Ciena Makes Direct Play for Ethernet Access Market, Acquires World Wide Packets

| Jan 24, 2008 | Optical Infrastructure | Competitive Intelligence Report

| Analyst: Jason Marcheck

Current Perspective: Positive
Vendor Importance: Moderate/High
Market Impact: High

Event Summary

January 22, 2008 -- Ciena announced that it has reached a definitive agreement to acquire World Wide Packets (WWP). WWP is a privately held company that makes Ethernet access and aggregation gear aimed at the large enterprise and municipal markets. Ciena reported that it would pay approximately $200 million in cash and $90 million in stock and assume up to $15 million of WWP’s debt as part of the transaction. The deal is expected to close in Q2 of Ciena’s 2008 fiscal year.

Analytical Summary

• Current Perspective: Positive on Ciena’s announcement that it intends to acquire World Wide Packets (WWP), because the deal expands Ciena’s Ethernet product line to address customer service edge, aggregation, and access networks, thereby making the vendor’s FlexSelect for Ethernet portfolio much more complete in terms of the ability to support advanced carrier Ethernet services. At the same time, Ciena seems to have paid a heavy premium for WWP, raising questions regarding whether or not the move will ultimately add value to the Maryland-based equipment supplier.

• Vendor Importance: Moderate to high to Ciena, because a move to strengthen its Ethernet portfolio helps to shore up a key weakness as it attempts to take advantage of the industry’s move toward packet-centric networks. However, it is unclear how much of WWP’s market momentum came via OEM arrangements from the likes of Alcatel-Lucent and Tellabs, thus indicating that an uncertain, yet potentially substantial, portion of WWP’s current revenue and/or sales relationships could be at risk.

• Market Impact: High on the optical infrastructure market, because Ciena paired the acquisition announcement with news that AT&T would be deploying WWP gear once the deal closes. By itself, this indicates that, now backed by a company of Ciena’s size, the WWP portfolio has become almost instantly more attractive to very large (and deep-pocketed) service providers. In addition, because some of Ciena’s key competitors (i.e., Alcatel-Lucent and Tellabs) OEM WWP equipment, these companies now face the prospect of either severing ties with WWP or reselling the gear of a major optical competitor.

Recommended Competitor Actions

• As soon as possible, Alcatel-Lucent and Tellabs should take steps to clear up any OEM confusion regarding their intent to continue selling WWP gear. Although the products are clearly strategically important to both vendors (else, why have the OEM in place), now that WWP is set to become a part of Ciena, new sales of WWP products through ALU or Tellabs sales channels will not only pad the coffers of an important rival, but also open up potential new sales opportunities for the CN 4200 – a key competitor to the 1850 TSS and 7100 OTS.

• All vendors with similar carrier Ethernet service delivery platforms should point out that Ciena’s claim of gaining a “first mover” advantage in the carrier Ethernet market are suspect at best. Case in point, via its OEM with WWP, Alcatel-Lucent likely helped generate some of the early momentum that made WWP an attractive target. Via its Atrica acquisition, NSN now has arguably the market-leading vendor in this space under its wing. In both cases, Ciena’s rivals can say that the vendor is playing catch-up, rather than leading the way.

• Ciena’s competitors should claim that until the requisite NMS integration work is done to bring WWP’s equipment under the control of ON Center NMS, the newly acquired product line is little more than a second OEM to go along with Ciena’s existing arrangement with ANDA. To this end, Ciena’s claims to have a cohesive end-to-end carrier Ethernet solution are subject to shades of grey interpretation.

Recommended End User / Customer Actions

• All operators interested in deploying advanced carrier Ethernet networks need to pay attention to AT&T’s deployment with Ciena/WWP. Since AT&T is the largest telecom network operator in the world, there will be plenty of lessons to be learned – about WWP’s products, about customer preferences and requirements, etc. – from observing this deployment. In turn, carriers can apply these lessons when making their own purchase decisions.

• Operators need to consider that Ciena is playing a role in Ethernet aggregation and access in the NGN build-outs of two of the world’s largest carriers (BT and AT&T). By itself, this fact makes a powerful statement regarding Ciena’s capabilities from a product offering point of view as well as from the standpoint of the vendor’s abilities to service large-scale, relatively aggressive rollouts.

• Alcatel-Lucent and Tellabs customers that have purchased gear OEMed from WWP need to press those vendors to clarify their plans for their WWP relationship after the Ciena acquisition closes. Certainly, all WWP products will continue to be supported regardless of who sold them. However, if either ALU or Tellabs plans to move away from WWP/Ciena, operators will need to begin making plans regarding future buying decisions.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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