NT article:
I don't agree about VOIP being the next big thing. SONS and CLRN is in that business now. New networks are integrating VOIP, but older networks are just replacing the traditional voice switches with VOIP as the equipment nears the end of their life. The growth from traditional voice carrier will be steady but not explosive as the need to replace on a wholesale bais is not there. A big chunk of profit still comes from the older equipment and as companies adjust to the environment of more traditional slower growth, cost becomes an issue so the reason to replace switches is not pressing.
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Nortel: More than just a phone maker
Inner workings are a mystery to most
Patrick Brethour
02:21 GMT-04:00 Saturday, August 18, 2001
Nortel Networks Corp. is a lot like the weather: Everyone talks about it, but its inner workings are a mystery to all but the experts.
Nortel is one of Canada's most widely held stocks and the largest technology company by far, but most of its business in building communications networks takes place out of sight of the public.
"It's not as if when the Internet comes into your house, it says 'Brought to you by Nortel,' " says Mark Quigley, a telecom analyst at Yankee Group in Canada.
The lack of a direct relationship with consumers is an image problem for many technology companies, but Nortel faces the extra burden of having a broad portfolio of products -- it is arguably the most diversified firm in its sector -- that are all technologically complex.
Nortel's products appear in almost every part of the Internet, a result of a four-year push by Nortel president and chief executive officer John Roth to wean the company from its roots in the telephone industry.
Mr. Roth has positioned Nortel as a major player in high-speed optical networks -- a collection of glass fibre strands that when combined with switches, routers and other equipment becomes an information network that is vastly faster than its copper wire predecessor.
Nortel sells products that run the land-bound Internet, wireless networks, the computer networks within companies and, of course, telephone networks.
His strategy had been a stunning success, nearly doubling Nortel's sales within three years to $30.3-billion (U.S.) in 2000, the biggest boom year ever in the communications equipment sector.
Unprecedented boom has turned to painful bust in 2001, leaving Nortel slashing a third of its jobs as sales fall and losses mount.
But the pain isn't equally distributed. Even within the five high-growth areas that Nortel has targeted as priority markets, the short-term turmoil and long-term recovery prospects vary greatly. The company's wireless business, for instance, increased 20 per cent in the second quarter, even as other units saw sales decline as much as 84 per cent.
There's debate among analysts about whether Nortel's broad range of products is a help or hindrance today, but the company says its portfolio continues to be a competitive advantage in winning big contracts for diversified networks.
"If you have three different companies come in to build your house, I don't want to see what your house looks like," says spokesman David Chamberlin.
Within each of those five areas, however, Nortel faces different market conditions and different competitors that add up to much different challenges.
Long-haul optical networks: Back pains
This is the spine of the Internet, the superhighway that carries Internet traffic between continents, countries and cities.
And it's also the area that has caused the most pain for Nortel, as the building spree in such long-distance networks screeched to a halt.
A year ago, Nortel utterly dominated this part of the market. "They had a huge leap there," says Andrew McCormick, Aberdeen Group's senior analyst for optical communications.
According to a study from Aberdeen Group, the company had a 55-per-cent market share for next-generation products, such as its optical amplifiers that allow data to travel for 4,000 kilometres without having to be regenerated. That results in big cost savings for the companies that run data networks.
And those figures understate Nortel's dominance, since they don't include sales of older products in the segment. Mr. McCormick said the narrower definition indicates where most of the growth will come in the sector.
Using that narrower definition, Nortel had lost its lead in the sector by July, 2000, with its 12-per-cent market share putting it in fourth place, behind Ciena Corp., Lucent Technologies Inc. and Alcatel SA. Mr. McCormick said Nortel is No. 2 when the long-haul market is considered, behind Ciena. Nortel would not comment directly on the study, but said this week that it believes it retains its No. 1 spot in the combined long-haul and metropolitan optical market.
Nortel's own regulatory filings show the extent of the slowdown in this sector: Sales in the second quarter of 2001 were just $293-million, down 84 per cent from that time last year. Indeed, the revenue decline in long-haul alone accounts for more than 40 per cent of the company's overall sales drop.
Nortel won't talk about when its revenue might rebound in this or any other part of its business. But Mr. McCormick and other analysts forecast a gradual rebound in 2002 as new applications soak up existing capacity and unlit fibre lines need to be put to use. That recovery, however, may not gain any real traction until the end of 2002.
Metropolitan optical networks: Urban riches
Local, or metropolitan, networks are also made up of fibre-optic cable, but their function is to act as a link between the high-speed Internet spine and Internet users.
One of Nortel's main products in this area is gateway access gear that acts as a kind of smart traffic cop to guide traffic between corporate networks and the Internet.
Right now, local optical is the mainstay of Nortel's business, accounting for $1.7-billion, or 37 per cent, of its second-quarter revenue. That's down from a year ago, but not as sharply as long-haul revenue.
Analysts believe that this sector will rally comparatively quickly, as fibre-optic cable is extended beyond the downtown core of many cities to remove transmission bottlenecks.
Later in the decade, an even bigger revenue stream is predicted to start flowing when fibre is extended into existing residential areas. "Optical metro is the ultimate battleground," says Brahm Eiley, president of Toronto's Convergence Consulting Group Ltd.
That's the good news. The bad news for the company is, as with long-haul, that Aberdeen estimates that Nortel's market share, if only next-generation products are considered, has dropped to 15 per cent from 20 per cent, trailing leader Cisco Systems Inc. (Nortel is ranked No. 1 for the entire market, according to Aberdeen.)
Wireless Internet: Bright spot
Nortel's wireless Internet business is the only part of the company that has grown over the past year and in the past quarter. As a result, wireless sales are now the second-biggest part of the company's revenue, at $1.5-billion in the second quarter. And it has announced a spate of new contracts recently in China and Portugal.
The company is aiming to capture 25 per cent of the global market by 2003, up from 19 per cent of new contracts before 2001.
Most analysts agree that the wireless Internet space will continue growing, but there is some concern that expansion plans may be trimmed because of the high price many firms paid to buy additional spectrum.
Intelligent Internet: Icing on the cake
Nortel doesn't provide separate revenue figures for this area, made up of services that are layered on top of a corporate network. Such services could allow a company to personalize the content on its Web site, for instance.
Voice over Internet protocol: The next big thing
Nortel still has one of its biggest battles -- and opportunities -- ahead of it, as businesses start to combine their computer and voice networks into a single entity.
The technical name is "voice over Internet protocol." Practically speaking, VOIP will trim network costs for businesses and open the door for advanced services such as dependable video-conferencing.
Iain Grant, managing director of Yankee Group in Canada, says corporations will spend "hundreds of billions" to make the transition this decade. But the spending spree won't start before 2004, he adds.
For now, Nortel's revenue from this area isn't significant enough to be broken out and is recorded in the catchall "Other" category.
As voice and data networks begin merging, Nortel will be facing off against Cisco. The U.S. company's strong presence in corporate data networks allowed it to blunt Nortel's advances in the late 1990s, after that firm acquired Bay Networks Inc.
For the rematch, Nortel says it has advantages stemming from its long history in telecommunications and the reliability of its voice systems.
Nortel's light dims
While still No. 1 in the overall optical network market, Nortel has lost ground in the last year in sales of next generation equipment in long-haul networks between cities and local networks within cities.
Long haul market share
2000*
Nortel 55%
NEC 9%
Marconi 0%
Lucent 19%
Corvis 0%
Ciena 11%
Alcatel 5%
Sycamore 1%
2001#
Nortel 12%
NEC 15%
Marconi 1%
Lucent 19%
Corvis 7%
Ciena 30%
Alcatel 13%
Sycamore 3%
Metro market share
2000*
Nortel 20%
Lucent 0%
Cisco 40%
Ciena 10%
Alcatel 4%
Sycamore 0%
Sorrento 16%
Redback 0%
ONI 10%
2001#
Nortel 15%
Lucent 1%
Cisco 42%
Ciena 9%
Alcatel 2%
Sycamore 3%
Sorrento 4%
Redback 7%
ONI 17%
-*Most recent quarter reported as of July 20, 2000
-#Most recent quarter reported as of July 20, 2001
Copyright © 2001 The Globe and Mail |
