NORTEL GOES INTO HIGH GEAR IN FIBER-OPTIC RACE

September 22, 2000

COMMERCIAL NEWS

San Diego, CALIF. — Susan Taylor reports that you need to picture the cramped confines of a submarine to appreciate just how far and fast fiber-optic technology has propelled Nortel Networks Corp.

In the company’s main optical networks lab in Ottawa – which sits among a string of buildings bursting at the seams with 2,600 researchers – a plaque in a quiet corner of the room reads “Das Boot”.

Named after the German film “Das Boot”, which is set in a claustrophobic U-boat, it pokes fun at the company’s humble beginnings.

“One of the areas where the early fiber…stuff started was literally a closet,” said Dino DiPerna, Nortel’s director of transport product development. “The guys had to literally crawl over each other to get around to the next piece of equipment.”

The only scrambling you are now likely to see at Nortel is its race to build fiber-optic equipment fast enough to meet the market’s insatiable appetite.

Hailed as a high-stakes gamble in its infancy, Nortel’s fiber-optic push is paying a handsome jackpot as the world’s No. 2 network equipment supplier reaps the riches of a three-year technology head start.

The company, which last year sold about $5 billion in fiber optic equipment, suggested this week it may reach revenues of $12 billion for the year from earlier forecasts of $10 billion.

Nortel, which develops a range of communications technologies, including equipment for wireless networks, switching, transmission and access, is currently best known for its market-leading fiber-optics systems.

The infatuation with fiber optics – the science of sending data as light rather than electronic signals – lies with its blistering speeds and massive capacity. Unlike clunky phone lines that carry information on copper, fiber-optics systems are built around strands of glass as thin as human hair.

Despite its delicacy, fiber can carry a massive load of information packets, whether it is voice traffic from a phone call, data from a Web site purchase, or a video clip viewed on the Internet.

“We went after what looked to be near impossible,” said DiPerna. Determination paid off in 1996, when Nortel produced the first fiber-optic system that sent data at a rapid-fire rate of 10 billion bits, or 10 gigabits, per second.

That is powerful enough, for example, to blast the U.S. Library of Congress’ entire 18-million book collection from Washington D.C. to Los Angeles in about 14 seconds over a single strand of fiber.

Buckle up, says Nortel chief executive John Roth, the speed limit is about to increase.

As rivals such as Lucent Technologies Inc. struggle to keep pace with Nortel’s 10-gigabit prowess, Roth keeps plowing ahead. Nortel is now testing 40 and 80 gigabit systems.

Long distance phone company Qwest Communications International Inc. claimed a new Internet speed record in June using Nortel’s 40 gigabit equipment, sending data four times faster than any existing commercial network. In October 1999, Nortel showed off its 80-gigabit system at a trade show.

Faster and more powerful networks are critical to carry the growing volumes of traffic that are increasingly clogging the so-called information highway, Roth said.

“We’re moving toward the analogy of an airline hub and spoke model and I’m flying direct, non-stop, New York-LA.,” he said in an interview at Nortel’s Brampton, Ontario headquarters. “Don’t put me on the milk run.”

Roth, a sports car buff who recently spent a week’s vacation racing his new Ferrari around a track at 170 miles (274 kilometers) an hour, is renowned for his relentless pursuit of speed. A pedal-to-the-metal pace runs throughout his company.

In the second quarter, Nortel tightened its grip on the world optical equipment market with a 43 percent share of sales valued at $11.1 billion in the first six months of the year. That is up from 28.6 percent in the same period last year, according to market researchers Dell’Oro Group.

“Being first to market has given them a tremendous amount of experience,” said Shin Umeda, an optical network research analyst at Dell’Oro. “They weren’t trying to go from zero to 100 like everyone else – they were already there.”

Among the challenges for Roth and his team is to stay ahead. Companies such as Cisco Systems Inc., which has been on a fiber-optic acquisition spree adding such companies as Cerent Corp., Monterey Networks, and Pirelli Optical Systems, is fighting hard for a bigger stake of the market. Cisco, which currently ranks seventh in market share, has the fastest growing revenue in this segment, at 53 percent.

Optical sales for rival CIENA Corp., which ranks sixth, are growing at 28 percent, according to the Dell’Oro Group. Lucent’s quarterly growth slipped 10 percent and Fujitsu Ltd (6702.T), which is ranked No. 3, posted a gain of just two percent.

Nortel is injecting $1.9 billion to more than double its manufacturing capacity and add 9,600 employees over 18 months. That follows a $660 million investment over nine months in similar production efforts.

At the company’s newly-built component and chip plant in Ottawa’s suburb of Kanata, construction has begun on a second building before the first is fully running.

Crates of costly semiconductor equipment are stacked in a hallway awaiting completion of ultra-pure clean rooms, where high-powered filters leave the air with less than 100 particles per cubic meter and water is so completely stripped of electrical ions that a toaster tossed into a tub of it couldn’t send an electrical current.

“We’ve typically tripled to quadrupled every year since we started this,” said Hans Thunem, a director of operations for Nortel’s optical components unit. “We’re going to do it again this year and we’re going to do it again next year.”

Nortel’s next bright light will be to link buildings with high-speed fiber networks that will allow high-bandwidth services.

This is a new but overcrowded market for Nortel, which dominates the so-called long-haul equipment market between cities.

“Nortel hasn’t enjoyed any of this business in the past,” said Roth. “Our optical business that we have today is built on the 20 percent (of data traffic) that’s between cities. There’s four times as much into the city.”

It’s this kind of market that fuels estimates that Nortel will reach $40 billion in revenues next year – a size that has tripped up larger corporations.

Roth is already on a typically high-speed plan to go beyond growing pains. He plans to strip down the corporation and remove the complexities that can limit growth, shedding products that represent less than a percent of sales.

“We need to pull the program forward and go up at a faster pace,” said Roth. “We’re not talking about doing this over years – we’re talking about doing it over Nortel years – which are only six-months long.”

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