William Owens

If Nortel Networks is to play the new international telecom game, it must strengthen its video portfolio, bundle its offerings and partner with would-be competitors, a Toronto-based telecom analyst says.

It must do these things to stave off a new breed of competitor that has been encroaching on the telecom maker's traditional territory in the past few years, said SeaBoard Group's Brian Sharwood.

Mr. Sharwood's comments matched those of Nortel CEO William Owens himself, who spoke to members of the local high-tech community at last week's technology executive breakfast hosted by the Ottawa Centre for Research and Innovation.

"It's a changing marketplace," Mr. Owens told the audience. "It's not just the traditional Lucents, Alcatels, Siemens, Motorolas and Nortels" competing on a global scale, he said.

The new face of telecom includes companies most people had not heard of three of four years ago, but which are now competing "face to face" with the Nortels of the world, Mr. Owens added, citing China-based ZTE and California-based UTStarcom as examples.

Along with Huawei Technologies, ZTE is China's biggest maker of telecom equipment. The two companies just won market share from Cisco Systems by offering lower prices for bay stations, switches and other gear. Meanwhile, UTStarcom announced last week that it received a contract from China Telecom Corp. to install a system for high-speed Internet access in five Chinese provinces and Tibet.

Mr. Sharwood listed California's Redline Networks, a developer of network appliances for web-enabled data centres, and Ciena, which recently bought Ottawa's Catena Networks, as other examples of the new threat.

Such companies, especially those in China and other parts of Asia, are giving Nortel a run for its money, marked by "remarkably low" cost structures, products that are "increasing in their quality" and R&D that is "growing in its sophistication and quality", said Mr. Owens, adding the U.K. is one market where Nortel is feeling the pinch from competitors.

"They also have an unlimited number of PhDs to participate in this growing marketplace and build new products."

A lot of Chinese telecom equipment companies have "incredibly low costs", agreed Mr. Sharwood.

However, Nortel can combat this threat by continuing to outsource parts of its operations, he said, pointing to the company's decision earlier this year to outsource much of its remaining manufacturing activities.

In June, a deal worth an estimated US$2.5 billion a year was struck that will see Singapore-based Flextronics take over Nortel's manufacturing operations in Brazil and Canada. Talks continue for the remaining operations in France and Northern Ireland.

People should also be aware of one, all-important difference between Nortel and its competitors, added Mr. Sharwood.

"Nortel is a trusted name amongst carrier groups. My theory is they need to continue to play that role and expand their offerings."

Nonetheless, Mr. Sharwood is "amazed" at how weak Nortel's video-over-Internet portfolio is. If the company wishes to be a serious competitor in the future, it must pursue this option full on, he said.

"Video is one of the things all the carrier groups are thinking about now because they know they're going to be competing head-to-head with the cable companies (in this space)."

Mr. Sharwood noted that Manitoba Telecom Services already has its video coming from other firms.

"Those are companies worth buying and partnering with that Nortel can, if they're a partner, go in with them and say, 'We're the ones who know how to (offer video)'."

In general, Nortel must focus on bundling products together so the company can offer an entire 'product set'," added Mr. Sharwood.

"They need to have that product set available ... even if some of these products are built by Nortel itself. They can't let other people come in there with other products."

If this were still "the roaring end of the '90s", Nortel would be buying up such would-be competitors.

"But they can't do that anymore. So they have to partner with them."

Last week, Mr. Owens said Nortel is interested in "packaged solutions", which bundle products for carrier customers, service providers such as Bell Canada or enterprise customers.

"(For example), maybe it's a good idea to provide a bundled, high-bandwidth DSL with voice over IP, with video IP or video streaming," he said.

He believes Nortel can offer such bundled product sets by partnering with smaller companies.

"We haven't been focused (on this) in years past, but I'm going to be really focused on that kind of thing in the future," he said, hinting this strategy could open the door for partnerships with Ottawa companies.

Also last week, Mr. Owens said Nortel will soon know the "names and numbers" of the employees whose jobs will be cut, referring to a previous decision by the company to cut 3,500 positions, or 10 per cent of the company's global workforce, to reduce costs and compete with the low cost structures of Asian counterparts.

The positions will be evenly split between Nortel's R&D operations and the firm's selling, general and administrative areas. The move is expected to decrease costs in these two areas to 35 per cent of overall revenues. In terms of R&D, Nortel will focus its cuts on areas that support legacy systems, he said.

"We're not focused, certainly, on Ottawa. But there will be some reductions here and I don't know precisely the numbers. But in the next 10 days to two weeks, we'll know the numbers and names."