Optical, Ethernet and Beyond

By Paula Bernier (News - Alert)

The network infrastructure sector saw another big combination this spring as Ciena closed on the assets of Nortel’s (News - Alert) MEN business. The deal brings to Ciena some very nice Ethernet and optical solutions as well as the customers that use them. But what was the key driver of the deal?

If you ask Tom Mock, senior vice president of strategic planning at Ciena, he talks about how the Nortel MEN purchase accelerates Ciena’s strategy by two to three years. Not only does it expand Ciena’s product portfolio, he says, it also gives Ciena a larger customer base, of larger carriers, and a broader geographic reach, particularly in Asia and Latin America.

“When we’re finished with this, from an optical networking perspective we’ll be No. 1 in North America, and a pretty strong No. 3 worldwide,” Mock says, adding that post-merger Ciena has a little more than 800 customers worldwide and about 75 percent of the world’s largest service providers.

But if you ask ADVA (News - Alert) Optical CEO Brian Protiva for his thoughts about the combination of Nortel MEN with Ciena (which probably has been ADVA’s most direct competitor over the years), he’ll tell you the key driver of the
deal was Huawei (News - Alert).

The Chinese Juggernauts
“There are a lot of companies that are being forced into having dual names – Alcatel-Lucent and Nokia Siemens (News - Alert) and now Ciena-Nortel – in order to try to compete with the Chinese juggernauts that are taking massive market share,” says Protiva of ADVA. “If you look at Huawei and ZTE (News - Alert) there’s probably at least 30 percent in the NGN technologies already owned by them. And therefore that’s forcing consolidation.”

In a study released a year ago this month, Infonetics Research announced that Huawei had taken the worldwide optical network hardware market throne, moving Alcatel-Lucent (News - Alert) into the No. 2 position. Infonetics reported that Huawei owned 23 percent of the market, in terms of revenue, as of the first quarter of 2009.

“Since 2002, the optical network market has grown at an 8 percent compound annual growth rate, but for most vendors it looked more like 6 percent because Huawei absorbed a significant portion of the annualized gains. I don’t see this trend ending anytime soon, and if it doesn’t, Huawei could be the overall market leader for 2009,” Infonetics (News - Alert) analyst Andrew Schmitt suggested last year.
And that’s precisely what happened.

“Huawei was the top-selling optical network hardware vendor in 2009, with the highest revenue in three out of four quarters,” Schmitt wrote in February. “Alcatel-Lucent edged past Huawei in the fourth quarter, but not enough to take back its optical crown for the year.”

Wowie Huawai
Of course, optical isn’t the only area in which Huawei has made a strong play. The company has carved out a strong position (if not the No. 1 position) in virtually every key area of next-generation networking – including access, IMS, IP router, LTE (News - Alert) and MPLS backbone technologies.

For example, in March, Infonetics Research, reported that Huawei ranks No. 3 in both the IP core router and IP edge router, with market shares of 10.60 percent and 15.61 percent respectively.

“Infonetics’ report for 2009 reflects Huawei’ s strong momentum in the IP field,” says Zha Jun, president of network at Huawei. “As part of Huawei’ s All-IP convergence strategy, our router portfolio is well suited to support the continued and rapid growth in Internet and business traffic. We will continue to strengthen our efforts in the IP field and focus on addressing challenges of carriers evolving toward ultra-broadband.”

Huawei has said its focus on addressing customer needs has enabled it to rocket past such industry giants at Alcatel-Lucent. But when you ask competitors about Huawei they frequently focus on the low cost of the company’s solutions.

Bigger Fish to Fry
Given Protiva believes these Chinese suppliers such as Huawei are driving M&A on a variety of fronts, it’s logical to wonder whether ADVA is poised to buy another supplier or could itself be the target of an acquisition.

In fact, says Protiva, there’s been interest both in and from ADVA, which did its last acquisitions back in 2006 when it purchased Covaro Networks and Movaz Networks. Would ADVA buy a company today, Protiva tells NGN magazine, it would probably be in the enterprise or Ethernet access space.

While carrier infrastructure is the largest segment of ADVA’s available market, growing by 13 percent and representing about 45 percent of its market, Protiva says his company is strongest in enterprise and Ethernet access.

Although enterprise spending fell off in 2009, it’s coming back quickly, he says.

“I see some strength in the enterprise space,” he adds, noting there’s a $500 million opportunity in the area of enterprise optics alone.

But Ethernet access looks even better to ADVA, which is the global leader in this space, he says.

“Ethernet access is the fastest growing opportunity for us – at 25 percent,” he says, adding this is an $800 million market opportunity.

That’s not to say ADVA has taken its focus off the carrier infrastructure space, however. In fact, says Protiva, the company aims to win a third large carrier this year and a fourth one within the next two years. Although ADVA is a small fish in a big pond on the carrier infrastructure front, Protiva says it’s able to compete due to its ability to innovate. “If you look at us over the last 10 years, ADVA has done quite nicely, grown probably five times our revenue run rate in a quarter from 10 years ago,” he says. “I don’t think there are too many companies that can make that statement.”

The only other company that can say that, he adds, is Huawei, which has captured enormous share in recent years.

According to data released this February by Infonetics Research (News - Alert), worldwide the optical network hardware market, despite 5 percent sequential growth in the fourth quarter, dropped 14 percent in 2009 from 2008. Other than Huawei, the only vendors that increased optical market share in 2009 were the vendors that focused on the optical edge, including Fujitsu (News - Alert), Adtrandtrandtrandtran and ADVA.

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