RedHerring. THE NORTHERN PLIGHT. To leapfrog Lucent and Cisco, Nortel needs more visibility
herring.com
By Luc Hatlestad
The Red Herring magazine
October 1998
In the telecom equipment industry's chess game of
consolidation, the first bold move was something of a
surprise. Most industry observers had predicted that
Lucent Technologies or Cisco Systems would be the one
to seize the board with a headline-grabbing merger or
acquisition. Instead, it was Northern Telecom, with its
$9.1 billion purchase of Big Four datacom vendor Bay
Networks in June--a deal that Nortel officials hope will
thrust the company permanently into the spotlight.
Like many things Canadian, Ontario-based Nortel has
long suffered from comparative obscurity. Lucent and
Cisco aren't household names like Microsoft or Apple,
but their superior marketing has made them easily the
network infrastructure companies best known to
corporations.
Quiet resolve
Although hardly an unknown, Nortel lacks the brand
recognition of its closest competitors. It's like the
Seinfeld episode that reduced the Three Tenors to
Pavarotti, Domingo, and "the other guy"--which seems to
be Nortel's role as the telecom M&A wave begins. But
in snaring Bay, the company showed a determination to
remain at the forefront of the industry, a resolve that it
must maintain to stay there.
In some ways it seems absurd to suggest that a company
as big as Nortel is relatively anonymous. It amassed
$15.5 billion in revenues in 1997, a 20 percent increase
over 1996. Although this number falls short of Lucent's
revenues ($26.4 billion), it's more than double Cisco's
($7.2 billion). But Lucent and Cisco completely
overshadow the Canadian titan in market capitalization:
at our press time Lucent (NYSE: LU) and Cisco
(Nasdaq: CSCO) boasted figures of $121.2 billion and
$102.1 billion, respectively; Nortel's was $30.6 billion.
More problematic is the other companies' lead in the
admittedly unquantifiable category of mind share.
Whereas Nortel's reputation is comparable to that of,
say, 3Com--as a perfectly successful company but one
unlikely to shake the earth any time soon--Lucent and
Cisco are consistently covered and often lauded by
numerous consumer and trade publications (including this
magazine: our Herring 100 list of top tech companies
has recognized Cisco as Best Predator for two years
running and Lucent as Best Overall for 1998 among
public companies).
This difference in image and perception is largely
attributed, of course, to Lucent's and Cisco's superior
technologies. But many industry observers say that these
companies' world-class marketing engines have taken
them that extra mile in the corporate market's
consciousness, and Nortel's shortcomings in this area
have analysts somewhat concerned. "People look at
Nortel and see great technology, but it's up against two
great marketing companies," says Paul Litva, an analyst
for TD Securities, a Toronto investment bank. "Nortel
owns 75 percent of the fiber-optic traffic on Internet
backbones, but what will it do to leverage that and to
raise its marketing profile with customers and the
investment community?"
A fair question, agrees Nortel CEO John Roth, although
he offers few answers. "The Bay acquisition certainly has
raised our profile," he says. "Bay's profile isn't as strong
as Cisco's, but it is fairly strong, and customers pay a lot
of attention to that sort of thing. The real question is how
to keep that momentum going. It's something we're
thinking and talking about a lot, because the other
companies do an excellent job in that area." (For a look
at Mr. Roth's reasoning in more detail, see "Telecom's
Bay Bridge.")
Nortel's purchase of Bay was in many ways a daring
marketing move, surprising the many analysts who had
thought either that a Cisco/Nortel merger might be in the
works or that Ascend Communications would be the first
datacom vendor to be swallowed up by a telco. The deal
also served the dual purpose of filling out Nortel's
product line in a space--LANs--where the company's
ability to facilitate convergence was deficient.
Mr. Roth points out that a strong LAN link is crucial to
carrying voice traffic over IP networks, one of Nortel's
pet projects, and Bay's LAN presence was one of the
factors that convinced Nortel to make the deal. "We
have a strong product lineup, but we weren't strong
enough to build really efficient and effective IP networks.
We were doing internal development, but the pace of the
market was such that we felt it was time to make an
acquisition," he says. He adds that the move was
important for Bay as well: "Corporate network
requirements are rapidly increasing and moving toward
the type of reliability the telecom industry is known
for--and away from the type that the datacom industry
has supplied so far."
Nortel's newly broadened product line complements its
even geographic distribution; some analysts think that
these two factors give the company better long-term
prospects than Lucent, Cisco, or other challengers (see
pie charts, below). "Nortel is better equipped than the
others to thrive in the long run," Mr. Litva says, "because
their business is split pretty evenly across public carrier
and broadband networks, enterprise networks, and
wireless."
All over the map
Mr. Litva adds that Lucent and Cisco, more than Nortel,
could be severely hurt by any downturns in the U.S.
telecom market. "One big concern with Lucent is that
about 10 to 15 percent of their business has come from
AT&T, which has been a closed market to everyone
except Lucent but is starting to open up," he says. "Also,
about 80 percent of Lucent's revenues come from the
U.S., so if that market cools down even slightly, it will
affect them." By contrast, he lauds Nortel for its market
presence in Europe--where the company's customer list
includes Cable & Wireless, British Telecom, and
others--and in Asia, where it has investments, but not so
many that it has been crippled by the Asian flu.
Mr. Roth confirms that although the Asian slowdown has
negatively affected about 3 percent of Nortel's revenue
stream, successes in Europe have compensated for the
loss. "More than 20 percent of our revenues are now
from Europe, and with deregulation there starting to
progress, a lot of customers have begun turning to us for
their systems," he says. "Our opportunity is to enter the
market with the new companies that deregulation has
helped create." (For more on telecom deregulation in
Europe, see "Liberalization Across the Pond.")
As for products, Mr. Roth is quick to note that Nortel
counts many companies other than Lucent and Cisco as
prime competitors. He cites Ericsson Telephone in the
wireless market; Alcatel Alsthom in transport systems,
switching, and private branch exchanges; and Newbridge
Networks and Ascend in IP switching as posing a threat
to Nortel. But not too big a threat: "We're quite proud of
being very balanced," he says. "Our customers are
divided almost evenly among wireless companies, telcos,
startup carriers, and corporations."
Nortel's ideal scenario has a company like Ericsson
buying Ascend, leaving Lucent in a datacom quandary.
Cisco, meanwhile, figures to have the most relationship
building to do in the telecom industry once the datacom
allegiances of its onetime partners, Lucent and Nortel,
are cemented. Whatever happens, the push now begins
for Nortel to become something more than the other guy.
NORTHERN TELECOM AT A
GLANCE
CEO: John Roth
LOCATION: Brampton, Ontario
PHONE: 905/863-0000
WEB: www.nortel.com
OWNERSHIP: Public (NYSE: NT)
FOUNDED: 1895
EMPLOYEES: 73,000
PRODUCT: Wire-line and wireless
telecom equipment
PARTNERS: Cabletron, Diamond
Multimedia, Brite Voice, Westell, British
Telecom, Microcell, MCI
COMPETITORS: Lucent Technologies,
Cisco Systems, Ericsson Telephone,
Alcatel Alsthom, Siemens, Ascend,
Newbridge Networks
REVENUES FY97: $15.5 billion
REVENUES 2Q98: $4.2 billion
MARKET VALUE: $30.6 billion
Table of Contents
c Herr |
