Nortel looks to software as it shops Metro Ethernet unit

The departing president of Nortel's Metro Ethernet Networks business will go to whoever acquires the division.

Nortel's decision to divest its carrier Ethernet and optical businesses was based on the company's shift to a more software driven business model, the outgoing head of those businesses says.

Nortel's decision to divest its carrier Ethernet and optical businesses was based on the company's shift to a more software-driven business model, the outgoing head of those businesses says.

Nortel is shopping its Metro Ethernet Networks unit in order to raise cash for other key product areas, which now include carrier VoIP, enterprise and "application services," says Philippe Morin, departing president of the MEN business. Morin will go to whoever acquires the division.

"Nortel is really stating that it's now going to focus on more of an application services focus -- what we basically call ICT," or Information, Communication and Technology, Morin says. "When you look at MEN... it's addressing a unique market – different from all of the other businesses at Nortel – and it's a market that requires consolidation."

MEN is a $2 billion business that accounts for roughly 14% of Nortel's revenue – the smallest piece of the company pie after carrier, enterprise and services. But it includes a lot more that just Nortel's Metro Ethernet Routing Switch (MERS) 8600, the pillar of the company's ambitious Provider Backbone Transport (PBT) campaign for building more efficient metro Ethernet networks.

MEN also includes optical infrastructure products such as the OME 6500 and 40G/100G metro- and long-haul transport systems as well as the Passport 7000 and 15000 series multiservice switches. Optical and multiservice switches are multibillion dollar markets unto themselves – optical transport is three times the size of carrier Ethernet.

So MEN's $2 billion in revenue and 400,000 installed network elements is parsed among three sizable markets, not just carrier Ethernet.

The market is crowded, as Morin suggests, but also booming. In addition to Nortel, there are 20 other vendors making carrier Ethernet switches, all vying for a market growing at a compounded annual rate of 42.5%, to $4.6 billion in 2007, according to Dell'Oro Group.

The market exceeded $1.4 billion in the second quarter of 2008, almost three times its size three years ago, Dell'Oro says. It's expected to approach $6 billion for the full year.

But "there are way too many players here," Morin says. "Everybody's staring at each other saying, 'Who's going to pull out?' We've been on that sort of path for the last three years."

Morin wouldn't say if there have been any offers for the unit to date, but he says there is at least one interested party. He also says the deal is not contingent on which company might be the acquirer; the focus is on getting the most from MEN.

"We're looking for Nortel to get the most value as this asset is worth – and this is basically cash," he says. "This is not a fire sale – we're looking at buyers and partners that will come in and really look at us as a way to consolidate the industry, grow and take a lead in that market."

Other reasons behind the decision to divest MEN were a need for Nortel to focus on fewer markets and to allow the MEN business to thrive under new, less burdened ownership, Morin says.

"Couple [our momentum] with a new owner which is really focused into that market, then … this is absolutely, in my mind, in a great position to lead and grow the market," Morin says, adding that he was involved in the decision process. "It's the right decision for Nortel and the right decision for MEN."

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