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Cisco's IP Progress

Cisco Systems racked up an eye-catching contract today with a deal to sell 180,000 IP phones to Bank of America - replacing traditional phones in 5,800 offices and branches in 29 states. Cisco, which ranked second behind Avaya Inc. in the US$726-million IP phone business last quarter according to the Synergy Group, said it has sold 3.5 million IP phones since entering the market in 1999. Don Proctor, vice president and general manager with Cisco's voice technology group, said the company is selling IP phones at a rate of two million per year – two to five times as many as any other competitor. He said this translates into the replacement of 8,000 traditional business phones a day. Although Cisco's progress in the IP phone market seems impressive, it is difficult to put into context how quickly the IP market is moving forward. In the scheme of things, what's the penetration rate of IP phones? 1%, 5%, 10%? Call me a pragmatic skeptic but numbers can be torqued to tell a story in different ways. There is no doubt IP telephony is going to make a huge impact one day, but you have to always keep in mind that hot high-tech trends are badly over-hyped, and IP telephony fits the bill.

RIM's on a Roll

Anyone looking for Research in Motion to stumble – at least in the short term – will likey be disappointed when the company reports its fiscal second-quarter results this week. According to Merrill Lynch, RIM should post revenue of US$305 million, 13% higher than the first quarter and a 143% increase from a year ago. Pro forma earnings are expected to come in at US42 cents, compared with 5 cents last year. Merrill Lynch analyst Pat Chiefalo cites the following reasons for RIM's strong performance:
- RIM continues to expand effectively in North America and Europe;
- More carrier customers around the world are coming onboard;
- More subscribers are upgrading their existing devices.
It will be fascinating to see how RIM's new 7100T handheld, which looks more like a telephone than a e-mail device, will affect the company's fortunes. The 7100T is an aggressive push into the so-called “prosumer” market, which means RIM wants to sell more devices to people who aren't CEOs or CIOs or CFOs, and people who pay their own wireless bills each month. The carriers are totally enthusiastic because RIM devices do not have to be heavily subsidized and they generate more revenue per month – otherwise known as ARPU – than wireless phones. The challenge for RIM and the carriers is convincing consumers to pay $70, or $80 or $90 for the convenience of having a wireless phone and access to e-mail. This could prove particularly challenging in the U.S. where intense competition has allowed consumers to enjoy fairly low wireless prices.

VOIP: To Regulate or Not

The future of Internet telephony in Canada has reached an important juncture with three days of hearings before the Canadian Radio-television and Telecommunications Commission. Among the participants making presentations are Bell, Telus, Vonage, Call-Net and Primus. In a preliminary decision earlier this year, the CRTC made it clear that it is leaning towards a regulatory environment where incumbent carriers such as Bell and Telus will be regulated while new entrants such as Vonage and Primus will be allowed to set prices as they wish. The idea is that this will encourage more competition within Canada's $30-billion telecom market. Of course, this does not sit well with incumbent carriers who believe they will be put at an unfair disadvantage because non-regulated rivals will be able to carve out market share by offering rock-bottom prices. It makes for an interesting philsophical decision for the CRTC – regulating the market to boost competition, which seems to be somewhat of an oxymoron. Personally, I think the idea of giving new players a small – but necessary – head start is a positive because it would make consumers aware of their services before the market is deregulated completely. If the CRTC doesn't go this route, Bell and Telus will likely swamp smaller rivals with massive marketing and bundling campaigns, and likely kill any kind of competition before it has a chance to flourish. The question how much of a head start do VOIP upstarts need? Six months? A year? For the sake of argument, let's say six months given that Internet telephony technology is ready to go, high-speed Internet penetration is high, and a growing number of consumers are becoming aware of Internet telephony services. There is no doubt Internet telephony will dramatically change the telecommunications industry. The question is how, or whether, regulators should play an active role in the technology's emergence. For those looking into what's happening with VOIP in the U.S., Lightreading.com has a good analysis piece.

Rogers Buys Microcell…Telus Wins

If anyone can track down Telus CEO Darren Entwistle, don't be surprised if he looks like the cat who swallowed the canary. With Rogers Communications boldly stepping up to the plate to acquire Microcell Telecommunications for $1.4-billion, Telus gets what it really wanted: consolidation within the wireless industry without more debt on its balance sheet. It's really the best of both worlds for Telus, which has slowly been winning back investor confidence for the past four years since spending nearly $7-billion to purchase Clearnet Communications. While Telus may feign disappointment in seeing its $29-a-share bid trumped by Rogers' $35 offer, you have to wonder if Telus forced Rogers into the arms of Microcell by making what could easily described as a half-hearted offer for Microcell. The obvious question is whether Telus really wanted Microcell? After all, Telus would have been forced to take on more debt; the cultural/corporate integration challenges would have been enormous; and the technical issues (Telus uses CDMA, Microcell uses GSM) would have be expensive and a complex headache. Entwistle can look at what happened today as a minor victory. With only three national players, the pricing environment should – in theory – improve, allowing each carrier to improve average revenue per user (ARPU). The wildcard could be Virgin Canada, the joint venture between Richard Branson's Virgin Mobile and Bell Canada. If Rogers moves Microcell out of the pre-paid market or struggles to integrate its operations, the huge window of opportunity could open for Virgin. Of course, this is something that will happen down the road. In the meantime, I suspect champagne is being toasted in Toronto (Rogers), Montreal (Microcell) and Vancouver (Telus).

RIM and Competition

Over the weekend, the Globe & Mail's business section ran a story about Research in Motion reaching a crucial strategic crossroad. The thesis, which is far from new, is that while RIM has enjoyed tremendous success and attracted nearly two million users, it is vulnerable to competitive threats from hardware makers such as Nokia and Samsung, and software developers such as Microsoft. This is legitimate argument given Canada's track record in the high-tech hardware sector is less than stellar, but it unfortunately ignores a key element: RIM's growing and powerful cache as the device for mobile e-mail. Say what you want about the Treo 600, or devices made by Danger Technology, Good Technology and Nokia, the RIM Blackberry is a category monster. Until someone comes up with a much better mousetrap, RIM will continue to be the dominant player. What RIM has managed to become is the default for people looking for on-the-go e-mail. This much-coveted but difficult to attain status is similar to what Apple has with the iPod in the MP3 player space, what eBay has achieved in the online auction space, and what Google has in the online search market. When a company is seen as not only the market leader but the market, it becomes very difficult for rivals to knock it off. Over the years, there have been a flurry of “the sky is falling” stories about RIM but the Waterloo, Ont.-based company continues to roll along. It wasn't that long ago that big, bad Motorola was going to roll over RIM, but where is Motorola these days in the mobile e-mail market? Nokia was also going to be a major treat but has, instead, licensed RIM's software after its original N-Gage product bombed out. Nokia should really focus on making sure its wireless phones are as cool as those made by Samsung and LG before it worries about developing a RIM-killer. Clearly, RIM realizes there is competition on the horizon. Its new 7100T pro-sumer device, which looks more like a phone than a Blackberry, is a positive step and an important strategic foray. For corporate executives who want mobile e-mail, the Blackberry will remain the device of choice. For the rest of us (who have to pay for wireless service each month), the 7100T will be an intriguing choice because it's a phone that also happens to deliver e-mail capability. Instead of people worrying about RIM being caught, perhaps they should be more concern that RIM is hot on the heels of Nokia, Samsung, Motorola and LG.

Nortel's Credibilty Issues

In the past five months (sincel CEO Frank Dunn and CFO Doug Beatty were fired), Nortel has been trying to restore its credibility. Bringing in ex-U.S. Admiral Bill Owens was seen as a necessary move in this direction despite his lack of private sector experience and success. Unfortunately, the company just can't seem to do the right thing. Just when you think they're getting back on the beam, something happens that causes the credibility process to start all over again. The latest “incident” is Nortel's disclosure in an Ontario Securities Commission filing that third-quarter sales will be lower than expected. Instead of US$2.6-billion in third-quarter revenue, Nortel now expects something around US$2.3-billion. Sales for 2004 could hit US$10.3-billion, compared with the US$10.65-billion Thomson First Call concensus. Nortel has either adopted more restrictive accounting practices; the market has taken an unexpected late-summer dive; or the company's senior executives/market analysts have little clue what's going on. It harkens back to early-2001 when ex-CEO John Roth bullishly predicted Nortel's sales would climb to US$40-billion. When the bottom fell out of the market, he expressed complete shock. While yesterday's news is not as shocking, coming out with a lower than expected sales forecast was the last thing Owens or Nortel needed right now. If you're an investor, this is becoming an increasingly difficult company to believe. How can you purchase stock when management doesn't appear to have his hand firmly on the tiller. For another interesting take on Nortel's recent troubles, check out the Motley Fool's Bill Mann.