Alcatel Lucent: fixed for the future?

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Alcatel-Lucent: Fixed For The Future

As Ben Verwaayen takes over at Alcatel Lucent, some observers are not sure how much of an advantage this will give the firm.

There are clearly high hopes that the new Alcatel Lucent CEO Ben Verwaayen can end the so-called “cultural differences” that have beset the less than convincingly merged company.

Even as his appointment was announced, however, there were hints of continuing dissent, with some investors reportedly unhappy that former Alcatel COO Mike Quigley had not got the job.

Still, Verwaayen has made the right noises so far, reportedly announcing that he is willing to step on toes when necessary and refusing compensation in the package that took him on board. On the other hand, he can expect to be very comfortably rewarded if his pledge to accelerate integration and innovation has positive results.

Richard Windsor, analyst with international global finance house Nomura, summed up what are broadly seen to be Verwaayen’s strengths-beginning with the obvious. “It was very important for someone to come to Alcatel Lucent who spoke French,” he said, continuing: “He’s been at Lucent before so he knows the company-even though it’s somewhat different now. He’s got a good track record. He’s been involved in the industry, albeit with an operator, for the last few years. All the little things work out in his favour.”

Certainly much has been made of Verwaayen’s successful tenure as chief executive of BT. But that alone, for Windsor, is no reason to be over-optimistic. “The challenges are to return the company to growth [and] to streamline it so you don’t permanently damage it,” said Windsor. He added: “The other problem they’re facing is the ability to return cash to shareholders, which has been very poor to date. What we really want to see is operating synergies come through and then some return directly to the shareholders in the form of higher profits.”

Shareholders did well out of Verwaayen’s reign at BT. So far, Windsor suggested, the savings made under the previous administration at Alcatel Lucent have done little to improve the bottom line. “It’s total lack of management accountability,” he said. “Management bench strength needs to be substantially enhanced. It needs a Nortel-style management renewal.”

And the ‘shop floor’ may also need attention. Julien Grivolas, principal analyst with Ovum’s telecoms group, questioned whether the “tough climate” caused by redundancies made so far and the threat of more to come could further stall regeneration. “You have to create motivation-to make people believe that their efforts are recognised,” he said.

But if there had to be further redundancies some smart money is already on the wireless division. Strip out wireless, Windsor suggested, and you already have a healthier balance sheet, although he stopped well short of suggesting that this should happen in practice. So too, it seems, does Verwaayen. So what happens next?

Grivolas argues that offering products and solutions across all technologies is a way of effectively betting on different horses, at least one of which could bring in a good return. “But at the same time,” he added, “you are fragmenting your resources.”

Why, for example, should anyone bet on CDMA2000? Most of Alcatel Lucent’s second quarter net loss involved a massive writedown for products based on CDMA technology. In additionDifficulties in CDMA may continue, Grivolas suggested, as North American CDMA2000 operators are going to be less likely to spend on their present networks in the prevailing economic climate. WorseIn addition, there are strong indications that a number ofmany CDMA2000 operators will migrate to LTE rather than UMB-even in China. However, Alcatel Lucent’s CDMA2000 expertise could be useful in an LTE-based future, when smooth handover and backward compatibility will be important to aid a cost-efficient migration to 4G from (among other technologies) CDMA2000.

HoweverGrivolas said that CDMA will still be around for a while and that there are still opportunities, in particular in China. For example, China Telecom has indicated that there will be further investment in the CDMA2000 network formerly owned by Unicom before eventually going to LTE. Alcatel-Lucent’s-or more accurately Lucent’s-strengths in that area may prove useful, as could its existing joint venture in China.CDMA2000 expertise could even be useful both inside and outside China, in an  LTE-based future, when smooth handover and backward compatibility will be important to aid a cost-efficient migration to 4G from (among other technologies) CDMA2000.China offers threats as well as opportunities, in the form of pricing pressure from companies like Huawei. However, Murray had some good cheer for Verwaayen: “Our view is that the Chinese are only able to do that in the commodity end of the market. In the high end-in the more technologically advanced end of the market-we really don’t think they compete effectively because the quality of their software and their technological expertise is not nearly as good as Alcatel Lucent’s.”

The UMTS side of Alcaltel Lucent’s business may be better positioned, however, after a rationalisation process that, in a first phase, replaced Alcatel equipment with that of Nortel while continuing to offer the former Lucent’s UMTS solution. and the announcement of plansThe next phase is to work towards creating a single, common platform by the end of the year. And that, according to Grivolas, is an important indicator of how the wireless business needs to be managed. Scale matters-and the company certainly has that-but to repay the benefits of scale, cutting back on an unnecessarily large range of products needs to be carried out.

It’s nevertheless clear, as a number of commentators have pointed out, that Alcatel Lucent’s strength is in fixed communications. It has enjoyed good results in such areas as DSL and fibre to the home, while the acquisition of Timetra (a small IP routing specialist), has made the company a strong player in IP routing. However, as IMS and 4G deployment become a reality, wireless evolution too will involve IP-based technologies. One could argue, therefore, that Alcatel Lucent’s strength in fixed IP routing could have a role in a converged-fixed and wireless-future.

But that is just one of numerous opportunities and challenges facing the new CEO. And a deepening recession is not a good time to be forced to deal with them. As Windsor observed: “The real problem that faces the company is to return to some form of revenue growth because if this current situation persists it’s very difficult to keep operating synergies from being gobbled up through pricing pressure and the brutal competition in the market.”

So, has Verwaayen taken on a poisoned chalice or a golden opportunity? On this question, Windsor is less gloomy. In fact, he had good news for Verwaayen. “It’s a big opportunity,” he insisted, “because it’s a long way before you can say Alcatel Lucent is beyond repair.”