Lucent's strategy
May 12, 2003 - Optical Networks Daily (OND)
(focuses on the global optical communications market, providing daily comment and analysis on the key players, markets and product developments.)
One of the fairly comic aspects of the present endless debate on the condition of the communications industry is that the industry is almost 100% in favour of "consolidation" in general, but almost totally divided about what this actually means in particular. The industry also seems pretty opposed to the concept when segments get closer to it "personally".
So with one side of her mouth Pat Russo can recommend the process of consolidation for everyone else, and with the other effectively dismiss it for Lucent, by describing Lucent's recently announced partnership with Juniper as the way of the future.
As we pointed out last week if consolidation is in the air, Lucent is about as prime a target as any, given that there are no longer many sectors in which it has a pole position to make money on a permanent/long term basis. Lucent's only route out of this seriously product-deprived position is logically, as Russo clearly sees, to exchange the umbrella of the still-valuable Lucent brandname, of the logistics and marketing channels of the company's global operations network, and specifically its strong historic links with the leading U.S. telcos and the U.S. states and federal establishment, for exactly such product-related partnerships as it has just signed with Juniper.
Presumably, the hope is that while Lucent is peddling Juniper-type routers and the fruits of other OEM deals, Bell Labs can yet achieve what it has not achieved to date - a steady flow of apposite, leadership and market-ready products across the whole gamut of Lucent's historic and intended markets.
The catch here is that Nortel, Alcatel, Ericsson and Siemens can also offer many of these big corporate infrastructure goodies, and in the case of Juniper mostly have already done so. Hence what Lucent can expect from Juniper is not exactly a mutual partnership in which Lucent might reasonably expect to dominate, but merely a percentage of the business not executed by Juniper itself or its other partners.
Whether this will be sufficient to give Lucent the level of sales to replace technology attrition (we were moderately optimistic the other day), and to provide some growth, is obviously not certain. Nevertheless, Lucent's overall share of the communications sector has fallen so far that fortunately maintaining share is not, in principle, any longer such a demanding target.
On the other hand Lucent has to find quite a few Junipers to cover the marketplace and it is not obvious that it can indeed find them. Certainly, the U.S. is still awash with startups or young companies with, on paper, much to offer in a technical sense. But Lucent cannot risk partnering with companies that have an uncertain future, nor can it possibly hope to spend the management man-hours evaluating them all - some of who no doubt will have disappeared into that great optical graveyard in the sky before meaningful discussions even start. On top of that, if Lucent is going to harness its corporate infrastructure to so many different product-horses, it must be able to control them and avoid the obvious risk that they prove too wilful and independent and in the end just tear the company apart.
Other points made by Ms Russo, such as that relating to a refocus on doing business with U.S. federal and state governments, are completely understandable in Lucent's circumstances, but are quite worrying in the context of the fact that the quarterly reports of Lucent, Nortel and Cisco suggest they may be slowly losing their grip of the fast growing Asian market.
The reasons are no doubt complex and certainly include product specific issues such as the idiosyncratic Korean market, the huge Chinese mobile market, the explosive growth of locally based companies such as UTStarcom, Huawei, ZTE and others, as well as the possibility that many smaller innovative U.S. vendors may be doing better in fastgrowing pragmatic Asian markets than in the U.S. However, Lucent's instinct to regroup around its heartland, strongly reinforced by growing security budgets and enhanced "Buy American" attitudes, may go some way to getting it out of trouble in the medium term but at the expense perhaps of its long term global position, where it is likely to end up as an opportunistic international vendor rather than a truly worldwide player.
Admittedly at the moment this mirrors to some extent the stalling, and in many cases actual reversal, over the last couple of years of the slightly hysterical globalisation tendencies evinced in the previous decade by the top U.S. and European telcos. But there are few who believe this is anything but a temporary hiatus in an inevitable long term trend, and within another five years the global strategies of Lucent and its telco customers are likely to start to diverge again.
The point is, it is necessary to consider what Lucent will have become even after its extremely long route to reconstruction - a primarily North American company with a large component of services and probably specialised administration-related contracts, and a very strong position in the North American mobile wireless market (the wireless sector, after all, contributed almost 40% of Lucent's business in the last quarter). On top of that of course is Lucent's legacy Class 5 switch business, where it is probably losing a bit more share with each cycle, and the optical business, where it is still an important player but has no chance, at the moment, to be a dominant one in a market that anyhow is not going to make Lucent's fortune.
The problem in wireless may be that while this has clearly become Lucent's core business, dwarfing the rest at the global level, it is really merely a very strong second rank player. Maybe one third of Lucent's business will, in the medium term, come from non-North American activities, where in fact this should rightly be well over 50%, and the company will also have a smattering of resale business, in the 5-10% range, from Juniper and others, that it will not really control.
Through tight management and strong focus on essentials, this could perhaps be a viable package financially, and if so, the share price will recover strongly and the management of the day may be well-feted. But the company will be a mini-conglomerate with its main rationale as profitability rather than strategic momentum within the envelope of a defined technology and set of industrial functions. And once again one wonders, in this mish mash of miscellaneous activity, with a company whose focus is no longer daringly technical, what will be the role and future of Bell Labs? It seems that if R&D activity no longer has the will and capability to project Lucent upwards, then inevitably Lucent will be bound to drag it down.
NB: An indicator of how badly Lucent seems to have lost its way is the fact that the most impressive product statement to come out of the New York analyst briefing appeared to be Lucent's definition of a programme to migrate its historically market-leading Class 5 switch business - the jewel in the company's crown - to a new softswitch systems approach, making it one of the last companies in the market to tread this route. |
