This was in this mornings Raleigh News and Observer Newspaper.
Nortel is remaking itself
By CHRIS O'BRIEN,
Staff Writer Raleigh News and Observer
Feb. 23, 1999
MORRISVILLE
-- If John Roth were a surgeon, the operation he performed on Northern Telecom
in 1998 might be described as radical.
During Roth's first full year as chief executive officer of the
Canadian telecommunications company, he spent $6.7 billion to buy
Bay Networks, laid off 3,500 employees and even changed the company's
name to Nortel Networks. By the time Roth put the scalpel down and sewed
the last stitch, his company had changed its focus from building equipment
for telephone networks to building Internet equipment.
The makeover will continue this year as Nortel plans to consolidate its
manufacturing operations, which could affect up to 10 percent of its
80,000 employees. In an interview last week, Roth said the changes this
year probably won't be as severe as those made in 1998.
But the goal remains the same. The Internet is changing everything
about telecommunications, and Roth wants his company ready for the
future. The Internet, he believes, will provide an opening for Nortel to
race ahead of its competition.
"Nortel has always taken advantage of change to propel [itself]
forward," Roth said. "We have to make sure we catch that wave."
Roth said that with some confidence because that's what happened to
Nortel almost two decades ago.
In the late 1970s, the company developed the first digital switch -- a
sophisticated computer that routes phone calls. Telephone technology was
just moving from analog to digital, and sales of Nortel's DMS switch took
off. The DMS, which was developed and manufactured in Research
Triangle Park, is a major reason the company has 7,500 Triangle
employees.
Roth was in the Triangle to help christen the new offices of Interpath
Communications, a Nortel customer and partner that represents the
changing landscape of communication services.
Interpath symbolizes both the opportunities and challenges that Nortel
faces. The Morrisville-based company bought $125 million in Internet
equipment from Nortel to deliver futuristic communications services. But
Interpath also has bought a substantial amount of equipment from Nortel's
newest competitor, Cisco Systems, as well as Lucent Technologies.
Lucent, Nortel and Cisco are considered the leading players in the new
market for building equipment that carries Internet traffic. Telephone
companies want this technology to replace their old equipment that carries
phone calls.
Lucent is the leading maker of telecom equipment in North America with
$30 billion in revenues last year. Nortel was a solid second with $17.6
billion in 1998. Cisco was third with $8.5 billion for its last fiscal year,
which ended in June 1998. But with Cisco posting annual gains of 30
percent, Nortel must grow faster if it wants to stay ahead of Cisco and
catch up to Lucent.
Pulling that off will require some delicate balancing.
Phone lines already carry more Internet traffic than calls. The amount
of computer data traveling over phone lines is growing more than 30
percent each year, while voice traffic is creeping up 3 percent annually.
But the phone companies' revenue still comes primarily from phone calls
and services like call waiting and caller ID.
Roth said the trick for Nortel is to build equipment that allows phone
companies to continue earning their old revenue while creating networks
that will eventually give them a profit from Internet traffic.
"It's up to us to help our customers make this transition," Roth said.
"Having said that, the voice traffic is still the premier traffic. Voice is 10
times the price of data. And it will stay that way for years to come."
In that spirit, Nortel last week announced a new line of equipment
called "Succession Networks" that will allow phone companies to add
Internet technologies to their old networks while still offering old
services. The good news for Nortel's 7,500 Triangle employees is that this
equipment will be developed and manufactured here and is expected to
offset declining sales of Nortel's traditional equipment.
Roth said Succession is aimed at enabling phone companies to let their
networks gradually evolve to Internet technologies rather than having to
rip them out and build new ones from scratch.
"No one's really going to rebuild the trillions of dollars they've
invested in their networks," Roth said. "It's a pretty smooth way of
integrating the technologies to allow customers to preserve their investment
while making the transition."
While it tries to sell new equipment to the old local and long-distance
companies, Nortel also must try to capture the market being created by all
the upstart communications companies being formed around the Internet.
Start-up phone companies and Internet service providers tend to lean
toward Cisco, which sells more than 80 percent of the gear that companies
use to carry Internet traffic. Nortel must convince these companies that it
understands the Internet language better than Cisco.
To help Nortel do that, Roth bought Bay Networks, one of Cisco's
biggest computer networking rivals. Nortel is incorporating Bay's Internet
technology into its products to attract the companies that are building new
networks.
"What Nortel is looking for is the many opportunities for the new type
of customers that are popping up now that deregulation is taking place,"
Roth said.
Nortel also will have to fight Lucent for those customers. Lucent
recently spent $20 million to acquire Ascend, another Cisco rival, for its
Net technology. Roth said Nortel looked at buying Ascend but decided that
it already had most of Ascend's major technology: an ATM switch. Roth
gently chided Lucent for not being able to develop the technology on its
own.
"It's rather interesting that Bell Labs was not able to develop its own
ATM switches," Roth said.
Even with all these parts in place, Nortel is far from being set. The use
of wireless technology is exploding. At the same time, fiber-optic
technology is becoming more advanced and continues to reduce the price
of making regular phone calls.
Nortel must help customers juggle all these technologies and
incorporate them in their networks.
"How do we assemble that for the customer in a cost-effective way?"
Roth said. "Because they will be in a very competitive business. What
Nortel has to do is be good on all of these fronts and then put them all
together."
While that is going to make it tough for the phone companies, it could
be a boon to consumers, Roth said.
"If you think about where we are in the evolution in wireless, we're
still in the early stages," Roth said. "... I'm still from the generation that
thinks the cost of long distance is high. But the cost of the bill for long
distance is becoming more expensive than the call."
Roth said he expects the company's operation in RTP to continue playing
a major role in the new Nortel, but one that will continue to evolve.
Nortel is studying the manufacturing process at its 24 plants around the
world and plans to shut down some and outsource some functions at others.
The company did that last year when it sold its plant in Creedmoor, where
it made cabinets that hold its specialized computers.
The company will continue doing the final assembly of products and
customizing them to customer's standards. But Roth said he wants the
company to shift its focus to developing software needed to deliver new
services.
Nortel also will continue to broaden its line of products, which may be
done through both development and acquisition. Roth said a broader
product line won't require anything as dramatic as the Bay acquisition.
"There are some holes we need to fill," Roth said. "But they're minor
compared to what we've done."
Chris O'Brien can be reached at 829-4563 or cobrien@nando.com
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