Nortel less Carrier Ethernet less Optical Infrastructure less LTE Equals What?

| Sep 18, 2008 | Telecom Infrastructure | Flash Analysis

| Analysts: Peter Jarich, Glen Hunt

Current Perspective: Very Negative
Vendor Importance: Very High
Market Impact: High

Event Summary

September 17, 2008 – Providing guidance on its Q3 2008 financial performance, Nortel announced plans to sell its Metro Ethernet Networks business including carrier Ethernet and optical assets, leaving the company with the following units: Enterprise Solutions, Mobility and Converged Core, and Global Services. At the same time Nortel announced plans to economize on its LTE R&D through options such as partnering or divestiture.

Analytical Summary

• Current Perspective: Very negative on Nortel's carrier Ethernet, optical transport and wireless businesses on the company's plans while mitigating its exposure to LTE. It can be argued that the moves will take Nortel out of markets where it was not going to achieve CEO Mike Zafirovski’s mandate of 20% market share (or one of the top two market share positions), thus providing the capital resources and focus necessary to bolster its position in other segments where greater success may be possible: enterprise, VoIP, gateways and software. Regardless, the move marks Nortel's departure from its traditional service provider packet switching and optical transport businesses, leaving too many questions unanswered.

• Vendor Importance: Very high to Nortel, because selling its MEN unit is a desertion of one of the core pieces of its business and a tacit acknowledgment that the company could not meet its internal or external performance objectives. Clearly, every vendor in the market faces fierce optical, carrier Ethernet and LTE competition, and must decide which of those spaces are critical to its strategic focus. However, Nortel’s significant R&D investment in its MEN group was beginning to show returns in the form of 40G sales and PBT leadership. By selling the business unit now, Nortel is admitting that a core portion of its business – a portion that was once its foundation, and more recently a centerpiece of its resurgence strategy – does not hold attractive long-term prospects for the success of the company. What’s more, while it is clear that the move transforms Nortel, pushing it away from carrier networks and towards the enterprise as well as applications such as carrier VoIP, it is debatable whether or not sole focus on these segments will provide Nortel with the long-term market leadership position it craves - leaving it less clear whether a restructuring on the scale of selling its MEN division and investigating a pullback from LTE was necessary to keep the company healthy.

• Market Impact: High on the telecom infrastructure market because by putting its MEN business on the market, Nortel is effectively capitulating to the reality that, even with an extensive customer base, comprehensive portfolio and promising technologies, it is struggling to compete with the mega-telecom vendors like Alcatel-Lucent, NSN and Huawei. Going further, contrary to Nortel’s positive comments about the optical market potential, when the number three vendor decides to leave the business, it speaks volumes about the short-to-medium term prospects for all players in that market, and complementary markets such as carrier Ethernet and LTE. In turn, this will likely leave competitors scrambling to determine whether or not Nortel's MEN assets are worth acquiring while simultaneously leveraging the restructuring to better compete for near-term sales opportunities. At the same time, However, while the exit of Nortel from the market may ease competitive pressures somewhat, the vendor had not significantly grown its market presence in spaces like carrier Ethernet or 4G wireless, making its departure less impactful.

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