It's the Customers, Stupid

Today's news of Alcatel-Lucent's dismal earnings forecast brings to three the number of major telecom companies that have seen their share price dive after posting disappointing results recently.

In a preliminary warning on its fourth-quarter earnings report, Lucent Alcatel said that its operating profit would fall well below analysts' estimates of around 29 cents per share. The stock plunged 10 percent on the Paris Bourse and was down by more than 8 percent on the NYSE as of 1:00 p.m. EST.

That follows similarly grim reports from Motorola Inc. (NYSE: MOT), which said last week it will cut 3,500 jobs after handset margins collapsed and its quarterly profit fell by 48 percent, and from Sprint Corp. (NYSE: S), which continues to hemorrhage cellphone subscribers and plans to cut 5,000 jobs.

These three big corporations are all in different parts of the business -- Sprint a wireless carrier, Alcatel-Lucent (NYSE: ALU) and vendor of telecom infrastructure, and Motorola a handset maker (with a significant business in wireless network equipment). Does their collective misery indicate a broader weakness across the telecom sector?

The short answer is, "Not at all."

As one indicator, take Light Reading's Top 10 Telecom Stocks for 2007, which highlights several trends that actually bode quite well: enormous growth in emerging market telecom networks, growing demand for access bandwidth over both fiber and wireless, reduced costs thanks to more efficient networks, overall increased profitability as a result of consolidation, and so on. (That last trend, obviously, hasn't held true for Alcatel-Lucent and Sprint Nextel, but never mind.) (See Alcatel-Lucent Suffers Stock Shock .)

Finding commonalities in three such big and different companies, with varying products and customers, is an exercise in speciousness, but I'll give it a stab anyway. The common failing of Sprint, A-L, and Motorola, comes down to (drumroll please) the user experience.

Motorola's problem, writes Richard Windsor, global communications equipment analyst at Nomura International , is "the user experience… The leaders in this space, Nokia Corp. (NYSE: NOK) and Sony Ericsson Mobile Communications , are miles ahead in terms of delivering a good experience to users."

Alcatel-Lucent CEO Patricia Russo (who, by the way, failed upward after a lackluster stint at fading photo giant Eastman Kodak), said that the merger "created short-term uncertainty for our customers and for our people as we worked to develop the combined company's product portfolio and new organization structure." Translation: In carrying out our grand strategy for world domination, we neglected our customers.

As for Sprint, the failure to successfully integrate the two networks after the Nextel merger has resulted in legions of dissatisfied customers, and thus plenty of defections. "Sprint's marketing has been confusing, the firm let the quality of the Nextel network slip, and it's been slow to adopt popular handset models," wrote the stock-market research firm Morningstar Inc. recently.

The moral of these divergent stories, in case you haven't guessed it: The best M&A strategy, the coolest looking handsets, the cleverest marketing campaign all add up to zilch if you can't serve your customers and keep them coming back. Particularly for consumer companies like Sprint and Motorola, it's amazing that corporations continually have to relearn the basic lesson of business: What matters is the user experience.

— Richard Martin, Senior Editor, Unstrung

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