Ed Gubbins

Byline: Ed Gubbins

As the telecom industry wakes from hibernation, equipment vendors are becoming eager to broaden their product portfolios and grow market share. But with reduced research and development budgets, even the large traditional incumbent vendors are recognizing the need to rely on their rivals to grow. The decision to acquire, resell or develop internally is guided by each vendor’s unique circumstance.

Ciena has been especially acquisitive, already spending more than $636 million in stock on acquisitions this quarter. That figure, while not taking cash off the bottom line, is about three times as much as the company spent on R&D in 2003. That’s on top of the $192 million in stock and $31 million in cash it spent buying Wavesmith and Akara last year.

Ciena faces more pressure to fully acquire companies because, unlike profitable competitors Nortel Networks and Lucent Technologies, it isn’t expected to turn a profit until 2006. The companies Ciena bought this quarter, Catena Networks and Internet Photonics, together took in about $65 million in revenue last year, according to RHK estimates – almost a quarter of Ciena’s 2003 revenue. Partnerships would give Ciena only a piece of that extra revenue rather than the whole stream, said Dana Cooperson, RHK’s optical group director. “[Ciena’s] investors are really beating on them to show improvements on the top line now,” she said. “From their perspective, it’s less risky to acquire someone than try to [develop products internally].”

With broader portfolios and healthier profit prospects, Lucent and Nortel can afford to be more conservative, partnering with companies instead of purchasing them. Lucent, which cut R&D by more than a third in 2003, has been more open to working with rivals, developing new products jointly with Juniper and Movaz Networks to accelerate its entry into the IP router and metro DWDM markets, respectively. Nortel cut R&D only by about 12% last year, but even it has opened to partnerships lately, reselling Avici IP routers and partnering with access vendors such as Calix Networks and ECI Telecom. “They’ve certainly realized that they can’t just go it alone,” Cooperson said.

Ciena faces a tougher road than Lucent or Nortel; while they are returning to markets they served pre-hibernation, Ciena is forging into new markets, and trying to reinvent its identity along the way. Tellabs faces a similar struggle, recasting itself as a data expert after absorbing Vivace Networks.

Among service providers, there are varying schools of thought regarding the effect of vendor consolidation versus cooperation. Some feel vendor reseller arrangements double the number of potential points of failure, raising the threat that carriers will get caught in the middle of a blame game. But joint development agreements such as Nortel’s and Lucent’s are a little more cohesive than that. More product lines also have been disrupted through failed integration of acquired companies than through faulty partnering, said Bill Flanagan, president of Flanagan Consulting. Integrating two companies with disparate markets and cultures can be a lot more hazardous than mixing two product lines, he said.

“Nortel has a better history of reselling than it does acquiring,” he said. “When you merge, [talented workers] often have disincentives for sticking around. They’re either fired or they can retire or start another company. If they’re ongoing businesses, they have to keep at it.” Joint development plans such as Lucent/Movaz and Nortel/Calix give customers the product integration they want without some of the concerns currently dogging Ciena about how easily it will integrate its acquisitions.

Still, some recent acquisitions are already paying off. Ciena’s purchase of Wavesmith Networks last April won it a contract with Verizon Communications last week. And since Alcatel acquired TiMetra last summer, the number of customers for that gear has grown from one to 11.

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