I was recently invited to meet with Nortel executives in
Boston to discuss the future of this communications equipment provider
making its living selling products to service providers and enterprise
customers. Nortelï¿½s President and CEO, Frank Dunn, was delighted to tell us
that the future was bright and that multimedia over IP would be what to look
for next in communications.
As I listened to Mr. Dunn speak I couldnï¿½t help but feel like we were
back in 1999, talking about how quickly the telecom market would continue to
grow. I heard the same sense of energy and excitement in the voices of the
Presidents of the various business units as well. Five years ago, the air of
excitement was apparent but it was a bit different. You see, Lucentï¿½s CEO,
Rich McGuinn hinted that the enterprise business was a slow grower; while
optical and other carrier products were the future and would subsequently be
Lucentï¿½s focus. Soon thereafter Avaya was spun off. From a financial
perspective this was a logical decision as at that time equipment providers
targeting carriers were trading at huge earnings multiples while Lucent
carried a lower relative valuation. Spinning off the enterprise unit would
allow Lucent to be a service provider pure play. Interestingly, Lucentï¿½s
growth predictions were correct for about one year, at which point, we all
know what happened.
To put this all in perspective, at the time, equipment providers and the
media (TMC included) were telling corporations that they no longer needed to
be in the equipment purchasing business. Hosted applications or ASPs as they
were called at the time would supply enterprise customers with all they
needed. The ASP market grew like over-fertilized weeds for a while but after
being alive for just over a year, they had their financing severed at the
knees, bankrupting most of them. So much for that idea. When the economy
turned downwards, there were few ASPs and probably none that were large and
financially stable and worse yet, we had just spent over a year telling
enterprise customers not to buy any equipment. Enterprises, as you would
expect, stopped spending. If you had to write a recipe to collapse the
telecom industry, the above events would be primary ingredients.
And so, we baked our telecom disaster cake. Then we ate it. We digested
it, and it seems we are now ready for a new serving of telecom growth and
success. That is what I kept hearing over and over in Massachusetts. Here
are some of the details:
Dunn pointed out that more communications products and services will
undoubtedly be necessary as networks grow. And they are growing quickly.
Faster wireless networks such as Verizonï¿½s EDVO allow users to generate more
and more traffic. Another major point is that telecom networks increase
global productivity, a point that is 100-percent right on target and I have
been preaching this for years. Another major point is that emerging
countries are leapfrogging the developed countries. Networks in Russia and
China will soon be more advanced than they are in the United States as they
have no legacy copper to deal with. They are going to a native VoIP over
fiber infrastructure. Add to that the fact that Chinese universities are now
churning out more engineers than the U.S. and you have the potential to see
rapid global economic growth. Dunnï¿½s message to service providers? Make sure
to offer broadband as well as voice.
More optimism came from Bob Mao, the President of the Greater China
Region. Mao mentioned incredible statistics such as the total number of
worldwide wireless and wireline subscribers in China was 10 percent in 1998
and last year finished at 20 percent! The growth rates will continue at a
torrid pace. China is busy urbanizing another 25 percent of their population
meaning 300 million people. This is an amount of people greater than the
U.S. population, requiring tremendous telecom infrastructure! Even
theoretically unlimited optical bandwidth will be taxed with these numbers.
Moreover China will have 3G later this year and there are four of these
licenses granted already. China Mobile already has 160 million subscribers
and adds three million more per month. Nortel was quick to point out that
China will likely use suppliers that are established in the G7 markets and
further, Nortelï¿½s recent win in the U.S. at Verizon helps helped solidify
Chinaï¿½s confidence in VoIP and further helps Nortelï¿½s chances of gaining a
large share of this business. Furthermore, China is deploying applications
at a rapid pace. An example is one cellular providerï¿½s ability to conference
20 people worldwide via CDMA.
Even the optical market is showing signs of growth, although I was
assured we will not see hockey stick growth any time soon. Still, wireless
carriers worldwide are choosing optical backbones. Campus networks are using
optical to centralize storage and record keeping. More users are opting for
optical Ethernet, further simplifying optical deployment. Nortel is further
seeing deployment of optical networks in managed service offerings from
companies like Nortel partners, EMC and IBM.
A recurring theme I kept hearing was that Nortel is somewhat unique in
being the only major player in wireless, wireline, and enterprise networks.
They feel that they can leverage their expertise in one area to assist them
in other areas. For example, applying their experience in the enterprise in
order to help their service provider customers sell to their customers.
Speaking of enterprise, every vendor these days seems to talk about
presence and Nortel is no exception. Also, according to the company, we will
see more video over IP (see the sidebar entitled Videoconferencing Summit)
as well and the difference between wireless devices and wireline devices
will blur as we will start to contact people, not devices. We can thank IP
telephony and SIP for these achievements. Unified messaging may finally make
it as a real application thanks to VoIP. Also, 3G video from mobile devices
could become prevalent. Wireless mesh technology is something that we will
see as well. Currently Nortel has a lab at MIT where this technology is
being developed. Expect it to reduce backhaul costs one day.
Another area where Nortel had been able to tie their products together is
WiFi, where they have used wireless carrier technology to develop self-aware
WiFi networks. Nortel pointed out that they are very proud of their legacy
heritage. They have experience that pure IP telephony competitors donï¿½t
have. We have seen enterprise customers rip out pure IP telephony solutions
and opt instead for hybrid networks of legacy and VoIP. Nortel can play to
its strengths in either arena.
From a long-term health perspective, Nortel has farmed its entire
manufacturing out to Flextronics, meaning they can have variable
manufacturing costs instead of fixed. In addition, sixty percent of their
installations are outsourced to partners. Preventative maintenance too is
Nortel feels it can compete very well in the service business as they
produce hardware. This experience allows them to solve hardware problems
more easily than ï¿½service-onlyï¿½ companies.
You canï¿½t walk away from an event like this without a tremendous sense of
optimism for worldwide communications networks. There are areas of concern
like the fact that America is behind in broadband networking and the fact
that jobs and education levels are growing more quickly abroad then at home.
Still, if you are a service provider, there is so much more opportunity
ahead and business and consumer users too will see more innovation at lower
cost, enabling them to be more productive and have better control over how
they communicate. The future is bright according to Nortel. Letï¿½s hope
theyï¿½re right and letï¿½s hope this future shines brightly on the whole
To The April 2004 Table Of Contents ]