Yankee Group, as per usual, had a large contingent of executives, analysts, and support personnel attend Mobile World Congress in Barcelona last week.  Over a delightful tapas meal, a group of us decided that it might be fun and useful to share our thoughts on the best and worst practices we observed from exhibitors at the show and consolidate them into a short list.  I volunteered to consolidate the sagest advice from the greater YG team. 

Below is a simple list of recommendations based on the best (and worst) practices we observed. 

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I spent half of the first day of Mobile World Congress attending and moderating for an Alcatel Lucent IMS customer showcase event was attended by the normal IMS cheerleaders – France Telecom/Orange, NTT Docomo, Telefonica, Belgacom, SFR and a new face with Verizon Wireless [VZW].  Alcatel Lucent says IMS is the pots and pans you need in the next generation network kitchen.
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I had an opportunity to meet with several HP executives at the annual industry analyst summit they held in Boston this week.  HP used this event to reveal all of the devil in the details of the massive new business unit created a few months back, CMS, which is short for Communications and Media Solutions.  This is a company that loves acronyms and always has.  CMS should not be confused with CME, which was a matrix’d organization targeting communications, media and entertainment industries and did not carry a P&L and is now gone [it was swallowed into CMS.]

The “CMS” business unit represents a first for HP, they have officially stitched together all of the various communications and media assets stashed in the company and aligned them against a P&L.  This is the first time they have organized like this for a specific vertical industry.  CMS includes the telecom network service delivery assets like OpenCall, NGOSS/BSS/SDP software, all of the EDS assets targeting C&E, and consulting and integration services and so on.
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What are the facts?

Nortel filed for chapter 11 bankruptcy protection on January 14th, 2009. This move was widely anticipated based on their inability to meet current and anticipated debt obligations and a desire to seek creditor protections while attempting to undergo a major restructuring effort and return to “normal” operations. What constitutes normal operations for a post bankruptcy NT is up for debate, but an attempt to focus on/retain the enterprise communications business has been widely speculated.

Yankee Group’s view?

It is prudent for Yankee Group to take a “wait and see” approach on Nortel until a clear picture of what further restructuring, headcount reductions, and divestiture of non-core assets will yield in terms of ongoing working capital. In Q4 it was estimated that the cash burn rate would give them 12-18 months of operational runway. We anticipate this may marginally improve if key assets are sold and/or they can secure additional capitalization [i.e. through a CN government loan].

Nortel’s Current Structure Conducive to Sale
Nortel is currently structured in a way that is conducive to a break-up, with carrier networks, metro Ethernet, and enterprise solutions business units. The global services unit will be decentralized into the three business units by the second quarter of 2009. I’ll make some comments on each of the business units in the next section.
Carrier Business Unit
The long-term impact of Nortel’s problems will be most pronounced, in our opinion, within their carrier focused segment. On the 4G front, NT just announced their exit from the WiMAX business and backing out of their strategic partnership with Alvarion as a result. This was due to poor unit performance and the declining prospects for WiMAX as a legitimate competitor to LTE or even HSPA+ for mobile broadband access.

Thus far, NT’s largest customers including Bell Canada, Verizon Wireless, and Sprint have indicated that they will stay with NT for the short term but we do not view this situation to be static.
Nortel has made a concerted effort to get “out in front” of the LTE market to provide a pole position for it to sell LTE migration solutions into its install base of CDMA. The CDMA business, while still large, is in a steep decline. Yankee Group gives its prospects in LTE very little chance for success–there is simply too much perceived risk with partnering with NT on LTE which is still 2 or 3 years away from wide deployment. We expect the benefactors to be ALU/Ericsson/NSN/Huawei as they begin to encroach into NT’s biggest customers, in particular in LTE.
Metro Ethernet/Optical Business Unit
The most valuable remaining piece of Nortel is the Metro Ethernet/Optical business [which has created operating profits in some quarters but had uneven performance] which has been for sale for several months without a deal being struck. Nortel needs the cash to fuel further operations but with the economic downturn it has been difficult to locate a suitor willing to pay what they believe it is worth. Huawei is speculated to have interest, other names have included Ciena and Cisco.
Enterprise Business Unit
If Nortel successfully divests its carrier and Metro business they will be left with an enterprise communications business which is also under tremendous competitive pressure from companies led by Cisco, Alcatel Lucent, Shortel, Mitel, Avaya. They have recently announced a new family of 10 Gbps Ethernet switches and tout their relationship with Microsoft on Unified Communications as a key asset.  This unit delivered 616M in revenue for the Q3CY08.
Conclusions
These are the worst of times for Nortel, once a telco bell weather organization and the the pride of Canada. We are not bullish on NT’s long term prospects for success, in particular within the telecommunications segment given the bankruptcy proceedings and global downturn. What is unclear is whether they can even survive as Nortel. The impact on customers will largely be determined by how NT emerges post bankruptcy and to whom key assets are divested and in what form. Nortel’s competitors stand to benefit the most from its demise but they too are under the economic challenges that has dealt a potential death blow to Nortel BUT were not as weak going into the downturn and therefore more resilient to come out of it intact.  This is one prediction we are not happy to see come true.

Alcatel-Lucent released some detail on their much anticipated re-structuring initiative earlier today.  They said some of the right things—reinforcing focus on areas of product leadership [IP/IMS, optics, broadband access, EVDO], “streamlining” mature product portfolios [such as CDMA, GSM, ADSL, legacy apps], promising  more agile R&D, consolidating carrier group from 6 to 4, and the elimination of 1000 “manager” and 5000 contractor positions.  Execution will be hard, as it always is for a company of ALU’s scale, especially in this economy and given ALUs track record of implementing internal restructuring initiatives [not great].

Of course this news will also again cause many ALU employees to lose a degree of external focus on customers as they prepare for yet another round of layoffs and re-org—without fail a productivity and morale killer.  But ALU’s new leadership didn’t have a choice, they had to do something NOW.

More details are required to fully understand the ramifications of these moves on existing customers, many of which have spent millions on the gear that now fit into the “mature” category and now face the nefarious “streamlining”.  This will be cause for concern as the economy and capex tightening is causing many carrier customers to extend their legacy investments as a hedge.

That said, I have to applaud ALU for not killing or divesting underperforming divisions all together. I’ve personally lived through that strategy at 3Com back in 2000 when management decided to discontinue the high end switching platforms, Corebuilder.  The reasoning was logical–take out the underperforming business to focus on growth areas–back then it was stackable switches.  3Com’s strategy had one major, unforseen flaw.  The high end switch business pulled the stackable business through.  Without the razor they could NOT sell the blades.  I think there are some similarities with what a company like ALU faces.  If they kill off or spin-off an underperforming unit, like CDMA, do they expect their biggest CDMA customers to shrug it off and keep buying the new gear?  Not likely.  Killing or selling divisions also open up the floodgates for competitor FUD which they already have enough of to deal with.

We are eager to see how ALU executes on its new strategy and hope that through it all they find a way to keep focus on their customers vs. internally or on the whims of Wall Street.

Spent a day with nice folks at Tekelec the other day.  I know them pretty well so there were no big surprises in terms of product strategy—they are signaling specialists on both the SS7 and IP side of the telco network and they have some ancillary products that build off of that position of strength.  They’ve been excelling in this area for years.   The question that always hounded them was, “what happens to Tekelec once when everything goes IP”??  Theoretically, with the SS7 footprint getting smaller and smaller, companies like Tekelec would be left out of the party without a drastic re-invention.  Its actually not true.

First of all, the idea that signaling issues go away with the introduction of layer 5 IP session control protocols like SIP is a pipe dream.  In fact, they may even be exacerbated given the fragmentation that we’ve witnessed in terms of proprietary SIP extensions softswitch and IMS vendor insist on for a number of reasons.  Tekelec removes all of this pain by sitting in the middle and playing quarterback, i.e. doing all of the necessary session and management control and even better, reducing capex and opex by increasing headroom on deployed equipment.  Check out there SSR product for more detail.

So, what did surprise me?  The discussion with the CFO.  Tekelec has been rewarded for its relevance in the center of the signaling network, or at least they haven’t been decimated like so many others.   Mr. Everett showed a great chart tracking the stock performance of several telco industry bellweathers for the past year including Acme Packet, Alcatel-Lucent, Sonus, Nortel, Ericsson, etc, etc.  TKLC beat them all, albeit with single digit price growth.  But they did GROW.  They’ve also got the type of balance sheet that affords their customers the sense of comfort that they’ll be around for a while.  This is especially important these days.  Lets see if they can keep it up.

Took a trip this week to Tokyo with some Yankee Group colleagues to attend a global industry analyst summit and iEXPO hosted by NEC.  I made time for the journey because I didn’t know them very well and wanted a better understanding of their experience playing in one of the most Anywhere savvy places in the world, Japan, and gain understanding of their plans to expand into other regions of the world.  After two intense days of executive meetings, lab tours, demos, and product pitches [and a belly full of raw fish], I am left with some distinct impressions about our host.

1. NEC is not [yet] a global company despite 46B in 2007 revenues and a formidable NGN portfolio with all the right pieces to compete with the Alcatel-Lucent, Ericsson, and NSNs of the world.  In fact, 75% of their revenues are generated in Japan despite being in the comms business for over 100 years.

2. They are far too product focused and are challenged in marketing their solutions outside of Japan [as admitted by the president of NEC, Mr. Yano in his keynote address]

3.  This company has a fascinatingly diverse product portfolio that includes satelllite/space technology, 3D digital video display systems, biometrics security systems, a cute talking robot, face recognition solutions applied to areas like security and digital signage/advertising impressions, and a full suite of carrier-class network hardware and software solutions [including their recent Netcracker acquistion], and a full suite of IT solutions including PCs, servers, storage, etc. 

4. I was impressed with their corporate values with a strong focus on reducing the environmental impact of what they do.  Firmly stiched into the corporate DNA, each of the business units is held accountable for their impact on the environment and it is refreshing to see them take their social responsibilites so seriously, from the top all the way down. 

Whilst an argument can be made for spreading ones competencies too thin, NEC has been able to make it work and find themselves diversified enough to withstand some tough times in the telco space.  They pulled all of their gear together for an NEC only tradeshow called iEXPO that we toured.  It was amazing to see all of the innovations this company is delivering in one place, they filled an entire Expo Hall the size of the Boston Convention Center in the heart of Tokyo.  Amazing.  A quick aside, they showed us a 3D preview of a film called The Sky Crawlers, a Japanese anime film seemingly about fighter pilots in a variety of breathtaking dogfights, I’ve never seen such realistic 3D animation, can’t wait to see it….

In terms of Anywhere, they are the driving force behind connecting people and things in Japan.  NEC is the dominant supplier in places like NTT, NTT Docomo, Softbank, and KDDI…some of the most bleeding edge service providers in the world.  Of a population of 120M, Japan has fixed broadband penetration of 55% and 100% mobile penetration [80% connected via 3G].  Taking a walk through a McDonalds [yeah, unfortunately I went...I really couldn't take another sushi meal] and on the subway…..nearly every person was connected to a laptop, portable gamer, and mobiles happily texting, emailing, playing, talking and working the night away. 

What does it all mean?  Its tough to say whether their success in ubiquitously connecting Japan will translate to other Anywhere markets.  They want to export their success but are up against many other well known, entrenched competitors at a time where supporting a migration from legacy networks [where NEC is weaker] is presently just as important as WiMAX/LTE/IMS/SDP skills outside of Japan.  Ensuring superior quality is an issue they have dealt with in the past [I couldn't help but notice that the face recognition software I encountered identified me as a 50 year old woman ].  But they have a shot and they are poised to take it, and I wouldn’t bet against them.

The announcement today that Patricia Russo, Alcatel Lucent’s CEO and Serge Tchuruk its non-Executive chairman are stepping down should come as a surprise to no one.  The merger of U.S. based Lucent and France based Alcatel, formed in November 2006, can be viewed as nothing short of a major disappointment to date.  These moves have been rumored for a while but it was generally thought that ALU would wait until they found a replacement CEO candidate before announcing departures.  Today it was announced that Russo will depart the company at the end of 2008 or perhaps earlier as they also announced net losses in the quarter close to 1.7B.  Thus far, investors are tepidly applauding the move moving the stock price up around 6% as of this writing, relatively little solace for those long timers who have seen their stock’s value drop by 60% since the company being formed.

Key Recommendations to Alcatel-Lucent
Alcatel-Lucent MUST:
• Identify a suitable CEO candidate (potentially from the outside of the company and industry) who will take the measured risks and bold actions required to be successful in a disrupted telecom industry, such as divesting non-core assets, rationalizing the workforce, establishing new channels to market, addressing emerging market requirements, determine a strategy to branch out into tangential opportunities such as a provider of technology and services to media companies.
• Get out ahead of LTE, which will be driven by the CDMA operators such as Verizon. This goes beyond providing infrastructure to supporting the development of the broader service, platform and device ecosystem that LTE is being targeted toward.
• Continue to strengthen its presence in the services market by broadening its customer base beyond merely the traditional communications market and into, for example, the media industry. Creating greater coordination with its product business is also essential.
• Augment its IMS and SDE offering so that it anticipates the bifurcation of infrastructure requirements between those focused toward traditional communications services and those targeted toward the long tail of services and applications that are emerging under the guise of the Anywhere Network.
• Capitalize on its strong incumbent position as the telecommunications industry transforms itself from its traditional communications roots. We expect further margin pressure on the business driven by the increasing market pressure of the Chinese vendors and growth of business in emerging markets.
• Position itself to better serve operator clients in emerging markets across Asia, Africa, Middle East and Latin America who are presently investing heavily in next-generation networks, but also in service-led business models that offer new margin opportunities for equipment vendors.

I had an interesting call with Rizwan Tiwana, the CTO of Wateen, a large competitive operator which recently rolled out a 802.16E WiMAX network spanning 22 major cities across the nation of Pakistan.   I was looking forward the call because Wateen sits at the bleeding edge of two next generation service and access network technologies, WiMAX and IMS.  Wateen also represents one of a small handful of operators with the combination of both technologies in commerical operation. 

As of today, there are approximately 25K Wateen subscribers who are using their WiMAX connections for both Internet connectivity and voice services.  That voice services are served up over an IMS control plane is a watershed moment for an industry that has seen some negative press on the viabilty of delivering voice over IP services over WiMAX.  So far, so good for Wateen and its WiMAX partner Motorola.  They are excited about ramping up the subscriber base even quicker when the next generation of CPE devices become available in the next half year.

I inquired as to what has made them successful and Mr. Tiwana boiled it down to this; setting realistic expectations and thorough network design and testing.  As he succinctly puts it…”WiMAX is not GSM or CDMA, you can’t just throw up towers and expect blanket coverage.”   Instead, they have taken pains to educate their users on what to expect in terms of coverage and ensure their sales channels also set realistic expectations in the market.  Its good to see a success story like this for WiMAX and IMS and I hope Sprint/Clearwire are paying attention. 

Checking in from the sunny and 107 degree Las Vegas, Nevada where the NXTComm tradeshow was held this week. All of the usual suspects carted their fancy booths, big staffs [armed with the latest and greatest corporate messages], various SWAG items, press kits and demo equipment into the heart of Sin City.

Word from vendors is that overall show attendance was a “mixed bag” and while the show seemed busy, several exhibiting vendors lamented that the quality of attendee or for short–QoA–left something to be desired. I suspect that this means that average foot traffic is approximately 15-20% “true” prospects for the solution that vendor happens to be trying to sell. The rest of the human traffic includes competing vendors [dressed incognito sans the normal logo’d golf shirts], business development folks, partners, staff, press/analysts and various other riff-raff. I saw an adorable older couple, must’ve been in their mid-80s, laboring around from booth to booth collecting vendor SWAG items including those squishy stress balls, flashing lapel pins, pens, and boxes of mints…..I guess it’s more interesting than walking around a mall.

My personal opinion is that smaller vendors with scarce marketing resources can find much better bang for the buck out there to drive lead generation. Educational webinars come to mind here, Yankee Group often has several hundred attendees show up and even more register with their contact details and interest areas. At NXTComm, the no-frills exhibitors are promptly rewarded with awful floor location and non-descript signage which in turn guarantees that they are left wanting for any traffic at all. Even this guy. Not sure how to fix this, but another strategy I’ve seen work well is making the lower-cost investment in an adjacent hotel suite or meeting room which allows the advantage of the common assembly of partners, customers, press and analysts without incurring the big expenses of an actual exhibit.

I’m betting that this show survives, if only because its among the last games in town which a singular focus on the telecom industry. A piece of advice for show organizers that one of my colleagues pointed out—get rid of the 3rd show day, its overkill and three days is too long to be away from the office/real job. Keep an eye out for my show re-cap which will be published for Yankee Group clients within a couple days.