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Allstream's VOIP wholesale business

It will be interesting to see how Allstream fares with the launch of its residential IP telephony service, which is aimed at small and larger service providers. Basically, Allstream has come out with a la carte residential telephony services, and announced its first customer – Hamilton, Ont.-based Mountain Cablevision. While this contract is interesting, the real excitement could come if Allstream unveils a deal with Rogers Communications Inc. at some point. Earlier this year, an Allstream VP alluded to an agreement between the two companies as Rogers prepares to enter the VOIP market in 2005. After the story appeared, however, both sides denied anything of the sort was happening. They claimed, instead, that a potential deal involved some related wholesale services such as access to long-distance networks. I say, where there is smoke, there is fire. Allstream's product launch today suggests something in perhaps smoldering.

As the Nortel Turns…New CTO

Nortel's drive to re-invent itself has taken another turn with news that CTO Greg Mumford is leaving. He'll be replaced by long-term Nortel executive Brian McFadden, who was heading up the company's struggling optical unit. There has been speculation Nortel may dump the optical business to focus on the faster-growing wireless and enterprise markets. As a result, the promotion of McFadden could be a harbinger of things to come. It is interesting Nortel choose to bury the news about Mumford's dismissal in its bi-weekly filiing with the Ontario Securities Commission yesterday. It is like Nortel believed the media “vultures” had enough to digest about the plans to eliminate another 3,250 employees without offering up news about a senior management shuffle. Mumford, who has received not-so-serious consideration for the CEO job before Frank Dunn was given the assignment in 2001, was ranked as Light Reading's “Top Ten Movers and Shakers in Telecom” so his departure will leave a huge whole in an already unstable corporate environment at Nortel. Apparently, he will act as a “special advisor” Bill Owens. That's good news given Owens' lack of telecom experience. It should be noted that Light Reading was the only media organization – as far I can tell – that picked up on Mumford's firing.

Research in Motion's Q2

Research in Motion's Q2 results were solidly boring – they showed growth and met the lofty expectations of analysts. Sales, profits and subscriber growth were what you might expected from a high-flying company whose technology is beginning to move into the mainstream consumer sector, as well as new international markets in Europe and Asia. UBS Warburg was sufficiently impressed to raise its 12-month stock price target to US$95 from US$85 using a 40x P/E multiple for fiscal 2006, while Merrill Lynch boosted its target to US$87 from US$77 due to the greater than expected pace of demand driving sales and business model leverage ratcheting earnings. Surprisingly, RIM shares fell in after-hours trading yesterday – perhaps because investors expected more.

Vonage Drops its Prices…Again

Looks like Vonage is starting to feel the heat amid news it is dropping prices by US$5 to US$25 for its premium plan. Vonage's move was matched by AT&T Corp., which made Internet telephony a priority after announcing plans in July to get out of the traditional residential telephone business.
There are a couple ways to look at Vonage's decision: competition is clearly getting more intense as carriers and cablecos enter the Internet telephony market so Vonage wants to make sure it maintains some kind of edge; or the company thinks it can attract more customers with cheaper and simpler packages.
I suspect it's a combination of the two. Given Vonage's aggressive fund-raising activity, it needs subscriber growth to provide investors with confidence it's on the right path. If the company can get bigger – even on the back of lower prices – there is a better chance Vonage will be able to do an IPO or be acquired by someone looking for a quick and significant foothold into the telephony market.
The big fear out there for all Internet telephony players is a price war will cause prices to continue to tumble due to the large number of service providers and the need to win over reluctant consumers. This does bode well for start-ups who will likely disappear without more funding. Vonage, however, has plenty of cash so it will be able to stick around for awhile. The big question is whether Vonage can maintain its momentum, or whether it has already peaked.

Can Owens Save Nortel?

When Nortel Networks Corp. fired three senior executives in April, including CEO Frank Dunn, it was supposed to be the start of a much-needed healing process.
Instead, Nortel finds itself with a board under pressure from institutional investors; rivals that appear to be stealing market share; an accounting scandal showing no sign of going away; and a new CEO, William Owens, who has received mixed reviews at best.
Amid these issues and challenges, Nortel is aiming to slash annual expenses by US$450-million to US$500-million through the elimination of 10% of its workforce, a reduction in research and development spending and the consolidation of business units.
All of this makes it painfully apparent Nortel is in as much flux as it was six months ago when Mr. Dunn, chief financial officer Doug Beatty and controller Michael Gollogly were let go “for cause.”
The latest example of Nortel's dysfunctional existence is an expected board overhaul. Due to pressure from institutional shareholders, many of its 11 directors will likely not seek re-election at the next annual shareholders meeting — including long-time chairman Lynton (Red) Wilson.
This is far from an ideal situation for Mr. Owens, 62, an ex-U.S. Admiral, who has been a member of Nortel's board since 2002. Despite his impressive military track record, his telecom experience is visibly thin when stacked up against someone like Lucent Technologies Inc. CEO Patricia Lusso, who has telecom executive experience that goes back to AT&T Corp. in the early 1980s.
Since taking the helm, Mr. Owens has been spearheading an aggressive public relations campaign — meeting with employees, analysts and investors . But the Street is already grumbling.
“He waved his hands a lot when he told us about his strategy but he didn't answer any questions,” said one analyst, who asked not to be named. “He has not worked in commercial enterprises similar to Nortel and doesn't know the telecom sector. The board put him in there because last time they needed a CEO, it took them six months. In the end, they got turned down by every outsider so they settled on Frank Dunn.”
Some however, are ready to give Mr. Owens more time to prove himself. Lawrence Surtees, head of telecom and Internet research at IDC Canada, said Mr. Owens was a good choice because he had been on the board and was active in high-tech, including a stint at Teledesic LLC. “This is not some run of the mill Dilbert-like manager,” he said. “This is a guy who is focused, intense, and to have risen to the rank he did [in the U.S. military] and introduced the stuff he did in the institution, speaks legions to some overlooked traits of his management/executive organizational ability.
“It may be a real coup to have this guy – he is no a slouch. I think clearly he is capable of possessing and grasping and wrestling with big strategy, translating vision into action, and recognizing you have to galvanize people. This isn't quite the moment or time to start bringing some radical new vision to Nortel until they deal with some of these immediate crises.”
Perhaps the biggest challenge for Mr. Owens is changing market dynamics. Intense competition, including emerging rivals from Asia such as Huawei Technologies Co. Ltd., means Nortel expects single-digit sales growth this year, which will be slower than the telecom equipment industry overall.
In a research note, RBC Capital Markets analyst Mark Sue said Nortel's performance may be due to soft demand for optical and enterprise equipment, and a slowdown in wireless spending, which has become Nortel's largest business. He is looking for more insight today when Nortel provides its bi-weekly update to the Ontario Securities Commission.
At the same time, Nortel has to deal with a crucial change in the market from large, expensive hardware to lower-cost products that feature more software. This means the contracts Nortel wins may be smaller. It may also see the company's revenue drop from the US$10-billion level unless it can win significant market share.
Mr. Surtees said lower sales could force Nortel to make even more cutbacks. The question is how far can the company go? “Given the new top line number, at what point will that mean abandoning a business unit in its entirety,” he said.
A senior Nortel executive said the company needs to look at where the market is going and prepare itself for the best and worse case scenarios, which could mean revenue of US$7-billion to US$11-billion a year. He said management needs to get a strong handle on a reasonable cost structure to withstand a bad quarter. “We have tried to be as rational and practical as we can,” he said. “If we are down to 20,000 employees, US$7-billion in revenue and we are profitable, we can produce a reasonable return to shareholders if we have a bad quarter.”
Nortel put on a brave face yesterday, insisting that its board is united in its efforts to resolve the company's problems. But old board or new board, neither may be able to help Mr. Owens overcome Nortel's mounting problems.

Nortel's Board Overhaul

According to the National Post, there is mounting pressure for Nortel to dramatically overhaul its 11-member board. Essentially, it comes down to presssure from large institutional shareholders who want to turf the company's longer-sitting directors – many of whom (surprise, surprise!) have little or no experience in the telecommunications sector. Clearly, Nortel's board has done a disastorous job in many, many respects – highlighted by the controversial compensation packages that go back to ex-CEO John Roth, and the ongoing and troubling accounting scandal. Some of 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 utlity in North Carolina; former Michigan governor James Blanchard; and lawyer Louis Yves Fortier. To be honest, it's a typical board: older, white, mostly male. You have to ask what exactly have the directors been doing over the past four years since the telecom sector started its severe slump. If Nortel's directors done their jobs properly, would Nortel be in its current mess? And how come Williams Owens, who joined the board in 2002, gets to become CEO when his performance as a director leaves something to be desired? A senior Nortel employee recently told me that employees are increasingly questioning why the company's directors seem to be Teflon-coated while 10s of thousands of Nortel workers have lost their jobs in recent years. In an age of corporate governance and Sarbannes-Oxley, the weak performance of Nortel's board sticks out like a sore thumb.
One last thought: Where have all these suddenly-outspoken institutional shareholders been the last four years, and why has it taken them so long to express their displeasure? If they were so upset – and they have plenty of reason to be given the terrible performance of Nortel's share – how come it has taken them so long to act? Just wondering….