Network giants go shopping

A new wave of consolidation is sweeping through the networking equipment market, but analyst Ovum says telecoms suppliers face an uphill battle, writes Steve Ranger.

Last week, telecoms equipment supplier Alcatel said it plans to buy the data networking equipment maker Xylan for about $2 billion, as part of a move to rationalise its products into three divisions - new carriers, existing operators and enterprise.

Voice traffic specialists such as Alcatel and Nortel are desperate to break into the data networking equipment market, because data traffic is rapidly overtaking voice traffic.

Alcatel is forming an Internet division to concentrate on Internet Protocol services for telcos. Chief executive Serge Tchuruk said it was part of Alcatel's plan to be 'a key worldwide player in the Internet field'. Alcatel also said it will acquire remote access company Assured Access for $350 million. In October last year, it bought high-end router and gigabit Ethernet switching company Packet Engines.

Ovum principal analyst John Matthews warned that 'the jury is out' on these acquisitions.

'Customers of these large suppliers are not as good at understanding enterprise data networking,' he said.

Siemens is said to be preparing an estimated $1.2 billion bid for the carrier grade part of 3Com's networking business, leaving the remaining parts of the networking company open to bids from potential buyers such as Nokia and Ericsson.

Nortel (now Nortel Networks) acquired Bay Networks for $7 billion last year, and Lucent bought Ascend for $19.3 billion.

Cardiff County Council principal IT consultant David Howells said the effects of Nortel's acquisition of Bay Networks were not yet clear. 'We are still buying the product and it still seems to be as good as ever - but it is still early days,' he said.

Telecoms networking companies might be able to buy the 'technology and customer lists', but would find it harder to acquire the skills to deal with smaller customers, Matthews said.

Telecoms suppliers are working from the wrong end of the technology, he added. 'They work by scaling down what they do for enterprise carriers but the model is going the other way.'

Datamonitor consultant Philip Codling said that despite this, the Nortel acquisition had gone better than expected. 'The fact that the business model is different doesn't mean they won't succeed,' he said.