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Nortel's 10-K is coming…Really!

Depending on how you look at, I was either half right or half wrong in a story I wrote yesterday in the National Post that Nortel Networks would not be able to make its self-imposed Jan. 10 deadline to file restated financial results.
The good news is – as promised – Nortel will file a 10-K with the SEC, which should give analysts and investors a mountain of numbers to crunch and decipher next week. The disappointing news is the company wil not file its 2004 Q1 and Q2 results for several weeks – contrary to what Nortel said in a Dec. 8 press release that both quarters would also be out – or in Nortel's PR jargon “commence” – on Jan. 10. Some would say it's only a small miss but Nortel should be called on the fact they are only meeting half of a promise to the investment community.
Nortel has done a good job filling many of its financial holes but it is unlikely we'll learn about the really juicy stuff: For example, why was ex-CEO Frank Dunn abruptly fired, and what actually went down behind the scenes? Was the company simply over-aggressive about its accounting practices or was there widespread systemic fraud going on? When you look at the lucrative bonus structure created to motivate senior management, it's hard not to believe the idea of cashing in was impossible to resist.

S&P: Cablecos Have an IP Edge

In a new research report, Standard & Poors believes cablecos have an
advantage in the emerging world of IP services because their “fat pipes”
give them a “clear technical and economic advantage over phone company
competitors” to offer voice, video and data to their subscribers. S&P
analyst Eric Geil also contends that cablecos also have an advantage because
they control all parts of a triple-play offerings while ILECs have to
compile their bundles from different suppliers.
This is an interesting viewpoint because it puts the spotlight on the
network infrastructure used to deliver IP services, which include VOIP.
While the cablecos have “fat pipes”, the ILECs are split on which approach
to take. Some such as Bell Canada believe fiber to the node (FTTN) will do
the trick while others such as Verizon and SBC are biting the bullet and
going down the more expensive fiber to the curb (FTTC) route. The issue for
ILECs is coming up with the most efficient, elegant and economical way to
stuff IP down the pipe as the bundling war picks up momentum.
Bell Canada is adamant FTTN will give it 26Mbps of bandwidth – more than
enough it argues to deliver voice, high-speed Internet and high-definition
TV.
The robustness of the network is a fundamental strategic issue because you
will not be able to play in the triple-play or quadruple-play game without
enough bandwidth. Does this mean cablecos will win the game just because
they have “fat pipes”? Before placing bets it is important to remember that
offering telephony services and winning telephony customers are two
different things. Cablevison has enjoyed some success but they are the
exception to the rule so far.

Vonage Starts Price War in Canada?

Replicating a strategy done in the U.S., Vonage Canada cut the price of its premium residential service yesterday by 13% to $39.95 from $45.95. The company said this move is consistent with its philsophy to pass along savings immediately to its customers. That may be true but you have to wonder about a business model that doesn't give you the luxury of enjoying the benefits of market leadership. A Bay St. analyst made a good point today when in pointed out it's strange that Vonage is compelling to make price cuts in Canada when there is little competition from the ILECs or cablecos, who don't plan to get into the market until later this year. In a sense, Vonage is competing against itself. My take is Vonage knows what's coming and it's hoping to get as much momentum and buzz that it can before the real competition starts to happen.
Vonage Canada
has slashed the price of its leading residential telephony plan by 13% — a decision that suggests the start of a price war and/or a pre-emptive move to attract subscribers before the major cable companies enter the market.
Vonage, a division of Vonage Holdings Corp., said its premium Internet telephony service has been reduced to $39.99 from $45.99. It comes with unlimited calling to anywhere in North America, features such as voice-mail and call display, and 100 minutes of low-cost international long-distance.
Vonage's decision sets a new pricing benchmark for the emerging Internet telephony market. The competitive landscape will become more crowded when Rogers Communications Inc., Shaw Communications Inc. and Videotron ltee launch telephony services later this year. Before they enter the market, Vonage hopes to attract early-adopters and establish its brand.
Bill Rainey, Vonage Canada's president, said the lower prices reflect the company's philosophy to automatically pass along cost savings to its customers.”One of our goals is to develop a different level of customer service in the telecom market in Canada that is at an excellence level,” he said.
“Doing things in a very unique way by pro-activity going to customers and putting them on a new rate is something you don't see in the telecom market.”
While lower prices are eye-catching, Canadian consumers have shown little inclination to adopt Internet telephony. According to NBI/Michael Sone Associates Inc., there were only 27,000 residential Internet telephony users in 2004. The consulting firm expects there will be 217,000 residential users in 2005 and 513,000 in 2006.
Among the hurdles facing Internet telephony growth are that many consumers do not have a strong grasp about how the technology works and its benefits.
There are also concerns about back-up power and the availability of 911
service. Another issue is low prices for traditional local and
long-distance
telephony.Eamon Hoey, a senior partner with Hoey Associates, said
Vonage's offer of
$39.95 a month is probably not enough to lure many consumers from
traditional service offered by incumbent carriers such as Bell Canada
or
Telus Corp.”There has to be a significant price differentiation for
them to move from
the reliability factor of wireline services to IP phony,” he said. “I
don't
see it at $39.95. At $29.95, you might get some takers. I don't think
[BCE
Inc. chief executive] Michael Sabia has to have many sleepless
nights.”Mr. Rainey said price will not be the key driver to Internet telephony
adoption. Instead, he said, price will be a component in a package that
includes reliability and quality of service, features and customer
service.”This is a new wave,” he said. “We are at a point where in less
than two
years, one out of four Canadians knows of IP telephony. Consumers and
business need to be educated on what making a phone call over the
Internet
is and how it can benefit them in their daily lives.”Last month, AOL
Canada Inc. became the latest player in the Internet
telephony market with the launch of its TotalTalk service. TotalTalk
comes
in two flavours: a $34.95-a-month version that features a variety of
features and 60 minutes of long-distance service in North America; and
a
$44.95-a-month version with 1,000 minutes of North American
long-distance.

Nortel May Miss Deadline

It appears that Nortel may miss its self-imposed deadline of Jan. 10 to file its 2003 10-K with the SEC. Sources say the delay is due to a disagreement with its auditors over bad debt treatment and that many auditors wanted time off during the holidays.
If Nortel does not file by Jan.10, they have some wiggle room. Last month, Nortel said it expected to commence its filing Monday. Read into that what you may but it could allow Nortel to do something without filing a 10-K. For more details see the story below.
Nortel Networks Corp. is not expected to file its restated financial results on Monday, a development that would break a promise it made to the investment community after it missed three self-imposed deadlines last year.
According to sources, there is major disagreement between Nortel and its auditing team over the recognition of bad debt.
Nortel's auditors are adamant this is a material issue that must be resolved before the company's financial statements for 2003 and the first three quarters of 2004 can be filed with the U.S. Securities and Exchange Commission.
Another problem, sources add, is that the accountants who have been working 24 hours a day, seven days a week, on Nortel's results told the company they needed time off during the holidays, or they would quit.
“I'm not surprised [by a possible delay] only because of the company's track record in the past 13 months,” said Gabriel Lowy, head of Lowy Research in Hoboken, N.J.
Given that new SEC regulations require Nortel chief executive Bill Owens and his financial team to certify its reports, Mr. Lowy does not think “they're going to want to put their names on anything they don't feel is certifiable.”
If Nortel is forced to delay its filing, it would be yet another setback to the company's credibility, which has nearly evaporated as its financial troubles have become more complex. The company's investigation into its books goes back to 2000. This has led to the firing of CEO Frank Dunn “for cause” last April, as well as the restatement of US$3.1-billion of improperly booked revenue.
Duncan Stewart, a partner with Tera Capital, said it is difficult to tell how investors will react to another delay by Nortel.
“If the company does not come out, does the stock even go down?” he asked. “We are so used to them missing deadlines, quite frankly what does it mean if they miss another. If they say it's not the 10th but the 24th, what do you do? If you own shares, would you sell all of them if they ask for another two weeks?”
Any pressure for Nortel to meet the Jan. 10 deadline disappeared earlier this week when the New York Stock Exchange granted the Brampton, Ont.-based company an extension until March 31 to file its 2003 annual report, or 10-K, with the SEC. The world's largest stock exchange had threatened to delist Nortel's shares unless it filed its results. “The hanging knife was moved aside,” said Bob McWhirter, president with Selective Asset Management.
Nortel spokeswoman Tina Warren said the company is “driving toward Jan. 10.” She would not confirm whether Nortel will file a 10-K with the SEC on or before next Monday.
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A View on VOIP

I had a chat yesterday with Ian Angus, a telecom consultant who has been
involved in the industry for more than 20 years. He has a nice take on VOIP
in Canada:
“For all the talk in 2004, there wasn't a lot of activity. What we saw most
notably in 2004 was VOIP turned the corner as far as enterprise systems are
concerned. For [consumers], it's nice stuff but you are still talking about
low, single-digit market share. In 2005, you will see the cablecos and
carriers come out with significant VOIP. Shaw and Rogers are coming out with
a product that will be much more like traditional voice service than VOIP
services such as Vonage.”
Angus Telemanagement, the firm headed up by Ian and his wife, Lis, marked
the end of an era this week with the sale of their Telemanagement monthly
newsletter to Decima Research. After 22 years, Ian and Lis want to focus on
other areas such as consulting and speeches.
Speaking of Vonage, it has reduced the price of its residential premium
unlimited plan by 13% to $39.99 in Canada. The package offers unlimited calling
anywhere in North America, a bundle of features and low prices for 100 minutes of
international calls. Is this the sign of a price war in Canada or another
example of Vonage's aggressive pricing strategy to preempt competition?

XM in Canada

For the past week, I've been experimenting with a portable XM Satellite Radio unit during my 30-minute commute to work. The service lives up to all the hype with selection that makes you wonder about the future/viability of commercial radio, which I have found increasingly unlistenable. It's strange how you keep waiting for the commercials to begin before you realize there are no commercials.
There are, however, some things about XM that fall short. The reception within downtown Toronto is lousy – cutting in and out when you pass a large building or bridge. This probably has something to do with the positioning of XM's satellites but it is frustrating nevertheless. On the portable unit I'm using, I'd also like to see XM display the titles of songs as opposed to just the name of the artist.
As for when satellite radio will actually come north of the border, it's difficult to tell how Canada's telecom regulator will move. The CRTC wants to maintain the committment by broadcasters to Canadian content but this approach is becoming more unworkable as digital technology gains momentum in the telecom and entertainment sectors.
In Canada, Canadian content rules have given artists such as The Tragically Hip, Rush, Sloan, Shania Twain and Neil Young much-deserved radio-play. But we've also had a steady diet of Celine Dion, Nickleback and Anne Murray jammed down our throats.
My hope is the CRTC allows Sirius, XM and CHUM/Astral to compete on a level playing field. Whoever offers the best service – with some Canadian content to appease the CRTC – should win the market. Any attempt to protect Canadian culture – whatever that is – is misplaced.