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Publisher's Outlook
April 2004

Rich Tehrani

Nortel Networks' Bright Future


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. Nortel�s 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 couldn�t 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, Lucent�s 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 Lucent�s 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, Lucent�s 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 Verizon�s 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. Dunn�s 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, Nortel�s recent win in the U.S. at Verizon helps helped solidify China�s confidence in VoIP and further helps Nortel�s chances of gaining a large share of this business. Furthermore, China is deploying applications at a rapid pace. An example is one cellular provider�s 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 don�t 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 frequently outsourced.

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 �service-only� companies.

You can�t 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. Let�s hope they�re right and let�s hope this future shines brightly on the whole industry.

[ Return To The April 2004 Table Of Contents ]

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