If

Ciena

(CIEN) - Get Report

is any gauge, Europe is shaping up as another

CLEC-type telecommunications disaster.

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And if it can happen to Ciena, a company with solid management, no controversial

vendor financing deals and a profitable product line, observers say there's no reason to believe bigger, more aggressive equipment suppliers such as

Nortel

(NT)

will escape unscathed.

Ciena has lost 28% of its value over two days as investors have grown alarmed by the near-death status of one of its bigger European customers,

Global TeleSystems

(GTS) - Get Report

. GTS represented at least 10% of Ciena's business last year, Ciena has said, and some analysts have estimated Ciena would garner 2001 revenue from GTS in the $60 million range. GTS shares traded Wednesday at $1.31, reflecting investors' doubts about its financial well-being.

Ciena, in a pre-earnings quiet period, would only say that it believes GTS will continue to be a good customer.

To be sure, $60 million is only 4% of Lithicium, Md.-based Ciena's projected $1.4 billion revenue next year. Of itself, the prospect of losing that revenue doesn't make for a grave situation at Ciena. But Ciena and its ilk boast expensive stocks whose owners have little tolerance for doubt. And in these waning days of free spending on Internet gear, the GTS worries strike fear in a jittery market that more European equipment buyers will hit the skids, damping demand and cutting sales growth at the gear pushers.

Et Tu, Europe?

U.S. companies weren't alone in the race to build the new Internet. Europe had its share of deregulation and a hothouse investment climate that spawned a surplus of upstart telecommunications network builders with all too similar business plans and pie-in-the-sky bandwidth ambitions. In Europe, as in the U.S., dozens of companies buried thousands of miles of big-pipe optical fiber networks to carry the rising tide of voice and data traffic.

And just like the competitive local exchange carriers, or CLECs, in the U.S. --

ICG

(ICGXQ)

, to name one -- the weaker outfits now appear destined to either consolidate or fail. Some have already made their exit.

A little deja vu: In September, European data network service provider

iaxis

sought bankruptcy protection. Ciena called it a minor blip, but went on to

plan a fourth-quarter charge of 6 cents per share to cover $28 million in uncollectible payments from iaxis. Like GTS, London-based iaxis was constructing a high-capacity pan-European network.

"You ended up with dozens of companies all bumping into each other trying to sell the same service, basic Internet access," says one New York-based hedge fund manager. "Everything that is tied to the Internet backbone has become a pure commodity service," adds the hedge fund manager, noting that few will survive the bitter price war among these companies.

The declining European telecom market hasn't yet figured into Nortel's game plan. Nortel says it has no reason to change its outlook on optical equipment sales growth in Europe, which it projects at a robust 34% next year.

Cobbling and Hobbling

Yet despite the pricing pressure that's infecting the European network builders, the bandwidth keeps on coming.

Another Ciena customer (and a deeply indebted one at that, with $3.9 billion in debt, according to

Credit Suisse First Boston

),

XO

(XOXO)

said this week it plans to buy and build a fiber network to connect 21 European cities. Shares in XO, nee Nextlink, have fallen 20% since the company unveiled its ambitious European expansion plans.

Two-year-old

CompleTel

(CPTL)

, another European network builder and also a Ciena customer, has seen its shares fall 63% in three months as it cobbles together its network.

"There has been plenty of backbone built in Europe and a lot of these start-ups just aren't going to make it," says one Silicon Valley-based money manager who asked not to be identified.

"At this point I've got to hope there is a bright spot out there, an improving euro and an improving macro economic condition in Europe that will lead to improved demand for capital spending," the money manager continues. "But who knows?"

One can only hope. Meanwhile, more and more "smart money" flees telecom and tech until that hope bears out.