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Cisco Deal Deflates Alcatel

The Paris gearmaker is dealt another setback as AT&T awards a key contract to its rival.






as a customer for key Net infrastructure, dealing a big blow to







Cisco said Monday that AT&T has chosen its carrier routing system, or CRS-1 equipment, to upgrade the telecom company's Internet backbone in 25 major cities. These so-called core routers manage huge volumes of traffic at major network junction points.

The deal with the largest U.S. telco advances Cisco's dominance as the leading Internet equipment supplier and hands some unwelcome news to rival Juniper.

But for Alcatel-Lucent, the failure to land the AT&T deal marks yet another painful setback on its jarring post-merger path.

"This is pretty dramatic," says Telecom Pragmatics analyst Sam Greenholtz. "This is bad news for Alcatel-Lucent's core router business and continues a pattern we've seen with them."

When it was still known as SBC, AT&T picked Alcatel-Lucent to be its primary equipment vendor. It was a sweeping victory and solid endorsement for the big Paris gearmaker, giving it a lock on a range of products to sell and many years' worth of network maintenance revenue.

But Alcatel-Lucent stumbled mightily in the past two years as network spending slowed and new products failed to catch on. In October, the company announced a management shakeup and another round of layoffs as it posted its third consecutive quarterly loss.

The poor performance has turned up the heat on CEO Pat Russo. She was asked by the board to provide a turnaround plan in October. Her plan, which was probably no surprise to Lucent fans, was to swing the ax and cut 4,000 more employees.

"This is one more nail in the coffin," says Greenholtz. "But I'm not sure it's the final nail."

Alcatel-Lucent shares recently were up a dime to $8.18. Cisco shares were rising 34 cents to $27.79.