Nortel and the megavendor innovation myth

In early post-mortems of Nortel Networks (TSE: NT), the criticism that the company failed to “innovate,” I think, misapprehends the current role of the world’s top telecom equipment vendors. These days, major suppliers survive and grow in large part not by inventing new technologies but by capitalizing on the innovations of other companies.

Increasingly, it’s what their biggest customers want: the largest vendors acting as integrators and project partners, acquiring or teaming up with smaller more innovative firms for key technologies.

Rather than push R&D dollars into trendy product categories, as Nortel did under Mike Zafirovski, Nortel’s peers made targeted acquisitions or partnered with those outside their comfort zone. Cisco, Ericsson, Nokia Siemens – the surviving companies knew when not to try to build something themselves.

After years of flat top lines, Alcatel-Lucent’s CEO has made it clear that his turnaround of the struggling megavendor will rely largely on partners. That humbler approach includes partnering in three directions: to gain credibility and presence in the enterprise IT space, to offload legacy product management and to discover disruptive new innovations. (I imagine that when he gave this speech internally, more than one employee wanted to raise his hand and ask, “With all these partners, what is it that WE do, again?”) And the company’s recently announced deal with HP – a classic Bellhead/Nethead truce – illustrates the strategy well.

Nortel partnered in the enterprise IT space, too – with Microsoft for unified communications and with IBM for Web services. But the former may have been too close to Nortel’s own business (much of the duo’s early sales focus was on Nortel’s existing VoIP customers, and that installed customer base remains one of the vendor’s most valuable assets), and the latter may have been too far afield, as the market had difficulty accepting Nortel as a Web 2.0 play.

Nortel’s persistent accounting problems may have prevented it from making more effective acquisitions. And some of its partnerships were short-lived or non-starters – with Huawei, Nokia and others.

In the end, Canada’s premier technology vendor needed to be more like Cisco: quick to capitalize on someone else’s R&D. But when former CEO Bill Owens brought in two former Cisco execs — Gary Daichendt and Gary Kunis – in 2005, their attempts to apply a Cisco strategy to Nortel were rebuffed, and they left after only three months. According to some reports, Daichendt and Kunis argued for Nortel to unload its GSM and UMTS assets and partner with Nokia instead. But Owens and the board wanted those businesses kept in-house. Zafirovski ended up selling much of the UMTS business the following year, but he still has the GSM assets. These days, Nortel is trying to unload all its innovations, and its rivals won’t be too proud of their own to pick them up.

UPDATE (6/30): Validating the above, here’s what Nortel’s chief strategy officer, George Reidel, said in bankruptcy court this week (from Bloomberg):

Wireless phone providers, including Verizon Communications Inc., told Nortel “we love your technology, but we are concerned about your balance sheet,” Riedel said. “Unfortunately for us, we will win the technology prize, but not the commercial business.”

Toronto-based Nortel has proposed selling its older technology, which is in decline, as well as so-called long-term-evolution technology that it spent as much as $200 million annually developing, Riedel said in court today.

Nortel’s biggest customers, including Verizon, have told the company they fear buying the services based on the new technology because of Nortel’s financial problems, Riedel said. They also cited Nortel’s lack of a global reach for their reluctance to buy the services, he said…The customers asked Nortel to find a partner that operates in more markets and has more money, he said.

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