Nortel, once an industry-leading supplier, has been on a downward trajectory the past few years, and it appears that the company won't recover. Now that it's locked in a death spiral, competitors are circling to pick the carcass clean. Nortel's impending demise leaves small and midsize businesses that rely on the company's equipment in a tough spot.
How the mighty have fallen. Not so long ago, Nortel gave Cisco a run for its money as the industry's largest and most successful network equipment supplier. But since the turn of the millennium, Nortel has struggled to defend that niche in the highly competitive network equipment market. Gone is the vendor's influence, with revenue and employees close behind.
Since 2000, Nortel has shed more than 60,000 employees -- a staggering number -- and more cuts are coming. The supplier posted a $3.4 billion loss in the third quarter and plans to eliminate another 1,300 jobs to curb expenses. Must be fun coming to work there every morning, eh?
Don't Miss: Whither Nortel?
So why is the company struggling so badly? Nortel's traditional focus has been on carrier equipment, wireless WAN infrastructure, voice products, and enterprise network devices. Almost a decade later, the vendor still seems to be feeling the repercussions of the dot-com bust. At that time, carrier purchases dropped like a stone, have only shown intermittent incremental increases since, and been quite volatile -- the company's carrier sales dropped 24% from the third quarter in 2007 to the third quarter 2008. During the dot-com bubble, Nortel expanded at a rapid rate and evolved into an inefficient, bloated, bureaucratic company. Consequently, the company has consistently operated in reactive rather than proactive mode and been a step behind rapidly changing market dynamics.
Competition in the networking market has intensified, and Nortel has lost its leading-edge status. Cisco has been on a roll, increasing its market share in many sectors and squeezing the life out of many competitors. Juniper emerged as a top choice at the network core, and Asian equipment manufacturers have become a market force. Competitors have taken dramatic steps to reshape their operations. Alcatel and Lucent merged, and Nokia and Siemens teamed up. Vendors such as Avaya and Enterasys have gone private with the hope of trying to right themselves and emerge in a stronger market position. Meanwhile, Nortel has operated in a business-as-usual mode.
Ironically, Nortel's business network equipment sector has performed well recently, but for some reason, this unit has received little support from upper management. Perhaps they viewed efforts to knock Cisco from its top position as futile, but companies such as Hewlett-Packard have been able to increase their market share and successfully vie for the No. 2 spot.
Nortel's history is steeped in delivering robust voice solutions to carriers and enterprises. At one time, the company was a leading PBX and central office switch supplier. Nortel's position was so impressive that Microsoft turned to it in July 2006 to enhance its position in the emerging unified communications market. Recently, Microsoft has been moving away from cooperating with Nortel and into a more competitive posture. Microsoft could cast Nortel aside like it has with other allies, such as IBM and Sybase through the years. With the move to IP-based voiced solutions, Nortel has seen its market position slip, and slip dramatically, leaving its voice business on tenuous ground.
In fact, the company overall is in horrific shape. Its stock is trading for about $1 a share, so it has a market cap of about $400 million. The math does not seem to add up; after all, Nortel generated more than $10 billion last year, so it should be worth more. The problem is the company has been burning through cash for more than decade -- now at the tune of about $700 million each year. At this rate, Nortel could be broke in a couple of years -- a process intensified by the recent financial crisis.
What happens next to the company? After a decade of mismanagement, turning it around does not seem possible. With the global credit crunch tightening, it seems unlikely that Nortel could go private. The most likely course is being acquired. Since there does not seem to be a fit for the entire company -- with the exception of perhaps Alcatel-Lucent -- it is likely that Nortel will be parceled up and sold piece by piece, a process that the management had hinted at earlier this year.
So what should a small and midsize business with Nortel equipment do? Such companies are now holding an Edsel. If it has been significant reliance on its products, then maybe it can wait it out and see what migration its new owner offers. If its reliance is minimal or a new network upgrade looms, then the time has come to move on.
See more columns by Paul Korzeniowski.
Paul Korzeniowski is a Sudbury, Mass.-based freelance writer who has been writing about networking issues for two decades. His work has appeared in Business 2.0, Entrepreneur, Investor's Business Daily, Newsweek, and InformationWeek.
