With little happening in the business world – other than the same-old,
same-old post-Xmas shopping frenzy – AT&T quietly unveiled higher prices for
its CallVantage service. According to PhonePlusmag.com, AT&T is rolling out
CallVantage Plus, which will provide nine additional phone numbers for $7.49
a month. Each number will come with their own set of features such as
call-forwarding and voice-mail. AT&T is also offering call-filtering for
$1.99 a month.
The most obvious questions are whether AT&T's consumers will cough up a few
more bucks a month for additional services, and whether rivals such as
Vonage will follow suit with price hikes of their own.
Given how AT&T and Vonage have used lower prices as the marketing tool to
attract business, AT&T's decision goes firmly against the grain. It also
demonstrates what I see as the most compelling component of IP – the ability
to easily roll out new features. Some of these services will fly while
others will fail. It is both an opportunity and a risk for service providers
but this is the real power of IP at work.
If Internet prices start to climb, it may suggest some pragmatism is coming
into play and perhaps the market is starting to go from early-stage to
early-maturity. AT&T perhaps believes there is enough demand that it can
push through prices increases without affecting growth. Given there is
suggestion CallVantage is not doing too well, it may also indicate AT&T
doesn't want or can't afford to play the growth at any cost game any longer.

In response to a comment about VOIP being a US$450-billion “black hole” for global carriers due to increase competition, it is important to remember there cannot be a completely “free ride” for the technology.
As VOIP becomes more widespread, competition will naturally cause prices to fall. That's great for residential and business consumers, who will see lower telecom costs. And it's great for players such as Vonage, which can offer inexpensive, feature-rich services by piggybacking on high-speed Internet networks with minimal infrastructure costs. It'ss not so great for carriers that have to deal with a new landscape that will force them to compete on price. This is why you see many carriers such as Bell, Telus and AT&T slashing operating costs by eliminating employees and getting out of non-core businesses.
The problem, however, is how deep do carriers have to cut to stay viable? If it gets to the point where investment in maintaining and upgrading core networks starts to be impacted, that would be huge trouble.
That said, I do not expect many consumers to weep tears for carriers that made tremendous profits for decades as they enjoyed little competitive pressure. Many people will forcefully argue they have had their day in the sun, and now it's time for the new, flexible and fast-moving players to dominate the playing field even if they operate few of their own facilities.
This facilities vs. non-facilities battle is something regulators around the world are grappling with. In Canada, the CRTC has been trying to enjoy the best of both worlds by encouraging facilities-based carriers AND competition. It is a tough balancing act that will get harder to carry off as competitors such as Vonage win more market share.

With the wireless carriers' emphasis – some would say obsession – with ARPU, the growth of the wireless data market is proving to be a huge boost to the industry. According to the Yankee Group, there were nearly 47 million wireless data users in the U.S. by mid-2004, compared with 29 million a year earlier. The consulting firm expects wireless data sales will surpass US$4-billion in 2004.
Most of the revenue has come from applications such as ring tones, games, screen savers, e-mail and photos. In 2005, video could be the next “hot” app in the consumer market based on the marketing activities of carriers in the key fourth-quarter sales season. New devices should also be an important theme as suppliers such as Research in Motion and Palm drive deeper in the pro-sumer sectors, while Asian rivals such as Samsung, LG and Kyocera come out with new technology.

VOIP has been described as a lot of things, but is it a “black hole”? According to Nadahl Shocair, CEO with DeTeWe UK, it's exactly that because it was will “take away” 30% to 40% of the US$450-billion of cash flow generated by global incumbent carriers over the next thee years.
Shocair believes VOIP will hack away at the balance sheets of incumbent carriers as new players such as Vonage and Skype capitalize on the technology, and the business market migrates to IP.
If Shocair was looking for some media coverage, his “black hole” comment certainly worked. While I'm not sure about the accuracy of his math, Shocair does inject some much-needed skepticism into the hype-riddled VOIP market.

With 2004 coming to an end, I've been thinking about some of the things I'd like to see under the “tree” by next Christmas. In no particular order:
1. Vonage's IPO: Let's really get a handle on whether Jeffrey Citron's latest creation meets the hype that has surrounded it for the past two years. With more than US$100-million in private equity raised, the expectations within the investment community are huge. While Citron has been coy about an IPO, you have to believe Vonage is simply waiting for just the right time – the right offer given Citron's track record – before a transaction happens. My take is Vonage's IPO will be huge because many investors will let their enthusiasm swamp the company's fundamentals or the competitive landscape, which is becoming more intense. If Citron follows his entrepreneurial modus operandi, do not be surprised to see Vonage taken out by an AT&T or SBC in 2005.
2. DIY Residential VOIP: I'm not talking about the plain vanilla VOIP currently being served up, which appeals to the early adopter set and people looking for a single Internet telephony line, but VOIP for a multi-handset households. Perhaps one of the cordless handset makers such as VTech, Panasonic or Uniden will enter into some kind of joint venture with Vonage or CallVantage, and sell a package that includes telephony service, three or four handsets, and a router from SMC, Linksys or D-Link. The alternative is expensive in-home service involving a truck roll.
3. Regulatory clarity: In Canada, the CRTC is expected to rule early next year whether or if to regulate Internet telephony. The choices appears to be quasi-regulation where incumbent carriers are regulated while competitors are free to set their own prices; or a level playing field. In the U.S., the FCC has decided VOIP is a federal responsibility. Now let's see what the FCC does next as far as regulation or lack thereof.
4. Rational, Pragmatic Research: As the Internet telephony market matures, we're starting to see some of the consulting firm issue forecasts about growth over the next three to five years. Not surprisingly, many of them are ultra-bullish given it's hard to sell research without some sizzle. Despite the excitement surrounding the technology, it's still an emerging marketplace with several obstacles. It would nice to see analysts exercise some restraint when it comes to growth projections to avoid the wild forecasts for e-commerce in the late-1990s.
If there's anything on your wish list, let me know and I'll put out some more comprehensive.

“D-Day” for Nortel Networks Corp. is Jan. 10 — the day the company is expected to start filing its much-anticipated restated financial results for 2003 and the first two quarters of 2004.
Nortel hopes this process will finally provide closure on an embarrassing accounting scandal that has seen 10 senior financial executives fired, including chief executive Frank Dunn and chief financial officer Doug Beatty.
But what happens after its audited results have been disclosed and dissected?
Rather than marking the end of Nortel's challenges, its financial results are just one hurdle — albeit a major one — the telecom equipment maker has to overcome to regain its credibility and momentum in a sector expected, at best, to see modest growth over the next two years.
Investors, meanwhile, are taking a wait-and-see approach. The stock has been hovering around $4 for the past month, after touching a 52-week low of $3.49 in mid-November. Among analysts, 19 rate Nortel as a “hold,” three have it as a “sell” and three call it a “buy.”
Here are some of the challenges facing the company:
THE TELECOM MARKET
After a period of implosion from 2001 to 2003, the telecom equipment market is starting to stage a slow recovery as carriers, cable companies and businesses make strategic investments in areas such as Internet telephony and wireless networks. As a result, telecom equipment sales are expected to grow 5% in 2005 and 5% in 2006.
Nortel is well-positioned in Internet telephony with products that allow carriers to migrate their networks from older, circuit-switch systems to Internet-based technology. The company is also one of the leading suppliers of wireless equipment, buoyed by strong demand in Europe and Asia as carriers there look to increase the speed of their networks.
Duncan Stewart, a partner with Tera Capital, said Nortel needs to come up with new and interesting technology through internal research and development, or an acquisition. “Three years from now, it would be 10% of their business, or a $1-billion business,” he said. “This would mean an acquisition of $500-million to $1-billion.”
The counter-argument to Mr. Stewart's suggestion is that Nortel's recent track record in making acquisitions is terrible: it spent billions of dollars during the telecom boom to buy companies with little or no revenue.
“Acquisitions are for companies that know what they are doing; Nortel needs need to fix their own house,” said one analyst.
Nortel may decide to strike joint ventures to move into new areas. A good example is a deal with Symantec Corp. to develop new products and technologies to battle network threats.
Another issue is whether Nortel's financial troubles are having an impact on customers. In a recent research note, BMO Nesbitt Burns analysts Paras Bhargava said Nortel's recent guidance of a year-over-year decline in 2004 sales compared with earlier guidance of a single-digit year-over-year increase suggests the accounting woes are causing Nortel to lose market share.
“Management distraction due to the prolonged restatements is perhaps a reason for the decline in revenues,” he wrote. “Nortel's peers are showing revenue growth in 2004, and NT's new guidance implies share loss, particularly in the important wireless arena.”
A NEW CEO
There is already speculation Nortel is conducting a search to replace William Owens, who replaced Frank Dunn as CEO in April. The idea is that Mr. Owens, a former admiral in the U.S. Navy with little telecom experience, will gracefully step aside after Nortel begins to show signs of stabilizing early next year.
Some analysts say the company needs a CEO who knows the telecom industry and global carriers, while others suggest Nortel should go with an executive from outside the industry, much as Ericsson Telephone Co. hired Carl-Henric Svanberg as its CEO last year. He had been CEO of Assa Abloy, the world's leading lock maker.
“If you are going to change CEOs, you need to do what Ericsson did — bring a turnaround executive — someone from a cyclical industry,” said Steve Levy, an analyst with Lehman Brothers. “The only thing we have been able to judge [Mr. Owens] on is his ability to set a deadline and not make it.”
BOARD OVERHAUL
Nortel's board has been assailed for being asleep at the switch and approving lucrative compensation packages that go back to ex-CEO John Roth. The most vulnerable directors include chairman Red Wilson; Robert Ingram, vice-chairman of GlaxoSmith PLC, who stepped down from the Molson board in July; Sherwood Smith, a former executive with a electrical utility in North Carolina; former Michigan governor James Blanchard; and lawyer Louis-Yves Fortier.
“This is one of the top 10 cases of corporate board negligence in Canadian history,” Mr. Stewart said. “These guys are poster boys for how not to do it. As a shareholder, I wish the board would change.”
Since the accounting scandal began to surface in late-2003, there have been no resignations or departures from Nortel's board. The only additions have been John Manley, the former federal finance minister, and Manfred Bischoff, a former executive with DaimlerChrysler AG.
In contrast, Lucent Technologies Inc., which has gone through its own accounting and financial troubles, has appointed six new directors to its 11-person board since 2002.
CLASS-ACTION LAWSUITS
Nortel has been hit with a flurry of class-action lawsuits, and the situation may become even more litigious after Nortel finally discloses its restated financial statements. It is estimated Nortel could pay US$500-million to US$1-billion in cash and/or stock to settle many of these suits. If some of the lawsuits are not settled, trials could start early next year.
Then, there are investigations being done by the U.S. Securities and Exchange Commission and the Ontario Securities Commission.
In 2003, the SEC fined WorldCom Inc. US$750-million for accounting irregularities, while JPMorgan Chase was fined US$135-million to settle charges it played a role in helping Enron Corp.'s accounting fraud. Earlier this year, the SEC fined Lucent for securities fraud and violation of the reporting, books and records and internal control provision of the federal securities.
COMPLETION OF RESTRUCTURING
Nortel is in the midst of eliminating 3,250 employees — a move that will shrink its workforce to about 32,000 and generate annual savings of US$500-million. The cuts are part of Nortel's efforts to reduce its operating expenses to at least 35% of revenue in 2005. The big issue is how much of what Nortel is shedding is fat and how much is bone. In August, during a conference call when the restructuring was unveiled, Mr. Owens said, “We are not restructuring ourselves out of business.”
© National Post 2004