Nortel

Nortel’s Ethernet auction: What of the NSN speculation?

It’s almost time to play “Who’s Got the Nortel Ethernet” assets, with the auction coming in little more than a week. The big question is whether NSN, Cisco or another player might jump on Ciena’s stalking-horse opening bid.

Most financial industry speculation is aimed at NSN, whose numbers seemed to show more product sales erosion than others in the market. At NSN’s analyst event, there was a sense that professional services were the name of the game, though of course they could never sustain a business of that size. Furthermore, nobody knows how much of the professional services business NSN could get without a strong equipment base. In short, NSN needs to sell gear.

The Nortel stuff would bring them a much better North American presence, one of the problems NSN is contending with. It may collide with the Juniper/NSN joint venture, however, enough to reduce its overall value. We don’t think NSN could up the Ciena bid more than about $250 million without paying so much the Street would trash its stock. We also wonder whether more low-OSI-layer assets will really help.

Our feeling: leave Nortel alone.

NSN’s 4G plans and strategic location for LTE center

NSN is opening a new LTE development center in Dallas, next door to the Nortel facilities, in effect, and thus able to draw on the labor pool from Nortel, much of which is willing to jump first and see how Ericsson might do second.

NSN had been an unsuccessful bidder for the Nortel wireless assets, but the move to set up its own development center might actually do the company more good by forcing it to devise a true LTE strategy of its own, integrated with its own assets and strategies.

Assimilating Nortel would not have been an easy task, in our view, and would have distracted management from the critical positioning exercises that are absolutely essential to getting a story ready for the fall planning cycle.

Nortel Carrier Ethernet assets still up for grabs

Nortel’s CEO resigned as the company reported another steep loss and the auction of the key business proceeds. At this point, only the Carrier Ethernet business remains on the table, and the losses there matched those of the company overall.

We’ve noted that most of the operators we’ve talked to have been skeptical of the prospects for the sale of Nortel’s Ethernet business, given the fact that its prior successes were linked in part to PBT, which has lost momentum in part because of poor strategy on the part of Nortel.

The hope that Ericsson might buy the unit seems at least partially justified, but the question is whether a buyer as conservative as Ericsson could really gain much traction in the space at this point.

Ericsson’s Nortel wireless win linked to carrier buying trend

Ericsson came from behind to win the Nortel wireless auction, beating out both NSN (the original straw-man bidder) and a private equity bidder for the deal. There’s still a step of court and regulatory approval, but we’re not hearing issues in either of the two areas so far.

The Nortel deal gives Ericsson another North American asset after its win of a management contract for Sprint. It also means a major disappointment for NSN, which really needed to boost its own position in the U.S. in particular.

Obviously everybody knows at this point that wireless capex will beat wireline for the foreseeable future, but we also think that the move is linked to an overall change in provider procurement policies worldwide, a shift to a partnership with a few key vendors that control significant opportunity ecosystems.

Other deals like this are likely to emerge, inside and outside the wireless space, as vendors mass up and position for the fall cycle. We cover this shift in depth in the July issue of Netwatcher.

Nortel passes; competitors should heed warning

Now that it’s pretty clear that Nortel is gone, the inevitable “what went wrongs” are multiplying. We’ve heard they didn’t innovate, now we hear that they weren’t supposed to. In truth, you can never game the outcome of changes in behavior that it’s too late to make.

Any company, to be successful, has to make its customers successful. There are a lot of paths toward doing that; some rely on innovation and others on integration or being a cost leader. Any company can pick one, but that’s the rub. You can’t pick none, or pick them all. Nortel never had a strategy, it only had a set of tactics to address this or that silo. At a time when “convergence” is the byword of the market Nortel didn’t see its market as being converged, as having a single set of needs and as driven by a single set of conditions. It was, and so they missed the boat.

Cisco or Alcatel-Lucent, both cited by some as examples of what should have happened at Nortel, aren’t out of the woods yet either. The world of carrier and enterprise networking changed forever in 2008/2009 and the remaining players have yet to be tested against the new conditions. Good things, and bad things, are still to come.

Nortel cut back Carrier Ethernet; focuses on optical

Nortel will be cutting back on its Carrier Ethernet investment and focusing more on optical, according to a leaked memo later largely confirmed by the company. The move is an acknowledgement of the company’s Ethernet woes, which buried its early hopes for the success of its PBT technology.

The problem we found with Nortel’s positioning was that the company was unable to make a strong case for PBT in a unified national network like BT’s, and in many metro networks, there’s not enough traffic engineering need yet to justify it.

But the big problem according to both our research with providers and our TCO modeling was the lack of effective operations tools for PBT networks, which by inference means Carrier Ethernet in general. It appears that TCO would be lower for a hybrid MPLS/Ethernet network or an MPLS-TP network because of better operations tools, but there is not yet sufficient information available to model this conclusion.

Nortel also had a major problem explaining its own approach, according to a number of operators we spoke with. The decision to move away from higher-layer protocols to lower-layer ones will be a difficult one to reconcile with long-term profit goals, though, because optical margins are often thinner.

Service layer platform vendors: Not game-changing yet

Nortel may be preparing its own application platform, something that would compete with HP ProCurve, Cisco’s new blade server, and Juniper’s JCS1200. All of these products reflect the reality that the “network” is dividing formally into a service layer and a transport layer, and that value-add in the service layer is critical to operators monetizing network investment.

The challenge for Nortel here will be the same as for other players: It’s not enough to have service-layer platforms; you also need an NGN Services Architecture, a framework for application/feature creation that empowers the platforms you’ve deployed.

Truth be told, none of the applications presented on these platforms so far has been compelling or game-changing, and operators want the game to change. Our view remains the same: The standards bodies tasked with work in the service layer are moving too slowly—as telco standards bodies tend to do. The vendors have been happy to blow kisses at standards instead of taking risks to get in front of the issues, and the operators have little chance to progress toward their goals without vendor support. This accounts for the uniformly low scores equipment vendors earn from operators in their support of operator monetization goals.

Nortel bankruptcy: A lesson for everyone

Nortel has filed for Chapter 11 bankruptcy protection, a move that comes as no surprise given that the only likely candidate to buy its business components (Huawei) ran afoul of government policy concerns. Nortel has, over the last decade, fallen from one of the giants to its current state of likely irrelevance.

While the proximate cause was the deferral in spending by carriers worldwide, which Nortel’s reserves simply could not handle, the true cause was a persistent refusal to deal with market conditions as they were. Nortel stayed with its core competences despite the fact that those areas were becoming core irrelevancies.

There is a lesson here for every other player in the telecom space: If you cannot promote service features and monetization you must inevitably be a player in a commodity market. Nortel will likely try to sell off additional business elements, and may even refocus on the enterprise, but unless it can become more strategic, it is unlikely to regain stability, much less stature. We are offering an audio brief on this as part of our new information product series; see New free information product from CIMI Corp.

Nortel’s Ethernet sale: Who will buy?

We may be coming to the point of a Nortel Ethernet sale soon after the first of the year, according to some of our sources. Four companies have been named possible buyers (Cisco, Ericsson, Huawei, and Nokia-Siemens), but we are hearing that the front runner is Huawei and that Cisco is not a serious contender. There are potential issues in a Huawei sale but company executives from both sides have been working to make them less likely to derail a deal. Whoever does the deal, it is likely that it will spur additional activity in the Ethernet space, and a Huawei buy could well set the stage for an eventual takeover of all of Nortel by Huawei

Nortel’s Verizon PBT contract sheds light on Ethernet market

Nortel has announced a PBB win at Verizon, the same provider who reportedly said it would not be using PBT. SInce PBT is officially PBB-TE and is a simple upgrade from PBB, we believe the sequence of events here shows the overall lack of media sanity on key technology issues.

First, Verizon’s selection of VPLS over PBT, as reported, was a core network decision not metro, where most of Verizon’s dollars are spent. Second, the “decision” had never been in doubt, as we reported when it was first announced, since Verizon’s core network isn’t even a candidate for Ethernet deployment.

In any event, there is no problem in the Carrier Ethernet market, and IP players may be looking wistfully at the opportunity there before long. Metro buildout is clearly on a faster pace worldwide than core build-out for revenue reasons.