LU:
Thanks tm. Check the bb for the info on the 3 lockups that we discussed, along with the numbers. I have a concern of where you received the 1st company's share #'s.
Whether in the form of Web content, wireless calls or Napster-like file swapping, communications traffic is coming on like a tsunami. Every network operator in the world must gear up or face being washed under. No three companies are better positioned to benefit from the next decade's Internet buildout than Lucent(LU:NYSE), Nortel(NT:NYSE) and Cisco(CSCO:Nasdaq), which make the cutting-edge equipment that runs networks.
So far, Nortel has catapulted to a sizable lead, while Cisco has taken an uncharacteristically tentative approach, opting to pick its spots rather than seeking to conquer the whole market. Lucent, meanwhile, has stumbled badly in the starting gate, making a series of missteps that have hurt the company's stock price even as rivals have continued to rally. With its earnings report due this week, Lucent's travails will occupy industry watchers' attention more than ever.
That in mind, TheStreet.com examines what's going on behind the scenes at the big telecom-equipment maker. In the first of a series of chats with these three companies' executives, TheStreet.com's Scott Moritz talked with Harry Bosco, Lucent's optical chief, late last month. They discussed Lucent's strategy, its competitive plans and how it expects to help shape the future of networks.
Setting the Scene
TheStreet.com: I guess we could start off with what seems the big question right now: Where is Lucent in terms of the optical-networking market? There have been lots of advances in the last year, yet we've seen Lucent lose ground to competitors. I mean, you guys invented the laser at Bell Labs and you've clearly shown that a lot can be done with laser light -- and yet you have been arguably lagging in the high-capacity optical race.
Harry Bosco: Let's back up a minute. We have been in the SONET [synchronous optical network, a transmission standard used to accommodate a variety of speeds and types of traffic, which is seen by many as inferior to new, higher-capacity dense-wave division multiplexing, or DWDM, platforms] business for a long time, and we were the first with DWDM with an eight-wavelength product for AT&T(T:NYSE) in 1985. We were the leaders in OC-48 [optical carrier level 48, which equals 2.4 gigabits per second] SONET systems.
'Shoring Up'
Lucent's Harry Bosco
Lucent
"I think we are in pretty good shape, and we are shoring up any places where we are short."
But we lost the market edge when the business started to swing toward OC-192 [10 gigabits per second]. We have since shored that up, and we have a full family of products going after that OC-192 business. We expect to get penetration back into that biz substantially this year.
TSC: Nortel's decision to pursue the 10-gig platform looks very smart in retrospect. Why didn't Lucent respond more quickly?
Bosco: All the market data said OC-48 2.5 gig was the key, and we put our investment in that. And quite frankly, [Nortel] got into a lot of these new carriers early on. But they absolutely got a jump on us in this market.
Speed to Market
TSC: Lucent is perceived to be slow to develop ideas from the lab and into products.
Bosco: Our technology is feeding into the optical-component area. We have a lot of the mathematical algorithms that are needed for these optical networks, and we are feeding our technology into the software layers, which will help intelligent optical networking.
TSC: Chromatis, the company you recently agreed to buy, makes a box that is filled with Bell Labs' components. So in effect you had to go out and buy a company that integrated your technology.
Bosco: You only have so many resources. These guys took the unique approach and saw the metro [edge of the network, as opposed to the core] opportunity and they did it. They were well on their way, and I thought, "Why should we compete with that?"
TSC: So start-ups tend to have an edge over larger firms like Lucent?
Bosco: For a focused product they have the edge if they can pull together the expertise and probably get to a niche product faster. We have to have more accountability to our customers, who want a whole end-to-end solution and have us integrate everything together.
Talking Talent
TSC: I have heard from your engineers that there was a hiring freeze for quite a while, at a time when your competitors where gearing up in optical. Did that end up hurting Lucent's efforts?
Bosco: Freeze is a relative word. We may have slowed down a lot, but we kept investing. The optical-networking unit continued to hire. We may have slowed down a little bit, but we recruited more college folks last year than we ever have. There are parts of Lucent that have slowed down, but we have never said, "Do not hire when you find the right person."
Feeling the Heat
Lucent shares sag through year 2000 as rivals gain ground
Source: BigCharts
TSC: How have you addressed retention of talent, which has been a big problem for you?
Bosco: We've done a couple things. We have broken into smaller teams, and we have put incentives on those teams, both in terms of stock options and cash, so they feel more like a small entrepreneurial team. And that seems to work. We've tried it with 15 different teams. It's not like people are running out the doors.
TSC: Cisco's new and enormous optical-manufacturing presence in New England hits you in a vulnerable spot, since you have a lot of optical engineers in the Boston area. How have you adjusted?
Bosco: There is some litigation going on right now that I'm not going to comment about. But I think it's a matter of keeping the teams together. That's not going to stop certain people from leaving, but we also have to do aggressive hiring. We are recruiting in the talent pools wherever they are the same as they [Cisco] will. The way I see it, if you have to hold people in, then you have a problem with your biz. So I like to say the door is open -- but I want all the employees to stay. And I'll do anything possible to make them happy.
Competitive Balance
TSC: On to a bigger should-they-go, should-they-stay kind of question: What's likely to happen to the microelectronics unit that has been rumored to be considered as a spinoff?
Bosco: I can't comment about what's happening with microelectronics. A long time ago, we decided to treat microelectronics as a partner and a vendor to competitors. We have done some good work with them; so have our competitors.
TSC: Since the microelectronics unit is a vendor to many of your competitors, wouldn't a more distinct separation lessen the perception of conflict?
Bosco: I think those concerns are behind us. They are a separate unit, and I think they'll win when they have a competitive product.
'The Door Is Open'
Bosco on retaining workers
Lucent
"The way I see it, if you have to hold people in, then you have a problem with your biz. So I like to say the door is open -- but I want all the employees to stay."
TSC: Nortel likes to boast that it offers products for an all-optical network, but even they admit that isn't exactly accurate. But they are working to fill the gaps. Where does Lucent stand in terms of providing optical products throughout the network?
Bosco: I think there has been some press out there that says Lucent is behind in optical networking. But I think you have to look at all the pieces we put together in optical networking. Some people highlight some niches, but you have to look at the broad family. And from that perspective, I think we are in pretty good shape, and we are shoring up any places where we are short.
TSC: So what's missing?
Bosco: We haven't announced anything in ultralong haul yet. But you'll see something coming down the pipe.
The Next Generation
TSC: Speaking of new-generation networks, there is growing sentiment among people like Desh Deshpande [chairman and founder of Sycamore Networks(SCMR:Nasdaq)] that network operators will want to have the ability to provide bandwidth on demand. The idea is that an immediate and temporary real-time circuit between two points is a far superior way to run a network than having to lease a big fiber pipe for 20 years. Is that a fair description, and do you agree?
Bosco: Yes. Prior-transport networks used to have a thing on top of the network called a network-management system. So if you were a customer that wanted to put some bandwidth across the country, you would put your request in, and then the network management system would provision a connection across the network. Then they tie in the billing. That could be a couple-day process; sometimes you could do it in a couple hours.
Today, if you wanted to get a big path from here to Pittsburgh from 8 p.m. to midnight, that would be feasible. That will be the future. For the mesh network, that's exactly what's going to happen.
TSC: How dramatic is this going to be? Will it drive the costs of running a network down even faster than they are currently dropping?
Bosco: It's going to mean a fast response to the customer. And they'll have more flexibility because they will only use what they need for a given period of time. It's going to change the business model. All the service providers are coming to us now, saying we want to be able to service our customers instantaneously when they put a request in. It cuts operating costs, and they get a bill out immediately. It's just better service.
'Accelerating'
TSC: You had a bad first quarter and ended up losing customers and market share to Nortel because you couldn't meet demand for optical equipment. How do you stand now? Are you able to say that you have gotten that behind you and are able to win back some of that business?
Bosco: We've been accelerating our plan, and we are on plan right now. We'll do a significant amount of 10-g business this year. We'll do some serious penetration into that market. It's one of these things -- today it may be 10-g, tomorrow it may be optical routers. It just demonstrates you have to keep your eye on the ball at all times.
TSC: Will your heavily touted optical switch, the LambdaRouter, turn things around for you?
Bosco: It's not like we are starving, but the LambdaRouter will generate a whole new -- purely optical -- network architecture. And this will be a key entry into this whole new market.
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