Canadian telecommunications giant Northern
is undergoing an evolution that should already be setting off alarm
bells in the executive offices of traditional data networking firms.
As part of the company's most recent earnings announcement this week,
Nortel executives divulged that two-thirds of
new network installations in the first quarter came from enterprise
corporate customers. Half of the networks the company installed in 1997
were for data needs, a sign that Nortel is moving away from its
traditional voice-based networks.
This type of encroachment into the data market, which up until now has been dominated by the likes of Cisco Systems, Bay Networks, and 3Com, has long been expected. Most
industry pundits have been pointing to Nortel and Lucent Technologies as sleeping giants in
the networking industry, which could tackle data networking from their roots
in voice-based systems.
Nortel announced first quarter earnings this week that beat analyst
estimates compiled by First Call by
two cents. The company reported earnings of $141 million for the quarter,
or 27 cents per share, on revenue of $3.51 billion.
Earlier this year, Nortel formally launched a new enterprise data networks
division under the leadership of F. William Connor. "We had reached
critical mass in this marketplace," he noted in an interview. "It became
obvious that we needed to weigh in for the future."
It has been no
secret that the likes of Nortel and Lucent have targeted data
networking as a key driver of future growth. Conversely, with data
equipment rapidly commoditizing and profit margins dwindling, even on
high-end equipment, data players are increasingly looking to add voice
capabilities to their products to take advantage of a new style of service
provider that offers both voice and data options to customers.
"If you're Cisco and you see prices dropping through the floor on
enterprise data equipment, then you're going to look at the voice and
carrier world for profits," said David Passmore, president of industry
consultants NetReference. "It's
the only new fertile ground for these data guys to get into."
That is why Nortel will spend much of its efforts this year shoring up its
product line for local area (LAN) data networking equipment,
according to Connor. The company will soon add Ethernet-based capabilities
to its popular Passport switch and will float a concept called "virtual
routing" in the third quarter of this year that intends to overlay several
sub-networks across one fabric.
Thus, while data players shore up the voice side of their business, Nortel
will dive into corporate data layouts, expanding from its roots in frame
and cell networks based on ATM (Asynchronous Transfer Mode) and frame relay.
"They're sort of the Rodney Dangerfield of data networking," noted
Passmore. "People don't think of them much because they don't have any LAN
To shore up its voice play, Cisco announced a partnership
with Ciena earlier this week and Nortel
recently announced an equity stake in Avici
Systems, a high-end routing start-up. Both are signs that the firms may
butt heads more often going forward.
Separately, Lucent announced earnings for its second fiscal quarter that
beat analyst estimates by 5 cents. The telecommunications giant
announced earnings of $180 million, or 14 cents per share, for the quarter,
excluding one-time charges related to the acquisition of gigabit-speed
networking start-up Prominet.
Revenues for the quarter increased 25 percent to $6.1 billion. Consensus
analyst estimates compiled by First Call pegged the firm's earnings per
share at 9 cents for the quarter.