be too much for even the largest firms like Nortel and Lucent, everyone is getting into the act.

The reason? Even the armies of engineers housed in companies like Nortel or the Bell Labs arm of Lucent can't keep up with the innovation in the industry, particularly as more talent leans toward start-ups over established firms.

"(Nortel's acquisitions) are indicative of the quality and maturity of the start-ups popping up in the industry," Chris Nicoll, director of infrastructure analysis for market watcher Current Analysis, said. "A lot of these start-ups are being run by people with 10 or 20 years in the industry."

Nortel has been thought of as a talent-rich research and development house. But, increasingly, talent is following the dollars, and the dollars are often in start-ups, as evidenced by the $3.25 billion price tag for Xros.

Nevertheless, Nortel executives insist the terms of the deal are indicative of a company that has been hard at work for years on a networking system it calls "disruptive" for the industry.

"This is not an overnight technology," said Clarence Chandran, president of Nortel's service provider and carrier group.