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IBM Seeks Greenfield Pastures

Light Reading
News Analysis
Light Reading
6/18/2001

Can IBM Corp. (NYSE: IBM) turn a profit on the problems of telecom equipment suppliers?

That's a question raised by Big Blue's recent alliances with Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), and Redback Networks Inc. (Nasdaq: RBAK).

All three companies have refocused their marketing in order to withstand the onslaught of the severe downturn in carrier spending -- often abandoning former customers as a result.

"We're not prepared to... do custom work," said John Roth, Nortel's CEO, in a news conference Friday (see Nortel's Nuclear Winter). Where once the firm could provide the services needed to help CLECs (competitive local exchange carriers) and specialized service providers such as ASPs (application service providers) and SSPs (storage service providers) get going, that's no longer possible. With severely limited funds, Nortel must concentrate on the largest carriers that have already got sizeable networks in place and have proven their viability.

Lucent's taken a similar tack. "We're focusing on top-tier providers only these days," says a spokesperson. "We can't address all providers directly. IBM is there to help."

IBM appears ready to take up the slack, by offering new products and services that link IBM kit to telecom gear -- a job that formerly might have fallen to the network equipment vendors themselves.

For instance, with the Redback announcement, IBM is offering new software that enables Web hosts and data center computers to interact with Redback's broadband subscriber-management system. The goal is to give service providers a way to create new offerings, such as individualized Web portals, for consumers and businesses.

IBM's announcements with Lucent and Nortel aren't focused on specific new products, but instead on IBM building new networks that wed IBM host and storage devices with gear from Lucent and Nortel, thereby putting carriers in a better position to generate new services faster and more efficiently.

It's an approach aimed squarely at new carriers. Jan Jackman, VP of strategy for IBM's Global Net Generation Business, says the main markets for the new IBM Global Services offerings for Lucent and Nortel lie in regions outside North America -- in Europe, Africa and the Middle East, the Asia-Pacific region, and Latin America. That's where newer, smaller carriers are still building network infrastructure.

But Jackman and IBM do not seem eager to have Big Blue viewed as capitalizing on equipment vendors' inability to meet their service markets. Instead, IBM says it's seeking to broaden its options, to help service providers take advantage of market trends, such as creating new kinds of revenue-producing services for business customers.

"Despite the slowdown, enterprises are still very bullish on extending Internet-based technologies into their infrastructures," says Jackman. At the same time, the benefits of outsourcing are starting to be fully realized by strapped IT departments, she asserts. The result is a prime market for service providers to offer a range of services formerly provided by corporate data centers.

How big is this market? IBM won't say. Terms of these latest telecom equipment deals haven't been specified. Still, the press release from Lucent quotes that company's director of strategic alliances as expecting the deal "to drive several hundred million dollars in product and professional services revenue to both [Lucent and IBM] over the next two years."

IBM is clearly in a position to profit from the new telecom opportunities. IBM's SEC filings indicate that its Global Services arm employs 160,000 people worldwide and accounted for roughly $33 billion in revenues across 160 countries in 2000.

"There are clearly going to be new opportunities opening for some players, as Lucent and Nortel and other big suppliers exit the customization market," says Lawrence Harris, VP at Josephthal & Co. "On the other hand, CLECs aren't the most attractive company to keep these days. There are some risks involved in doing business with them."

The sheer bulk of IBM Global Services should enable it to tackle the risks involved in dealing with new carriers, risks the equipment vendors and smaller integration firms are no longer prepared to assume.

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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