Nortel, Avici patch things up

If at first you don’t succeed…

Nortel has asked Avici Systems to be its dance partner again in the IP core router ball. These two broke off a courtship almost five years ago when Nortel married router and Ethernet switch siren Bay Networks.

Since then, Nortel has bungled two attempts to build its own core router and saw paramour Juniper Networks sleep around with rivals Lucent, Siemens and Ericsson.

This week, Nortel rushed back into the arms of Avici with a three-year agreement in which it will integrate, sell and support Avici’s core routers as the “preferred partner” of Nortel for building converged, multiservice optical IP networks. The reunited couple will also engage in joint marketing activities, development and technology collaboration.

These activities will initially focus on the service management and operations integration. The newlyweds said they will immediately begin integrating Avici products under Nortel’s Preside Management system for basic operations, administration, maintenance and provisioning support.

As a dowry, Avici has granted Nortel a warrant to purchase 800,000 shares of Avici common stock at a formula exercise price of about $8 per share. The warrant is exercisable after seven years (a “seven-year itch”?) but the right to exercise the warrant may be accelerated if Nortel achieves certain performance milestones.

Nortel chose to remarry a core router maiden because the service provider core router market is expected to grow from $1.2 billion in 2003 to $2.6 billion in 2007, a compound annual growth rate of 21%, according to Synergy Research. Also, Nortel just won a significant VoIP contract with Verizon that ultimately requires a converged packet core.

Nortel chose Avici – again – after a deep packet inspection on several candidates, incumbents and start-ups alike.

“Avici met our requirements and they have product today,” says Sue Spradley, president of Wireline Networks at Nortel. “We know we made the right strategic choice.”

As for Juniper, Spradley says Nortel only marketed its routers for edge applications even though the companies clearly stated at the time of their partnership announcement that they were targeting the core.

Avici comes with some warts, however. It is a distant third to Cisco and Juniper in market share – 5% in the third quarter vs. 65.6% and 28.4% for Cisco and Juniper, respectively, according to Dell’Oro Group – and it has been challenged in growing its customer base significantly beyond AT&T, Qwest, WilTel and Huawei. Indeed, AT&T was the only customer to contribute 10% or more to Avici’s third quarter revenue.

 The company has yet to turn a profit even though third quarter revenue was up 44% year-over-year and 7% sequentially.