Drop in demand for circuit-switching prompts Nortel to change its focus

When the so-called tech wreck hit the major telecommunications equipment manufacturers, the world was watching Nortel Networks Corp., which had completed an acquisition binge.

After losing more US$30 billion over the last two years, the Brampton, Ont.-based equipment manufacturer has reorganized

itself, grouping its network convergence efforts into four key areas: enterprise, wireless, wireline and optical networks. The move is part of Nortel’s effort to lead the industry in delivering integrated voice, data, multimedia and Internet Protocol (IP)-enabled services for enterprise customers.

Al Safarikas, Nortel’s vice-president of wireline networking, says a major component of those services includes voice over IP, IP virtual private networks and the attendant advanced IP services, such as “”find me, follow me”” messaging, and IP-based call forwarding and filtering.

Shift to IP Networking

This is a major shift, not only at Nortel, but industry-wide, says Lawrence Surtees, director of telecom and Internet research at IDC Canada. Surtees attributes the shift more to technological evolution than to economic woes.

“”The demand for circuit switching is gone from being the engine of Nortel and Lucent,”” he says. “”Instead it’s gone straight into a wall. The shift is not so much because of the (economic) crapout but the rise of telco networking.””

Convenience and cost are two of the reasons for this shift, Safarikas says. He uses a common problem that faces enterprises today to illustrate the advantages of an IP-based network.

“”You have two or three telephone numbers for home and office wireline, and one for mobile and at least two e-mail addresses. If I need to get a hold of you where am I supposed to reach you?

“”Our IMS solution puts control back into your hands so you can control all points of contact instead of putting control into the hands of whoever is trying to reach you.””

Safarikas says Nortel’s product is more sophisticated than the simple communications management options, such as call and e-mail forwarding and voice mail that have become common elements of people’s lives. He adds IP networking helps cut costs.

Through a Web-based interface, users can set multiple filtering and routing options based on a combination of criteria, including the call’s origin number, area or country code, time of day and message type (voice, fax or data).

Even as Nortel pursues its integrated network strategy, the downturn didn’t leave the company unscathed.

“”It reeled in their ambitions,”” says Surtees. “”But the same key, core technologies are the enablers of public and private networks, so there’s not a huge upheaval in terms of abandoning core areas.””

Instead, the pullback translates into things like a change in the kinds of research and development telecom companies invest in, such as a halt in developing faster optical switches. Yet, optical networking remains a key component of Nortel’s strategy.

“”Optical is still the underlying critical engine for networks and Nortel is not walking away from it,”” says Surtees.

Nortel also continues to spend a significant proportion of its revenue on research and development, says Safarikas. Although total spending has decreased, it remains around 15 to 20 per cent of Nortel’s revenues. In 2001, that amounted to $5.3 billion (US$3.5 billion). About half of Nortel’s research and development money is spent in Canada, at Nortel’s main research facility in Ottawa.

Analyst predicts major shakeout

Meanwhile, the next industry growth phase remains as much as 10 years away, says Surtees. He predicts the implementation of third-generation (3G) wireless networks (which promise speeds of 384 Kbps to pedestrians using mobile devices) is three to five years out, and the bulk of the “”paradigm shift”” to move from analogue to digital networking will occur in about a decade.

And there is bound to be an industry shakeout that will shrink the number of major players to as few as two or three companies, as the more successful ones acquire their competitors, says Surtees. “”I can’t think of a CEO of Nortel I’ve met in the last 20 years that hasn’t had on their minds the sense that there’s going to be a reckoning.””

Safarikas argues the industry has already gone through a major shakeout, with “”hundreds of startups”” in the telecom sector going out of business in the last few years, and the ones that remain are bound to stay. He adds Nortel is well-positioned to capitalize on emerging markets in converged telephony and network services, and in metro networks and long-haul optical beyond that.

Surtees agrees.

“”There will be a scramble by one or two other competitors to catch up to Nortel’s lead,”” he says. “”Those that are left at the starting gate will hasten their demise.””

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Jim Love, Chief Content Officer, IT World Canada

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