How far will Nortel go when it comes to reducing operating expenses? That's the $64,000 question – or perhaps the US$10-billion question given Nortel's annual sales – after CEO Bill Owens said yesterday that he wants to reduce operating costs to less than 25% of sales. With such an aggressive target, Owens is clearly looking to completely re-invent the struggling telecommunications equipment maker. The question is: why so much, so soon? It may be that Owens wants to make his mark as a CEO given that running Nortel – or any other large, world-class company – did not appear in the cards for the former U.S. Admiral until Frank Dunn was fired in April. If you look at Owens' track record at SAIC and Teledesic, there is little to suggest he has the pedigree to thrive in the private sector. It makes the five-year package that Nortel gave Owens look extremely generous – particularly the five year timeframe for someone viewed by many at a temporary, stop-the-bleeding selection. Owens' willingness to make dramatic strategic moves may have to do with the fact that given Nortel's need to distance itself from its troubling accounting scandal, he has jumped at the opportunity to overhaul Nortel so it can stay competitive. There is little doubt that if Nortel maintains the status quo, it will likely become a second tier supplier – while Cisco and upstarts such as Huawei Technologies continue to gain momentum. If Nortel does reduce its workforce even further to 25,000 people, you will be looking at a company with a staggering 75% fewer employees that it had at the peak of the telecom boom. The question that begs to be answered is what will Nortel look like after Owens is finished his corporate makeover? Will he be a Jean Monty or a Paul Stern? At this point, there is no doubt Nortel will be a smaller company focused on a few high-growth areas. This is a long way from the “be all things to all people” strategy embraced by Frank Dunn and John Roth. It also suggests Nortel may become more like Ericsson, which has morphed itself into a wireless player out of financial necessity. Perhaps a much bigger question facing Nortel is whether its future lies with a marriage to Cisco. Sure, Cisco CEO John Chambers has made it clear that he does not like doing large acquisitions, but a deal for Nortel would make it an IP powerhouse in the corporate and carrier markets. Chambers may be motivated by the reality there a number of aggressive Asian equipment makers such as Huawei emerging as dangerous threats. If Cisco wants to maintain its dominance, you have to wonder whether it can afford to maintain its small, strategic M&A strategy. In theory, Nortel seems to be vulnerable to a takeover if Owens slashes costs and improves profitability. In reality, however, the major obstacle may be the Canadian government's reluctance to see its flagship high-tech company falls into foreign hands.
You have to be intrigued by the launch of Research in Motion's new handheld device, the 7100T. Looking more like a phone than an e-mail device, it offers many of the features loved by the Crackberry crowd, but does away with the QWERTY keypad. What you get is a device with a little less battery life (eight days vs. 10 days for the 7200) but a more consumer-friendly product. For anyone who has been reluctant to adopt the Blackberry due to concerns that it is primarily an e-mail device, the 7100T should overcome any concerns. Strategically, the 7100T demonstrates that RIM is capable of taking crucial moves to address competitive issues. With Nokia coming from the phone side of the wireless world with its new 9300, and upstarts such as Danger and Good coming from the e-mail side, RIM needs to make bold moves to remain viable and, more important, dominant. The 7100T is a positive move in the right direction.
Looks like Nortel CEO Bill Owens is making the rounds with the analyst community these days. The folks at UBS Warburg came away with a somewhat muted reaction. While UBS believes Nortel is now pursuing a larger addressable market by focusing on a bundled/complete solutions approach, it warns that this could cause the company's operating margins to be less than Nortel's public goal of 10% – thereby producing “mediocre” profits. If is not already abundantly clear already, Nortel is destined to be a smaller company in the future that will produce lower priced technology. While margins may be higher than selling big boxes to telecom carriers, Nortel could easily be a US$5-billion to US$8-billion company in the not too distant future. This idea has been a core part of IDC Canada analyst Lawrence Surtee's thinking in recent years. Surtees, who followed Nortel for nearly two decades as a reporter with the Globe & Mail, has been telling people for the past three years that the days of Nortel selling multi-million boxes will be over soon. On top of everything else that Owens has to address from a financial and strategic perspective, this new “price” reality will be a huge challenge.
You have to wonder about the magnitude of Nortel's restatement efforts in wake of the company's decision today to delay the release of its financial results for the past six quarters until next month. Nortel claims the delay is due to the “volume and complexity” of its restatement effforts. There is no doubt Nortel's accountants have a lot on their plate but it's a strange move for a company trying to regain credibility with investors, analysts and suppliers. The delay is either a cautious move to make sure further mistakes do not materialize, which would embarass Nortel yet again; or a disappointing move given Nortel had told investors certain events would happen on certain dates. In the meantime, it has been interesting to see CEO Williams Owens continue his “song and dance” campaign with reporters and analysts around the world. In an interview with reporters near Boston earlier this week, he talked about industry consolidation and how suppliers are talking to each other about all kinds of options. Ever since Cisco CEO John Chambers publicly spoke in June about a potential partnership with Nortel, there have been all kinds of speculation concerning a deal. Personally, I think it was another example of Chambers' strategic brilliance. While he puts the market and media into a frenzy about a potential mega-deal, Cisco has started to make acquisitions again after a bit of a slow period. Last month, it bought P-Cube for US$200-million. P-Cube makes technology that helps carriers provide higher quality and differentiated IP services without spending large amounts to upgrade their systems. While Nortel may be shy about making key acquisitions given its disasterous multi-billion dollar spending spree under ex-CEO John Roth, the company may have no choice but to beef up its IP portfolio. If Nortel had the financial resources, strategic courage and senior management focus, it should take a serious run at Juniper Networks Inc. With a market capitalization of US$12.5-billion, Juniper would be a huge bite for Nortel but it would shake up the telecom equipment sector and make Nortel a IP tour de force.
For those who were concerned the buzz about VOIP was beginning to wane, fear not. The fine folks at the Yankee Group issued a bubbly report earlier this week that forecasts there will be 17.5 million U.S. households with Internet telephony service by year-end 2008. The Yankee Group also expects 56% of the homes with the service will be cable customers, and Vonage's market domination will shrink. When it comes to predicting trends four years out, there should always be some uneasiness. Technology, market developments and pricing are so volatile and unpredictable, it makes forecasts a bad science. Anyone who bought in the enthusiastic e-commerce forecasts in the late-1990s knows this lesson far too well. There is no doubt Internet telephony will take hold if only because it will be so attractively priced (including bundles that include cable and high-speed Internet access) that many consumers will find it hard to resist. The challenge facing carriers is whether they jump into the VOIP business or start playing the pricing game with their traditional POTS technology. Truth be told, they probably don't have much of a choice.
You really have to wonder whether Microsoft has any sense of strategic momentum given its decision to delay the release of its new operating system, Longhorn, until early-2006. Even when it does come out, Longhorn will be a minor upgrade over XP. Then, you have Microsoft's controversial XP Service Pack 2, which is supposed to fix all the wrongs within XP. The big problem, however, is the computer community is torn over whether to install the upgrade because it is incompatible with many software applications. You figure Microsoft would have figured that out before it issued such a major release. Maybe it's arrogance, maybe it's ignorance or maybe it's incompetence but it ain't smart. It has been suggested that Microsoft split itself into different unit or simply issue a huge cash dividend and wind down the company. What route you want to fantasize about, there is something rotten within Microsoft. This is a company that has struggled, despite its market dominance, to come up with another killer app beyond Office and Internet Explorer. Investments in the online, cable and gaming sectors have not been major successes. It is hard to tell whether Bill Gates and Steve Ballmer have lost their competitive zest. Whatever it is, there are signs Microsoft may need a Lou Gerstner-like executive to come in and shake things up.