Why megavendors aren't so tough after all.

Last year, as the telecom industry's top equipment vendors moved toward consolidation, the rest of the vendor landscape was grimly warned: Join the consolidation trend or be trampled by the new breed of titans.

A year later, some of the vendors having the hardest time navigating the market are those with the longest legs. Last month, Alcatel-Lucent flattened its revenue outlook for the year based on a drop in spending among North American wireless carriers. A few weeks later, its chief rival, Ericsson, also warned of lower-than-expected sales, citing similar reasons. Investors in each company puzzled at how management could have been caught so off guard.

“The situation at Ericsson may take several quarters to work itself through,” wrote Mark Sue, an analyst for RBC Capital Markets, last month, not long after making similar remarks about Alcatel-Lucent.

Meanwhile, some of the companies doing well lately are those with just a fraction of the girth and muscle of their largest rivals. Juniper Networks has thrived in Cisco Systems' shadow, beating Wall Street expectations for the third quarter and raising revenue expectations for the fourth. Ciena, whose work force is about 2% the size of Alcatel-Lucent's, also beat the Street last quarter, reporting 34% growth over year-ago revenue and predicting 20% growth for the full fiscal year.

It's not just a matter of size, of course. After all, Juniper has help from a trio of big-shouldered partners: Alcatel-Lucent, Ericsson and Nokia Siemens Networks. (NSN contributed 11% of third-quarter revenue; the other two, less than 10%.) Ciena partners in the opposite direction, working with start-ups in helpful niches such as Anda Networks, which sells copper bonding technology for Ethernet services. In addition, there are plenty of modestly sized vendors struggling with the same spending trends as the largest suppliers; for example, Adtran and Tellabs have both complained of carrier spending dips.

“I don't think the issues are related to megavendors,” said Ron Kline, research director for Ovum-RHK. “It's more about who your customer is and what they're buying.”

Part of the current problem for companies such as Alcatel-Lucent and Ericsson may be the distraction of wide-scale integration. But according to Tom Nolle, president of telecom consultancy for CIMI, a more meaningful common thread they share is “an imperfect perception of the strategic direction of the market.” These days, there is perhaps no market segment that confounds its participants quite like wireless — one in which the megavendors are making big bets. Alcatel-Lucent, for one, has couched much of its growth story in the promise of IP multimedia subsystem (IMS) architectures. “More and more, there are expectations IMS may not even come about because the service framework doesn't appear to be a reality,” Nolle said.