Lucent Wins Verizon Gear Deal

Coddling the big cats is paying off for Lucent (LU).

The telecom gearmaker has won a three-year contract to supply Verizon (VZ) with metro optical phone network gear, say people familiar with the deal. The deal is valued in the neighborhood of $1 billion or more, these same people say, and marks a substantial victory during a period of falling network spending by big telcos like Verizon.

The win comes at a critical time for Lucent, which is in the midst of a death-defying turnaround. Rivals, particularly Tellabs (TLAB), are bound to be stung. Tellabs was widely thought to be the front-runner for this next-generation dense wave division multiplex, or DWDM, deal. An endorsement from Verizon, the nation's biggest local phone company, could have catapulted Tellabs ahead just as phone companies are shopping for new gear to accommodate heavier traffic.

Lucent had no comment, and a person close to the company said no announcement was imminent. Verizon declined to comment.

Tech Talk

Word of the arrangement has been making the rounds for weeks, aided in part by a briefing that Lucent's Bell Labs engineers gave analysts recently. It seems the tech team spoke highly of the unannounced contract and their efforts to design the optical gear -- dubbed EON -- hand-in-hand with Verizon technicians.

Verizon had been working with various vendors for a couple of years on a product to boost network capacity, says a former Verizon engineer. The attraction of DWDM systems is that they use devices that act like prisms to separate laser light into component colors, making one optical fiber capable of carrying many channels of information at one time.

Ramping Industrywide DWDM metro sales forecasts

Source: Communications Industry Researchers

Industry observers often refer to a shift in equipment spending toward the metropolitan, or metro, networks and away from the already overbuilt core, or intercity, portion. The acknowledged trend within metro is that phone companies are gradually shifting away from older synchronous optical network, or SONET, gear, which require two fibers to connect calls and data transfers. The shift is running strongly toward more flexible and capacious DWDM devices, which can connect using just one fiber.

Racing toward that sales opportunity are Nortel (NT), Cisco (CSCO), ONI (ONIS) and Ciena (CIEN). The core metro DWDM market is expected to hit $538 million by 2005, up from $112 million this year, according to Communications Industry Researchers, a Charlottesville, Va.-based market research shop.

Lucent's win snatches the deal out of Tellabs' hands, not long after Tellabs apparently beat Ciena out as Verizon's front-runner. Wall Street has been waiting for Tellabs to make sales inroads with its new Titan 6100 and 6500 series optical systems. But so far the progress has been disappointing, leaving Tellabs with little to offset the falling demand for its older Titan 5500 equipment.

The Tech Edge

Lucent has had significant stumbles in this metro optical market, most notably the termination of Chromatis, a highly respected optical shop that Lucent acquired for $4.5 billion last year. Lucent was unable to integrate the tech and perhaps the culture of the start-up into its product line, and more widely into its new core customer strategy.

In August, nearly two years into its struggle to regain its footing, Lucent decided to limit its efforts to some 30 major global customers, killing most products that didn't show immediate profit potential. It was one of several severe moves, including the firing of nearly half its employees, by Lucent in its attempt to change its disastrous course.

But Lucent realized that one of its strengths was that its gear was installed at most of the world's major phone networks. And one of the primary challenges for the network owners was trying to improve their networks by integrating new equipment. Because Lucent sold the original gear, it had the best perspective on how to make new systems mesh with the old. In short, Lucent saw its new role as hand-holder to customers in transition.

"Phone companies were waiting for the large players to step up and help them migrate their entire networks," says one analyst, formerly with Lucent, who asked not to be identified.

To be sure, one contract doesn't spell immediate success for Lucent, but you can bet the beleaguered networking shop will still sing the deal's praises as loud as it can.

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