Qwest Deal Breathes Life into Nortel, Sector

Qwest Communications International's announcement that it is using Nortel Networks' products to build a new packetized network in a 14-state region is a signal that the telecom recovery has begun, that packets are the future and that reports of Nortel's d

Qwest Communications Internationals announcement that it is using Nortel Networks products to build a new packetized network in a 14-state region is a signal that the telecom recovery has begun, that packets are the future and that reports of Nortels death are greatly exaggerated.

Bill Lesieur, director of the market-research firm Technology Business Research, said the announcement is significant for Nortel and the industry. "It revalidates that the migration to packet-based continues to some degree, in spite of massive cuts in capital spending by service providers worldwide," Lesieur said.

Last month, Qwest CEO Joe Nacchio announced that he was slashing 2002 capital spending by $2 billion and cutting revenue projections by one-third. He blamed a slumping worldwide economy.

But even during slumps, carriers cant afford to stand pat in the face of demand for more services and bandwidth, and competitors network upgrades.

Packetized networks are "so much more efficient and increase the features you can offer," said Jeff Kagan, an independent telecommunications analyst. "And it makes a carrier more competitive because it gives them remote control over services."

Lesieur is not surprised that Qwest is the first regional Bell to announce that it is completely rebuilding its old circuit-switched network in its original region. "Qwest wants to be a global carrier offering full services at very competitive prices," he said.

Qwest, which started life as a competitive carrier with its eyes on a global network, acquired U S West and its 14-state local exchange near-monopoly last year. The 14-state U S West region in the Rocky Mountain West and plains states is Qwests cash flow region to support its global expansion.

Qwest becomes the first regional Bell to announce that it is replacing its old circuit-switched network in its original region with a packet-switched network that can bring new services such as Voice-over-IP.

But Qwest isnt the first regional Bell operating company this month to announce a major deal with Nortel. On Oct. 3, SBC Communications announced that it would use Nortels Dense Wavelength Division Multiplexing (DWDM) gear to enhance services in the metro areas of its multistate network.

Last month, Nortel announced that it will provide optical backbones for China Telecom, optical Ethernet for China Unicom, nationwide DWDM optical equipment for Hutchison 3G in the U.K. and metro DWDM for Philippines Long Distance Telephone Co.

Those announcements are huge for Nortel, which announced a second-quarter loss of $19.4 billion, Kagan said. "Theyre betting on Nortel being there for them and betting on their technology," Kagan said. "You get positive momentum, a lot of orders, and you are rocking and rolling." Nortel can go it alone, but because its stock price still is very low, it will continue to be subject to merger rumors, Kagan predicted. He also predicted that Nortel, along with ADC Telecommunications, Alcatel and Lucent Technologies will snap back once carriers start spending money again.

The Qwest deal "shows that the North American market is ready for the evolution from circuit-switched to packet-switched networks, Sue Spradley, president of carrier Voice over Internet Protocol at Nortel, said. "If the quality of service, the security and the voice quality wasnt there, Qwest clearly wouldnt be running it on its network.

Qwest will keep its Asynchronous Transfer Mode backbone for the 14-state region. "Theyre not going to pure a pure IP play yet, Spradley said. Nortel is talking to most of the major regional Bells and international carriers about conversion to packet-switched networks. "Many are taking the first steps with ATM, but some will going with IP directly, she said.

By upgrading the existing hardware to accommodate softswitches, and adding gateways, the total number of switches falls sharply, and Qwest saves capital and operating costs.

"Most of the carriers are interested in growing services in their networks if they can get a cost-effective way to packetize their networks.

Nortel next year will be in testing with most of the major carriers on its Class Five switches that bring advanced services closer to the end user -- an indication that even during a downturn, Nortel continues to invest, Spradley said.

For delivering basic services, ATM is the equal of a circuit-switched world, and IP is getting close, industry observers say. Factor in the cost savings, and the fact that IP or ATM are superior to circuit-switching for video streaming, follow-me calling and other advanced services, and the migration to the new networks become a no-brainer.

The question is when. As of Friday, the answer seems to be sooner rather than later.