What's next for Nortel?

When Nortel Networks is finished with its latest round of layoffs, divestitures, facility closings and management shakeups, the vendor will hardly resemble the company that it once was.

Nortel, which last week announced plans to fire up to 20,000 more people, shutter more "noncore" operations and replace its CEO with its CFO, is streamlining its business again after warning of another multibillion-dollar quarterly loss. It will now focus on three areas -- long-haul optical, metropolitan and wireless networks -- instead of the five it targeted just three months ago. Two IP-related areas have been dropped from the ranks.

The reinvention, if things go according to Nortel's plans, would cut costs, stimulate growth and keep the company alive. But users and industry observers say the company is on a downward spiral from which it may not be able to recover.

"They're not going to be around," says Frank Dzubeck, president of Communications Network Architects in Washington, D.C. and a Network World columnist. "It is highly improbable that they'll exist the way they are today by the end of the year."

Nortel has been selling off pieces of itself since mid-year -- the most recent being the Clarify CRM operations, for one-tenth of what Nortel purchased it for, and the DMS circuit-switch manufacturing operations -- and the pace is likely to pick up.

Some users say they're seeing Nortel de-emphasize its enterprise business.

"I'd kind of written them off a while ago as an enterprise vendor," says Fred Archibald, a network manager at the University of California at Berkeley's computer science department. "The last few years they have not produced for us. We've been shopping around."

Dzubeck believes Nortel will be broken up and sold off, or acquired in a leveraged buyout, perhaps by competitors such as Cisco. Cisco CEO John Chambers last week dismissed speculation that Cisco would acquire Nortel -- in whole -- but purchasing chunks of the company, such as Nortel's market-leading optical business, may be a more likely scenario, observers say.

A Nortel spokesman scoffed at the idea that the company is looking to sell itself out of existence.

"I find it humorous because we've already talked about the divestitures that we're doing, and have already done about five of those," he says. "As for Nortel disappearing or being broken up to be sold in piece parts, I would not agree with that."

Nortel is becoming a more attractive target for someone else to buy; in fact, "the possibility has never been more likely," states investment firm UBS Warburg in a recent report. Cisco might be interested in buying Nortel for its enterprise and voice-switching business, and European networking giants L.M. Ericsson Telephone Co. and Siemens AG may also bid for the company.

Enterprise demise

As for the enterprise business, analysts say the company will continue to pay little attention to it.

"Over the last year Nortel has shown less focus or at least less results on the enterprise side," says Nikos Theodosopoulos, a senior analyst with UBS Warburg. "That business continues to be less and less relevant for the company."

Nortel's share of the Layer 2 Ethernet switch market has dropped in six of the last eight quarters, according to Dell'Oro Group. Its share of the Layer 3 Ethernet switch market has dropped in five of the last eight quarters, and from a market leading 37.8 percent in 1998 -- when Nortel bought Bay Networks -- to 11.8 percent in 2000, according to Dell'Oro.

"Nortel talked little of its enterprise business in 1999 and 2000, apparently not paying much attention to the Bay Networks business that brought IP networking expertise and technology to the company," says Bill Lesieur, director of the Network Business Quarterly at Technology Business Research. "In retrospect, Nortel would have been much better off if it had fostered its enterprise business to build up a revenue base that would have served to diversify the blow of the optical market falling off."

While selling off the enterprise business is a possibility, Theodosopoulos says it is not likely in the near term. Nortel seems to be trying to use its stable of enterprise customers to entice service providers to buy its carrier gear, he says.

Again, the Nortel spokesman dismissed such a move.

"(Nortel CEO John) Roth has been very clear about the enterprise business and how important it is, and the amount of innovation that takes place in the enterprise business and how that benefits service providers and carriers," the spokesman says.

Indeed, other users believe purchasing enterprise products from Nortel is still a safe bet.

"We still believe they are pursuing most of that (enterprise business)," says Phil Kwan, associate director of network infrastructure at Incyte Genomics in Palo Alto. "At this point in time, I'm not too concerned about that."

But Roth steps aside as CEO on Nov. 1 to be replaced by current CFO Frank Dunn. Dzubeck says Roth's firm resistance to breaking up and selling off Nortel piece by piece hastened his departure.

"He did not want to be there when it was dismantled," Dzubeck says. "He fought the board on this on a continuing basis. Then it was decided that there wasn't any way around it."

Whether the "D" word is dismantled, divested, dissolved or something more final, analysts say it's time for Nortel to forget about the buzz around IP, optical and emerging carriers and focus on incumbents like the regional Bell operating companies.

"The biggest mistake that they made was the same mistake that everybody else made, which was getting caught up in the hype," says Thomas Nolle, president of CIMI Corp., in Voorhees, N.J., and a Network World columnist. "They focused too much on IP, too much on optics. It's clear that what Nortel has to do is support their traditional customer base as their customer base structures to support the new shape of the industry. In the future in the industry, it's obvious that the RBOCs are going to be the only survivors."

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