Telecom's Tough Times

As Nortel Networks CEO Bill Owens continues to tell investors and analysts the company – among other things – can be competitive with Asian rivals and emerge from its troubling accounting scandals, it is important to remember the realities of the market – things are are extremely tough out there for most suppliers. Nortel came clean with its struggles today when it said third-quarter sales will be lower than the second-quarter. The company is now looking for a single-digit revenue increase this year, while the overall market will grow faster than that – suggesting Nortel could be losing market share. Another telecom maker having its troubles is Ciena Corp. In a recent interview with Reuters, Ciena CEO Gary Smith said he does not expect to see a recovery any time soon.”Our assumption is that the market will continue to be turbulent,” he said. This is pretty blunt talk from a CEO who needs to reassure investors of his company's prospects. Even more evidence of the telecom industry's struggles came from Celestica Inc., which saw its stock pounded after disclosing that third-quarter revenue will be US$200-million to US$205-million below expectations. Celestica's customers include Cisco, Lucent and HP – making it an industry bellweather of sorts. Even sales in the much-hyped Internet telephony market have been less than impressive. According to consulting firm Dell'Oro, second-quarter sales of equipment such as softswitches and media gateways climbed just 3% from the first quarter.
So what's happening out there? It appears many carriers continue have continued to adopt a cautious approach to spending. At the same time, prices are under attack as low-cost suppliers such as China's Huawei battle for market share. More and more, the telecom equipment market looks like a sector in dire need of consolidation. Perhaps it won't be on the scale of Cisco buying Nortel, but there are too many players fighting for a shrinking piece of the pie.
Amid this environment, Nortel and Mr. Owens are waging an aggressive public relations campaign to win back the affections of investors, analysts, customers and suppliers. The company is attempting to spin a story of restitution, stability and confidence – and who better to deliver it than a former U.S. Admiral? The problem, however, is while Nortel attempts to make structural and strategic changes, the market is scuffling and shifting. If Nortel can't generate sales momentum, all of its PR efforts will be for naught.

RIM's 7100T – Reality Starts to Hit Home

In the wake of the rave reviews for Research in Motion's new 7100T wireless device, some sober thought is being given about its potential impact with consumers. The 7100T is RIM's boldest move to produce more of a telephone-like product, and a real move away from its e-mail-centric Blackberry product. The tech world is excited about the size and shape of the 7100T and – most important – its consumer-friendly US$200 price tag. That said, analysts are now pointing at the 7100T's weaknesses. In particular, there are issues about user frustration with RIM's innovative keyboard, which uses predictive technology to help create words. UBS analyst Michael Urlocker is also concerned about the lack of a digital camera and a flip phone feature, and the relatively short battery life. Granted, this is RIM's first crack at making a telephone, and it's an impressive first move. You would expect a smart company like RIM to address many of the analysts' concerns with its next-generation product.

Microcell's Future

Now that Rogers Communications Inc. has spent nearly $2-billion to acquire AT&T Corp.'s 34% stake in Rogers Wireless Inc., where does that leave Microcell Telecommunications. It now seems rather unlikely Rogers would make a run at Microcell, which has been sitting in limbo since Telus made a $29-a-share bid for it earlier this year. Rogers likely doesn't have the financial appetite to spend $1.5 billion or so for Microcell, even though a deal makes some sense given they use similar technologies, and consolidation in the wireless industry would be healthy for Rogers, Telus and Bell. As Microcell, Canada's fourth largest wireless carrier, tries to carve out a viable business, it has been desperately trying a variety of marketing tactics to retain and attract customers – the latest being unlimited incoming calls. As this happens, questions are starting to be raised by analysts about whther Microcell's churn rate is significantly higher than what the compoany admits. Microcell appears to be waiting for two scenarios to materialize: its business gains momentum as some of its marketing tactics resonate in the market; or it waits until another suitor (Rogers, Craig McCaw?) come to the rescue. At any rate, the Rogers-AT&T deal should not be last major news of the year.

Broadband Prices Tumbling

Some interesting data came out this week from TeleGeography, which reported that prices paid by large corporations and ISPs to access the Internet at ultra-high speeds has dropped sharply in the last year. TeleGeography says the average price for a STM-1 fell 49% in Europe and 55% in the U.S. It's not all bad news for carriers, however, as increases in traffic have offset lower prices. In Hong Kong, for example, TeleGeography said prices fell 50% but traffic jumped 350%. If prices keep on going down, you have to wonder if consumers will ever see lower retail prices as competitors battle for market share in the high-speed market.

More Cuts at Nortel

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.

RIM's New Device

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.