Telecom Recovery Hopes Raised By Verizon Moves

Critical infrastructure upgrades by two Verizon business operations set the stage for a telecom stock rally that had financial analysts yearning for similar news from other carriers.

Verizon Communications Inc. and its joint venture with Vodafone, Verizon Wireless, announced wholesale network conversions to a unified infrastructure based on the Internet Protocol. Verizon Wireless anticipates spending at least $1 billion on its upgrades but has not yet signed up suppliers. Verizon Communications has not put a dollar figure on the wireline deal it made with Nortel Networks Inc.

While the two upgrade programs have no direct ties to each other, according to a Verizon Wireless spokesman, the combination points to a mass migration to all-IP networks going forward. Indeed, Wall Street is hoping that the phasing out of circuit-switched services finally has begun, with voice-over-IP (VoIP) applications leading the way out of an unprecedented three-year telecommunications slump.

"On the macro level, it does seem to mark a return to capital expenditure, something we haven't seen much of for three years," said Michael Doherty, vice president of telecom practice at analyst firm Ovum (Boston), "and that's positive for the industry as a whole."

"It's a sign that we've reached the bottom and may be heading upward," said Lynda Starr, vice president for U.S. carrier research at Probe Group LLC (Cedar Knolls, N.J.). "But there are still many [macro] economic factors that stand in the way of saying it's a full telecom rebound. I've [seen] nothing to indicate a surge in activity over previous months."But combined with positive fourth-quarter news from Nokia, the announcements served to pump up stock prices for telco equipment makers. Nortel, meanwhile, followed up its Verizon announcement with word that it will sell core routers from Avici Systems Inc. (North Billerica, Mass.) in a deal that also gives Nortel options on 800,000 shares of Avici stock. Under a joint marketing and technology development pact, Nortel will resell Avici's TSR, SSR and QSR routers, and integrate them under the Nortel Preside management system. Nortel has an existing reseller agreement with Juniper Networks Inc.

Verizon Wireless plans to spend $1 billion on a national upgrade of backbone services compliant with the cdma2000 1X Evolutionary Data-Only (EV-DO) third-generation cellular standard. The Verizon Communications wireline upgrade will be based largely on soft switches and media servers from Nortel Networks.

While most technology analysts view the drive toward IP networks with optimism, Tom Nolle, principal analyst and chief executive officer of CIMI Corp. (Voorhees, N.J.), cautioned that "VoIP can drive technology, but it will never be a significant revenue stream." Voice, he said, "remains a giveaway whether it's TDM [time-division multiplexed] or packetized," as broadband services become the principal revenue generators. Instead, Nolle said, carriers are shifting to IP backbones in order to provide converged services over a unified protocol stack.

Verizon Wireless' plan is to have EV-DO services at rates of between 300 and 400 kbits/second in most major cities by the summer, and then to expand nationwide in the following 18 months. Though no contracts have yet been signed or suppliers anointed, the spokesman said the company is very happy to date with work performed by both Nortel and Lucent Technologies in the limited commercial launch of EV-DO networks in the San Diego and Washington, D.C., areas. Those networks, which went live in September, formed the basis upon which "we've been assessing the business case [for EV-DO] that led to today's announcement," the spokesman said.

Nortel's letter of agreement with Verizon Communications, meanwhile, is expected to be followed by a formal five-year agreement. Verizon said its network will center on the provision of VoIP services in both local-area and long-distance markets. However, moving all communications to IP will allow Verizon to offer many additional merged broadband and voice services, such as instant video calling and unified messaging. Analyst Nolle called such services the "real moneymakers for carriers."Verizon used Nortel equipment for some intercity packet-conversion work in 2002, and Nortel already has begun shipping Succession 2000 soft switches and the Multimedia Communication Server 5200 to Verizon for the next phase of circuit-to-packet conversion. The 2002 deal did not make Nortel a shoo-in for the broader contract, Verizon sources said, since Verizon treated its convergence platform contract as a full competitive analysis of several vendors' systems.

Jim Dondero, vice president of marketing for wireline products at Nortel, said that the real significance of the new pact was that all traditional Class 4 and 5 circuit switches would eventually be taken out of Verizon's network, making the local and long-distance nets end-to-end IP (a Class 5 TDM switch is used for local services, while a Class 4 "tandem" switch is used in interconnecting regions).

Nortel could realize two advantages in this transformation, Dondero said: from being a primary supplier to a large carrier for true IP convergence, and from possible secondary business as other carriers respond to Verizon's decision to phase out circuit switching. "In terms of its impact within the industry, this is a very big deal," Dondero said. The Verizon architecture shift and new service offerings affect enterprise customers of every size, as well as residential customers, he said.

The Succession and MCS products will be the primary hardware platforms of Verizon's local and long-distance packet-conversion program. Nortel will be the exclusive provider of soft switches to replace both Class 4 tandem and Class 5 local-switch functions. Verizon also will sell the full suite of Nortel's Enterprise IP Telephony products to enterprise customers, and will work in conjunction with Nortel to encourage customers of Nortel Meridian PBX and Norstar key systems to upgrade to packet-based systems.

Dondero said that Nortel will continue to support PBX and key-system customers with upgrades to existing hardware platforms, but will emphasize transitions to IP-based enterprise systems in the future.(Additional reporting by Robert Keenan.)