John Roese’s Blog CTO, Nortel

Location: Ottawa, Canada

There have been a few comments left lately from people looking for more detail on Nortel’s overall corporate strategy and where we’re placing our bets to win in the future.

The one from Paul Stevens is a good example. “He asks: What are the bets that Nortel is well-positioned to place? What are the sizes of these market segments, and how much does Nortel expect to capture? Why will you win?”

Mark Evans – and, yes, I do read your blog periodically, Mark – also recently asked “What’s Nortel?”

Who better to answer those kinds of questions than my colleague George Riedel – Nortel’s Chief Strategy Officer – who took me up on my offer to do a guest blog entry. Judge for yourselves and let us know what you think…

First of all, John, thanks for the invite to be a guest blogger and for the opportunity to directly address one of the recent posts. Let me try and shed some light on the "where will the growth come from" question.

Let’s start by agreeing on a few key assumptions:

1) We have to drive for profitable growth. Nortel has publicly committed to adding 300-500 basis points a year over the next two years to go from a breakeven company to earning 13% operating margin, through a program we call “Business Transformation”. This program involves six key areas of focus targeted at both reducing OPEX and expanding gross margin to achieve the US$1.5B improvement. And this stuff is all within our control (e.g., supply chain, G&A costs, R&D effectiveness, etc). As evidenced in the financial results we issued two weeks ago, our focus on executing on this program is showing solid progress.

2) In terms of timeframes, we need to separate out the investments we are making in products/partnerships/portfolio restructuring vs. the timing of the impact on the top line. 2007 will be an important transition year for us – where because of our UMTS access exit in late 2006 we’ve communicated flat to modest decline in aggregate growth. The real point you should take away is that, as we stated on March 16, we will grow faster than the market in the key growth businesses in 07, just like we did in 2006.

3) Our key to success will be built on three tenets: i) a focus on disruptive technologies to exploit the opportunities of change (more below); ii) aggressive work with partners/ecosystems to get leverage – both in terms of solutions as well as go-to-market leverage; and iii) having the global services capability to pull it all together and help our customers make the transition to new solutions.

4) We think the nature of the "hard problems" that many of our customers are now facing are cross domain. (John talked about this in his first blog entry.) They won’t be solved by simply throwing another box at the problem. Rather, they will require an integrative approach, where the combination of experience and portfolio in a range of businesses will be needed. For us, that’s enterprise and carrier, wireline and wireless, infrastructure and applications. We think others will have to develop the same scope of expertise to be successful in areas like Fixed Mobile Convergence, SOA, Web Services, Unified Communications, Video Solutions, etc. Growth comes from being relevant in the right areas, at the right time. We think we've picked the right areas – it’s execution that will make the difference from here on in.

So ... Where will the growth come from for Nortel? Why will we win? How big could these market opportunities be?

Four organic bets

We've laid out four areas of focus for growing the company and have placed our bets accordingly. They are as follows:

1. Carrier Ethernet. The combination of our strengths in optical and Ethernet technologies, together with our market lead in some key technology areas (e.g., PBT/PBB and 40G optics), our focus on some key applications (e.g.,wireless backhaul, business services, and triple/quad play) and our differentiation in OAM for transport customers give us a material shot at winning share/growing revenue. As recent examples, I would point to our announcement last week to embed IBM’s Tivoli Netcool software as the foundation of our new common management platform and to our announcement in January re our role in providing a carrier-scale Ethernet solution for BT’s 21st Century Network. We've bet on PBT because we see it as a much lower cost and far less complex answer than MPLS for the edge of the network. Customer engagement seems to support that. Under the current definition of the market, and depending on which research firm you reference, this is a US$1.4B market, growing at about 45% per annum. However, if you think about the long-term consequences of optical and Ethernet technologies coming together – and about the TDM-centric nature of the SONET/SDH infrastructure – we think carriers will look to reduce cost/complexity by migrating to Ethernet-centric transport architectures, and that opens up a several billion dollar market to drive growth via substitution.

2. Unified Communications. Unified Communications represents another disruptive discontinuity and is an important part of Nortel’s drive to transform the enterprise. We are at the start of a huge industry change that will both redefine the PBX landscape and integrate various collaboration technologies – messaging, call center, presence, voice/video, etc. – across boundaries. Our Innovative Communications Alliance (ICA) with Microsoft is a key vehicle for us to participate in this rapidly evolving market. This drives growth within our installed base but, equally important, opens up a much broader addressable market. Again, sizes vary, but we think the market will grow rapidly off a small base in 2006 and we've publicly committed to an incremental $1B in top line growth over the next several years. (Our recent financials suggest we’re on our way. Our Q4 2006 Enterprise revenues were up 39% over Q3 and 61% over Q4 2005.) This incremental growth will include voice and data products (e.g., think branch office consolidated device) and professional services. Oh, and by the way, it won’t all be premise-based. Look for hosted solutions coming to a carrier near you soon.

3. 4G. We are seeing a confluence of events that is driving 4G: more demanding applications (like video, user-generated content, gaming, true broadband access); a growing acknowledgement about the limitations of 3G networks; an expansive number of new devices wirelessly enabled (without subsidies?) – the hyperconnectivity trend that John has talked about) – and a new set of operators engaged in deploying in a range of markets. These events are creating a fundamental transition to a range of 4G technologies – and let’s argue that WiMAX (802.16e) and LTE are most likely to be the leading candidates for that. Why do we feel good about our prospects in 4G? Three reasons: we invented much of these technologies via our developments in OFDM/MIMO; we are very influential in the standards bodies based on our contributions; and we've learned from the sins of the 3G past (where we didn’t have devices) so have been very focused on developing expansive ecosystems with chip vendors and various device companies – and, oh yeah, we've been driving fast to make these technologies available to leading customers, having demonstrated a live LTE air interface with LG devices in Barcelona at 3GSM a month ago. How big in the near term? In 2007, neither WiMAX nor LTE will bring material revenues. In 2008, we'll see meaningful WiMAX revenue. For LTE – more likely it will be 2009/10 before we see real commercial deployments.

4. Global Services. To be successful, we not only need to innovate but also integrate. I've focused on the innovation aspect above, so let me briefly touch on the "integration" one – or, more specifically, on the range of global services we are building to make the transitions real. Network integration and support services, applications integration services, hosted and managed services are the tools of the trade here. With our partners, we have a huge opportunity. Again, we’ve publicly declared that we plan to double our $2B services business over the next several years.

Taken together, we’ve refocused the company over the last 6-8 months on a set of four strategic bets that will start to deliver the growth and the relevancy we need for Nortel to be successful. We've been transparent about the nature of the bets – as well as about the challenges. We've also watched the industry dialogue about Nortel change over this timeframe – from "is it real?" (e.g., PBT, WiMAX, Unified Communications), to some early wins, to a much richer dialogue with customers about where we are going. It’s interesting to note how these changes are showing up in key standards bodies (e.g., IEEE, ATIS, ITU-T) and in the competitive pronouncements from competitors. It’s a good sign we are on the right path when key competitors lead by talking down our solutions while customers and standards bodies are embracing them.

Why do we think we’ll win? We know where the market is headed, we have the cross-domain assets we need (wireless/wireline, enterprise/carrier, infrastructure applications), we’ve aligned those assets with the market opportunity to make some very strategic bets, and we are making the necessary changes in cost structure, processes, people and programs to get the execution right.

With the growing confidence in our ability to execute, a stronger set of financial performance metrics, a more robust group of partners/ecosystems and a more cogent communication about where we are going and why, we feel good about the potential for the road ahead. We also know we have lots of work to do. Look for progress on strengthening our balance sheet and turning towards accretive, meaningful ways to strengthen the business. There is more to the story to come.

STAY TUNED