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Summary:

The problems at Alcatel-Lucent are not unique to the Franco-American communications equipment maker. Instead they are part of a bigger disease that ails some of the older gear makers in the West, which are being squeezed by low-cost Asian rivals, fewer buyers and massive shifts in the technology landscape. Continue Reading

Earlier this morning Franco-American telecom giant, Alcatel-Lucent, gave CEO Pat Russo and Chairman Serge Tchuruk the proverbial boot after the company reported a disastrous quarter, missing its earnings and revenue targets. The company says they resigned – which is utter rubbish because in this day and age, no one gives up megamillion-euro pay packages just because they’re feeling pious.

Much of the blame was put on macroeconomic factors and the wireless industry’s transition from CDMA to WDCMA. The company tried to point to a silver lining on the horizon (2009), but somehow it feels like wishful thinking.

Today’s turn of the events not only highlights the folly of the unlikely pairing – the worst since Billy Bob Thorton hooked up with Angelina Jolie – it also points to a larger, much deeper problem facing the telecom equipment makers in the West.

Too Many Sellers, Too Few Buyers

At the time the deal was announced in April 2006, I had pointed out that the merger of Alcatel and Lucent was driven primarily by the lack of market control by equipment vendors. As carriers continued to consolidate, most equipment companies have lost their pricing power and have been left to snivel like lowly serfs in front of industry powerhouses such as AT&T and Verizon.

In November 2007, I spoke with Krish Prabhu, the then-CEO of Tellabs, who lamented how carrier consolidation was crushing smaller players like his company. Troubles at Motorola and Tellabs are part of the same trend that has besieged the industry. Nokia Siemens, Nortel and others are also struggling to find a strong footing in what seems to be a quicksand hidden by hot tar.

At the same time, the industry is coming under sharp attack from low-cost Chinese vendors that are essentially subsidized by various governmental entities. By playing the cut-price game, they have won key contracts in fast-growing Asian, African and Latin American markets, and recently have started to mop up in Europe.

The presence of ZTE and Huawei has helped carriers squeeze blood out of a stone and destroyed the money-making potential of Western equipment makers. Companies like Alcatel-Lucent don’t really have much flexibility – they have huge cost bases that include R&D, manufacturing and little ability to play the price game in the rapidly growing Asian markets.
If these deflationary forces were not enough, some of these companies are just not prepared for the rapidly changing needs of today’s networks.

The world has gone all “IP” and the needs of telecom operators, especially the new ones with big wallets in Asia, Africa and Latin America, have evolved accordingly.

The State of The Telecom Market

The troubles of these companies come at a time when the sales of equipment to service providers and enterprises are going up, totaling $139 billion in 2007, up 13 percent from 2006, according to Infonetics Research. The research firm is predicting total equipment sales will climb to $174 billion in 2011.

Unfortunately, most of the sales are coming in areas where large incumbents such as Alcatel-Lucent have marginal presence. For instance switches, routers and IPTV gear continues to do well, as does demand for fiber broadband-related equipment. (Alcatel-Lucent has been doing well in GPON, but has seen its DSL sales slow down and profits evaporate, thanks to competition from Huawei.) China and India are beginning to account for a much more substantial part of the worldwide capital expenditure.

What makes the situation worse for Alcatel-Lucent is that they blew up in middle of an investment cycle. Why? Because the cycle has hit a plateau in North America and Europe, according to Infonetics Research. In China and India, the Chinese equipment makers are cleaning up. The growth in those two economies, much like rest of the emerging economies, is coming from the mobile buildout and lately, from WiMAX demand as well.

According to Infonetics Research, Cisco was the largest company in 2007, followed by Alcatel-Lucent. In the telecom sector, an increasingly resurgent Ericsson is running neck-to-neck with Alcatel-Lucent, which explains today’s disaster.

What Next For Alcatel-Lucent?

The shuffling of management doesn’t really address or fix the structural issues of this company specifically or industry at large. Earlier this week, there was a story in the Wall Street Journal about Alcatel-Lucent’s move into the services business. I am sure that’s going to work out eventually — they reported $1.3 billion in service-related revenues this quarter — but in the long run they would have to buy their way into the market. Alcatel-Lucent could acquire Cognizant, a telecom industry services company, but for that they would have to give up more than half of their company. And even that isn’t going to fix this company’s structural and fundamental problems.

Too bad, for at one time Alcatel looked like the king of the telecom hill. By buying Lucent it turned that hill into a heap of scrap. I think this company is headed in the same direction the relationship of Thornton and Jolie went: south.

  1. Om,
    A complete story… Wow! I like the short and the story from start to finish..

    Cheers, Nag

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  2. @Nag

    I decided to go old school on this piece. Straight forward magazine style story. It has been a while since I did that.

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  3. Om,

    ALU and NT missed the fundamental change in communications 10 years ago. They did not prepare their roadmaps for new communications (IP) and felt they could continue to squeeze revenue out of carriers using their dated solutions.

    Let’s go into the future 10 more years. Where do you think the likes of ALU & NT will be? Alive, reborn, dead??

    Ben

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  4. @Ben… walking dead would be my pick :-)

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  5. Jesse Kopelman Wednesday, July 30, 2008

    From a business perspective, Billy Bob and Angelina was very successful — both became much more famous and got better parts after they started dating. I’d say this was more Kid Rock + Pam Anderson — both less relevant than before the marriage.

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  6. OM,
    Will splitting of “Angeline and Billy Bob” cause Alcatel folks to send Lucent packing, or will the new CEO continue to struggle through the merger of unlike systems/management styles/etc?
    Thx
    JTW

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  7. [...] nuevos low cost PCs que los grandes tengan unos resultados comerciales similares a los que están sufriendo algunos fabricantes occidentales de equipos de telecomunicaciones, como [...]

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  8. Om, very good article, but I would say that like Angelina, ALU just need to find a Brad Pitt…

    @Ben Ortega, I would not discount Alcatel-Lucent too quickly: #1 in ADSL, #1 in Optics, #1 in IPTV, #1 in IMS, #2 in edge routers just behind Cisco, leading WiMAX and LTE and a pioneer in NGN. All these technologies have IP in their veins, and that is why telcos partner with ALU to transform their networks with IP.

    ALU might not get the limelight that Cisco gets on IP, but we would not have broadband at home without the ADSL, FTTH or GPON technologies where ALU is #1.

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  9. Jose, well said, the Bell heads are doing great and will take back the world…Several years after the merger we still keep multiple products in each category and this gives great confidence to our customers and partners…#1 in IMS is really a major +ve…Gives me confidence to buy stock…..#1 in WiMAX is just wonderful stuff, just wait for the market to happen….

    Sure…

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