Ciena strengthens its Ethernet portfolio by acquiring World Wide Packets

Ron Kline, Research Director

On 22 January 2008, Ciena announced its intent to acquire World Wide Packets, the privately held supplier of carrier Ethernet switches, for approximately $300 million in cash and stock. The move gives Ciena additional Ethernet expertise and products to attack the growing Ethernet access market, and fits with its FlexSelect and Ethernet-over-any-media strategy. However, many think the price is too high for a company that had approximately $30 million revenues in 2006.

Ciena announced its plans to acquire World Wide Packets (WWP) in a stock and cash deal valued at about $300 million. At the same time the company announced that WWP had won a contract with AT&T to supply carrier Ethernet switches for use in providing business Ethernet services. On the conference call announcing the events, Ciena was short on details regarding the size of the AT&T contract, how it might contribute to future earnings and whether Ciena was urged by AT&T to acquire the company. Ciena has been honored as an outstanding supplier by AT&T and is considered a strategic vendor.

The AT&T deal is the key: without it the pieces do not fit together. AT&T currently operates a national/international optical mesh network called ION (intelligent optical network) using Ciena CoreDirector OCSs, NEC SpectralWave 1600 LH DWDM systems, and Cisco ONS 15454 OEDs. The Cisco gear provides TDM access (including Ethernet over SONET) and the NEC gear provides core transport between cities. The glue of the network, which has been in operation since 2001, is the CoreDirector switches and the GMPLS control plane jointly developed by Ciena and AT&T. Currently, AT&T has been expanding the network into the SBC and BellSouth territories. Additionally, WWP has a rich set of carrier-class Layer-2 OAM&P capabilities that will give Ciena a compelling end-to-end multiservice network and service management story after what is likely to be a considerable integration effort.

Implications for ON

While World Wide Packets' LightningEdge service aggregation switch and service delivery switch family are not ON products per se, they fit nicely with Ciena's strategy to provide solutions that converge multiple, disparate networks onto a single, Ethernet/IP-based infrastructure.

As AT&T migrates its business services and customers towards IP/Ethernet and away from TDM, the selection of World Wide Packets products could spell trouble for incumbent Cisco. Coupled with the Layer-2 switching functionality on the CoreDirector, the WWP product set will provide an efficient and cost-effective access solution for AT&T, eliminating the 15454 from the ION architecture and driving increased CoreDirector revenues. The selection also puts another large carrier in the PBB camp - with likely PBB-TE (PBT) deployments to follow - plus the expertise acquired from WWP will help the company bolster its strength at BT, a vocal proponent of the PBB-TE standard.

From an ON standpoint, the WWP equipment will provide Ciena an efficient on-ramp for Ethernet traffic that is aggregated at the network edge and handed off to the transport network. The WWP equipment fills a product line void, providing Ethernet-based network termination and central office aggregation capabilities not currently provided in the CN 3000 series. The move does, however, bring into question Ciena's OEM relationship with Anda Networks, the current supplier of Ciena's Ethernet access technology. The CN 3000 series provides Ethernet aggregation over fiber (GigE), TDM (SONET/SDH), and PDH while the WWP gear provides only Ethernet aggregation over fiber (GigE). Ciena insists that its existing OEM relationships will remain in place.

World Wide Packets had approximately $30 million in revenues in 2006 and over 100 customers through a combination of direct sales and OEM arrangements with Alcatel-Lucent, Ericsson, and Tellabs - agreements that Ciena says it will honor. Still, we have heard those words before, and who knows what that will mean for Alcatel-Lucent, Ericsson, and Tellabs when the dust settles. We fully expect that, despite protestations to the contrary, these OEM arrangements will not survive based on past history: Alcatel-Lucent/Movaz (now ADVA) is a recent example.

Although not part of any OEM deals with Ciena or WWP, ADVA Optical Networking and Nortel sales could be affected as Ciena gains greater market presence through its PBB/PBB-TE based deployments at BT and AT&T.

We view the acquisition as a positive step for Ciena. However the company still faces a large integration effort going forward, not only on the product/software side but also managing remote WWP resources (located in San Jose, California, and Spokane, Washington), which is not an area in which Ciena has excelled.

Ron Kline brings 18 years of service provider experience to Ovum and is responsible for overall direction of Ovum's North American optical networking research. Ron specializes in bandwidth management (DCS and OCS), aggregation (SONET and OEDs), and WDM. Recent projects include researching the use of metro WDM in NA carrier networks and the growing role of Ethernet transport in metro carrier networks. Ron has a wide variety of network transmission and switching equipment experience and extensive knowledge of network management and operational support systems.