Hi, Kenneth - I just got back into Nortel after being out for a long time - five years. Even in 1996, the question of vendor financing was an issue.
Nortel has been financing their own business for a long time: long before 1996. As a practice, vendor financing has a long and generally successful history. The example most consumers would be aware of would be the corporate financing plans available to new-car buyers. GMAC has added profitability to GM sales for a long time.
That's an oversimplification of the matter, but the point is that there is nothing inherently wrong with the practice.
Obviously, the concern is that a recession will turn those loans into a burden on Nortel. The imminence of a recession is a belief, or a fear, held by many: the problem is that there is insufficient data on which to base that belief. Certainly there are signs that it is possible, but one of the foundations for that idea is that current economic conditions will continue. However, if there is an easing in world capital markets, and and if the Fed loosens monetary policy, while dropping interest rates, we should see a return to solid, predictable growth in the 2-3% range.
For a different outlook on the matter, see the following...
biz.yahoo.com
The heart of the matter, I think, lies in the anticipated buildout of 3G infrastructure. The operators in Europe and the UK have put themselves in a cruel dilemma: for better or worse, they paid far too much for spectrum, and they floated a lot of paper to cover the cost. Every day they wait, they are paying interest on tens of billions: probably tens of millions a day. Capital markets have reacted with some shock to the amount of debt that has been issued; given the current tight money, operators are unlikely to get the additional money they need to finance the infrastructure buildout. They must get the infrastructure built, and start generating revenue to pay off their debt.
In that environment, the aid of the vendors is crucial: and don't forget that the aid comes at a price, and that price is the interest rate charged, which generally increases the profits of the vendor. It's certainly not a loss-leader.
For Nortel, they end up providing the whole package: from the time the user dials the number, until the phone rings, the stock quote is read, or the email delivered, Nortel has a piece of the pie.
Could it be bad? Yes, in a worst-case scenario, it could. But it ain't necessarily so. Nortel could just as well be enabling business that otherwise would not occur, to its greater profit.
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The article was very badly written, and not well thought-out.
'...it would be good to consider how the actual, commercial GPRS launch is going to unfold in Europe
during the next three months. I can guarantee that it's going to be messy.'
Well, that ain't rocket science. Setting up wireless infrastructure and getting it running right isn't easy. Anyone who remembers the first rollouts of CDMA will recall the birth pains. But what does that have to do with vendor financing?
'The launch of 2.5G general packet radio services systems is inevitably going to be an ugly spectacle, involving nasty spats over the lack of interoperability among different network/phone vendors. By next summer, fine-tuned models will start demonstrating the true potential of 2.5G.
Well, duh. So by next summer, they'll start resolving the bugs that he was fretting about in the paragraph before. Wow! A whole 6 months later?
I fail to see why issues of handset compatibilty have been drawn into a discussion of vendor financing. What is the point, or the relevance? His sole purpose seems to be dump a mishmash of disconnected negativity on Nortel's activity.
Not worth the paper it's written on, IMO.
JM2C,
Jim |
