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Nortel adds data networking

The Canadian telecommunications giant is undergoing an evolution that should set off alarm bells in traditional data networking firms.

Canadian telecommunications giant Northern Telecom 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 products."

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.