The backwards telecom industry is trapped in a gridlock ruled by bankruptcy lawyers, bullheaded shareholders, government bureaucrats, and greedy executives, shutting down the process of good old Darwinian herd-thinning (see Bankruptcy Boondoggle). It's time to take some action. We need to get things moving.
So, let’s get started. This project demands swift autocratic decision-making. We've decided to assume the role "Telecom God" or TG for short. TG has supreme authority over the industry, forcing companies and agencies to take action by royal decree. By declaring who survives and who does not, and who merges with whom, TG will map us back to more profits. (TG refers to Himself in the third person, as Gods are wont to do.)
First: Planning. Even the Gods need help, so TG has consulted “Setting a Course for Convergence: The Incumbents’ Wireline Strategies,” a cracking report written by the mortal Geoff Bennett, Heavy Reading Chief Technologist. (Heavy Reading is Light Reading Inc.’s paid research division.)
Bennett’s report, based on interviews with dozens of carriers as well as the CTOs of the six major incumbent equipment suppliers, comes to a sweeping conclusion: Telecom networks are quickly merging into a new infrastructure based on IP and MPLS. But many of the incumbents are ill-equipped for this transition, and there is a lot of product overlap.
Makes sense, eh? Well, you'd be surprised at how ill-prepared some of these companies are. Take a look at how fast Ciena Corp. (Nasdaq: CIEN) got stuck in Long-Haul Hell, without a viable outlet to multiservice networks. And Nortel Networks Corp. (NYSE/Toronto: NT), after nearly a decade of efforts, has still made only modest progress on its IP routing pilgrimage.
TG used Bennett's reports to align strengths and weaknesses for the coming convergence. Naturally, it made sense to take the companies as ranked from strongest to weakest, and pair the strong companies with the weak.
To begin, Cisco Systems Inc. (Nasdaq: CSCO) is ranked as the strongest and Lucent Technologies Inc. (NYSE: LU) the weakest in Bennett's report. Conveniently enough, Cisco ranks very highly in packet-based technologies and has a strength in enterprise accounts. Lucent, in contrast, has a top-notch carrier customer base and strengths in the metro and core optical, while its packet position is weak.
TG notes that the stock market had valued Cisco shares very highly (making good acquisition currency), giving it a market value of $146 billion (!) and it has nearly $10 billion in cash and short-term investments. Lucent, in contrast, was trading at a mere $3 and has a paltry market cap of $13 billion. Cisco could buy Lucent for a reasonable price, using a mix of stock and cash, and create a company with complementary product lines.
Hence, our new industry superpower: Cisclu.
TG says it is Good. This deal looks dandy because Cisco could use some of its cash to help eliminate Lucent’s $5 billion debt, reducing interest payments and increasing cash flow. Lucent’s $1 billion per year in pension costs would be a headache, but we’re suspecting that the R&D value Cisco would receive with Bell Labs could make up for this because the R&D budgets could be combined.
Okay, what about the others? The “Middle Four” we’ll call them. They consist of (in Bennett's ranking): Nortel, Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Marconi Corp. plc (Nasdaq: MRCIY; London: MONI), and Siemens AG (NYSE: SI; Frankfurt: SIE). TG has gone ahead and paired them off.
Nortel, the next strongest company, has strengths in ATM, Sonet/SDH, and even a bit of enterprise business. They get Siemens’s ICN business. For a psalm. Folks forget that Siemens AG is a diversified engineering company that has plenty of other businesses and doesn’t really need to continue mucking around in telecom. Let there be Normens!
That leaves Alcatel and Marconi. Just for chuckles, TG will pair off the English with the French. That creates the mellifluous Alcatoni.
In this new environment we have Cisco-Lucent (Cisclu), Nortel-Siemens ICN (Normens), and Alcatel-Marconi (Alcatoni). Clearly, The Cisclu combo looks to be the Monster of the Mix.
What about all those other companies? You’ve got fairly large incumbent challengers like Ciena, Juniper Networks Inc. (Nasdaq: JNPR), and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). TG has decided to use them to beef up positions against the Cisclu Behemoth. Normens looks weak in routing and needs to compete on the packet front with Cisclu, so they get Juniper. Alcatoni could use some more switching products and revenue in North America – so we'll toss them Tellabs and Ciena, because they need to beef up the revenue picture.
And the remaining small fry? All those startups left over from the IPO boom that are just sitting on cash, doing not much of anything? Tossing them to the Big Boys would disburse the cash to the remaining “Big Three,” who could all use it.
Over time, TG reserves the right of further consolidation to combat the slouching Cisclu Beast. The newly formed Normens and Alcatoni may merge, forming Normenscatoni – Bibbity-bobbity-boo!
There now, don’t you feel better about things? If we would all just get there faster, we’d be well on our way to a speedy recovery. This plan would allow the remaining companies, which would then have fewer competitors, to stabilize pricing and make some money.
But yes, there's one big problem left. Still left to fix is the carrier space, the prospects of which give TG a headache, because it also involves not just mergers, but the question of regulation.
TG has weighed eliminating the Federal Communications Commission (FCC) to start with, but that's a large task and may necessitate a deal with the Antichrist – a job for another week. TG is going to rest now.
— R. Scott Raynovich, US Editor, Light Reading