Dow Jones Newswires -- November 6, 2000
Dow Jones Newswires
WSJE: Column: Business Europe: Why Lucent No Longer Shines
By RICHARD MINITER
(Editor's Note: This is an opinion piece from Monday's
Wall Street Journal Europe. Mr. Miniter, a Journal editorial
writer, edits the Business Europe column.)
With its high stakes, brutal combat and slain giants, the European telecommunications market is starting to look like a scene from the film Gladiator.
Certainly the stakes couldn't be higher. Europe is at the red-hot center of the global telecommunication revolution. While the U.S. still has better search engines and content development -- everything from Google.com to WSJ.com -- Europe is moving more quickly to make the Internet revolution an on-the-ground reality. European phone operators are rapidly installing broadband, which provides high-speed access to the Web, and providing Web access for mobile phones. Across Europe, mobile phone use has consistently exceeded forecasts for the past five years. Both Finland and the U.K. now have more mobile phones than fixed-line phones. And European users are increasingly treating their mobiles like portable computers, not just phones. Data transmission will soon bypass voice as the primary use of mobile phones. European GSM operators say that they expect e-commerce over mobile phones to become the number one source of revenue by 2003.
That's why companies -- such as Lucent Technologies, based in Basking Ridge, New Jersey, and Nortel Networks Corp., based in Brampton, Canada -- are slugging it out in Europe. These companies, which supply the equipment and software to build, operate and improve phone networks, know that Europe is the place to test and prove their technologies. Whatever technology -- from high-speed optical switches to network software -- leads in Europe will probably become a world leader.
Which brings us to the slain -- or at least wounded giants. Lucent Technologies, the former Bell Labs division of the world's largest telephone company, was spun off from AT&T in 1996. The new company quickly made history with the largest-ever initial public offering, in dollar terms. With its strong growth, innovative products and growing earnings, analysts and observers soon ran out of superlatives for the new company. Then the young giant stumbled. Lucent fell behind its longtime rival, Nortel Networks, in both market share and total sales in key areas. Its stock price has dropped more than 70% since Jan. 2000. Lucent CEO Richard McGinn's last public appearance was on a Fortune magazine panel entitled "Guys who get it" -- he was dumped two days later. Institutional investors -- after Mr. McGinn's company failed to meet earnings forecasts for four consecutive quarters -- didn't think he got it. (He was replaced by Henry Schacht on Oct. 23.)
What went wrong? And what can European executives, at telecom start-ups and recently deregulated phone companies, learn from Lucent's struggles? Six lessons emerge from Lucent's bitter experience.
-- Lucent never shed the layers of bureaucracy that it acquired during its 122-year history as part of AT&T, one of America's most notoriously bureaucratic companies. "At AT&T we used to have conference calls to plan conference calls," one Lucent executive told me recently. "We're not doing that at Lucent." Fair enough. But former Lucent managers complain of endless meetings and conference calls, according to Business Week and other publications. Indeed, impatience with slow decision-making (along with a weak stock price) seems to be the main reasons why so many have left.
Jeong Kim, the founder of Yurie Systems Inc. which was bought by Lucent in 1998, is one of the few entrepreneurs to stay at Lucent. He is also one of the company's brightest stars. As head of Lucent's optical networks business, he reorganized the division into 17 semi-autonomous units. He tied managerial pay to performance. But his main operational goal tells a lot about the bureaucracy at Lucent -- he wants to improve delivery time by 30%.
-- Management turmoil. Ten of the 19 top executives pictured in Lucent's 1999 annual report have left. Those executives followed a stampede of other key managers, who fled as soon as their pre-IPO options fully vested in Oct. 1999. The trade press is full of reports of headhunters trying to place top-level Lucent executives at new companies. Perhaps the most egregious example: Lucent bought Ascend Communications, a fast-growing manufacturer of data transmission equipment, in June 1999. Many former-Ascend executives have since left -- thereby destroying a substantial amount of the value of buying it.
-- Great technology doesn't always translate into a great business. Lucent is famous for its R&D efforts, which absorb roughly 10% of the company's annual revenues. Lucent has earned an average of four new patents per day since 1996 -- making it one of the U.S. Patent Office's 10 most-active applicants. And the investment sometimes pays off. Lucent's new all-optical router, which can direct 10 times the amount of Internet traffic as competing products, is certainly promising. But the product won't be available until December and no buyers have been announced. And, too often, the technology doesn't make it out the laboratory door.
-- Listen to customers and engineers. Consider Lucent's experience with optical network switches -- the fastest growing part of the phone equipment market. Lucent engineers developed a 10-gigabit phone switch in 1997. But the top brass didn't believe that their customers wanted more speed -- just as the Internet was driving phone network usage into the stratosphere. Incredibly Lucent's sales force never asked customers if they would buy an ultra-fast switch, Mr. Schacht admitted in several press accounts. So the company put the technology on the shelf -- while rival Nortel began offering its own version of the high-speed switch. Nortel grabbed 43% of this lucrative $6 billion market, while Lucent, which finally began offering its product last year, now has only 15% of the market.
-- Don't lend to too many customers. Lucent has loaned out some $1.7 billion to phone companies to buy its equipment. It is a classic technique for boosting sales -- but what happens when the start-up phone outfits can't pay? Lucent's new chief financial officer, Deborah Hopkins, is taking a tougher line on financing customers' equipment sales. Given her track record at Boeing Co., she should be able to fix this problem over time -- either by collecting the balances or selling off the debts in secondary markets. But it won't be easy.
-- Focus, focus, focus. Lucent has acquired 38 companies since 1996. It has made so many acquisitions that its Web site offers investors the choice of viewing them alphabetically or chronologically. Now the company is talking about spinning off a number of divisions, including its microelectronics unit. It has made the same mistake of its former parent, AT&T. Now it seems to learning to follow the GE model -- pick a number of high growth, high margin businesses and dump the rest.
There are some encouraging signs at Lucent. It is actively addressing its problems and may be a bargain at its current price -- many analysts have rated the stock a "buy." But, for now, Lucent seems to be a case study for what not to do. |
