THE DAY AHEAD: Lucent ups fiber optic ante

Larry Dignan
3 min read

Lucent, Nortel and Cisco just can't stop spending billions on revenueless fiber optic startups. While the three-horse fiber optic race is good theater, it's far too early to declare a winner.

Lucent Technologies (NYSE: LU) entered the fiber optic game with its $4.5 billion acquisition of privately held Chromatis Networks, which makes metro optical networking systems.

Lucent vs. Cisco vs. Nortel: Who will win?

Metro optical networking systems are bridges that move Internet, data and voice traffic from the larger network "core" to commercial office complexes and residential customers living in high-rise buildings. You've heard about the long-haul fiber buildouts by Qwest Communications (NYSE: Q), Global Crossing (Nasdaq: GBLX) and others. Metro networks -- onramps that consolidate traffic onto urban beltways -- are the next step.

But the metro network buildout is still six to 24 months from becoming reality. In fact, most metro products are still in the evaluation phase. Qwest is evaluating Chromatis gear.

"In the metro area no one is the leader," said Craig Johnson, an analyst with the PITA Group, an independent research firm. "The battle is really just starting."

And Lucent, Nortel (NYSE: NT), Cisco (Nasdaq: CSCO) and Alcatel (NYSE: ALA) are sprinting just to get to the starting line. Here's the fiber optic scorecard. Cisco recently acquired Qeyton Systems for $800 million to fill in its metro network lineup. Last year, Cisco gobbled up Cerent and Monterey Networks before they had a chance to go public.

Nortel has also been busy, buying CoreTek, Xros and Qtera to name a few. Now there's speculation that Nortel will have to buy a metro networking startup to keep pace.

Most of these startups have no revenue, but the big networking companies reckon they can take a hot product and move it through their sales force quickly. That's why the networking behemoths will spend billions on unproven companies.

``We've been courted by several over the past few months, (but) it was not (about the) price. It was specifically the ability to scale. Lucent has the best strategy with respect to optical networking among the Big Three,'' Chromatis Chief Executive Bob Barron said in an interview with Reuters.

Johnson said the acquisitions will continue. Metropolitan networks are the real aggregation points where bottlenecks can occur. The company with the leading technology wins. "That's why Cisco, Nortel and Lucent are spending to get a soup-to-nuts portfolio," he said.

If you had to pick the current fiber optic leader, Nortel would be it. Nortel has gained mindshare and momentum when it comes to next-generation networks. It also has a large installed base and can leverage existing infrastructure. However, leads don't last long -- there's always a new startup with better technology. Six months is a long time in this space.

The rest of the pack

While the Big Three fiber optic giants are established, there's a significant pack of players in the background. These players include JDS Uniphase (Nasdaq: JDSU), Ciena (Nasdaq: CIEN) and Sycamore Networks (Nasdaq: SCMR).

Although these companies play in different markets, they do share a common problem. They have to get big quickly.

JDS Uniphase doesn't have much to worry about -- it's been buying companies and technologies aggressively. Ciena and Sycamore either have to acquire or be acquired.

"Ciena is riding the wave," said Johnson. "But it's hard to see the long term (five years out) if it doesn't go on an acquisition binge."

Johnson noted these second-tier players don't have to acquire companies pronto, but will have start spending to get big.