Nortel's Dismantlement: A Bow to Market Forces

It wasn't that long ago when over a dozen network equipment providers vied for a piece of the telecom infrastructure pie. For years, carriers steadily grew their voice networks, carving out profitable subscriber bases held captive to expensive rate plans. They built large, monolithic networks the NEPs sold at healthy profits. Nortel was a darling in the industry reaching a market cap of $250B at the peak of the market in 2000. Everyone in the telecom ecosystem was happy. So what happened that so dramatically impacted Nortel's future? Here's a few reasons: the Internet, de-regulation in the U.S., and Asian competition.

• The Internet changed everything. A communication network based on digital bits & bytes made long-distance calls irrelevant, enabled new, cool features and lowered the cost of network equipment through consolidation. New competitors offering VoIP service plans forced traditional carriers to respond with their own lower cost plans. Revenues from voice has been in decline ever since. This has placed tremendous cost pressure on carriers who in turn forced NEPs to lower the cost of their next-gen systems year over year often by double digits.
  
• The Federal Telecommunications Act of 1996 changed the landscape of the telecom industry significantly. It allowed any communications business to compete in any market against any other. And new competitors emerged. Most notably, cable providers joined the telecom market offering the "triple play" package of voice, TV and Internet access. Carriers responded by offering cable service. New entrants like Vonage and Skype offered unique all-you-can-eat voice plans leveraging VoIP technology. All of this activity created a fierce competitive environment, placing further downward pressure on cost and ultimately leading to a massive consolidation of U.S. carriers. Fewer carriers meant fewer network deals for NEPs. This trend spread around the world. It became clear that only the strong would survive.
  
• To get the attention of a western-based NEP, one need mention only one word: Huawei. The China NEP shocked the industry by developing high quality network equipment at a cost no other western-based NEP could approach. Initially focused on the China market, Huwaei quickly expanded into international markets with aggressive marketing and sales tactics. Revenues exploded from $2.7B US in 2002 to over $23B US in 2008, a 46% increase over 2007. International contracts now make up over 75% of Huawei's revenue. Other Asian NEPs such as ZTE and DaTang added to the market pressure. Unable to compete on price, the global NEPs responded by consolidating their operations, offering both breadth and depth. Alcatel-Lucent and Nokia-Siemens merged their operations. Motorola and Nortel saw their market share decline while unable to find a suitable dancing partner on their own.

Ericsson, the 800 lb gorilla in the GSM market, has been able to remain independent and now, pending anti-trust approval, will reap the benefits by acquiring Nortel's crown jewels at a bargain basement price. Nortel's rapidly declining but highly profitable CDMA signal processing unit will nearly double Ericsson's North American revenues and strengthens Ericsson's ability to serve the same wireless operators in the evolution to LTE. Nortel tried it's best to remain independent but in the end was unable to adjust to the market forces it once mastered.