Optical/IP Networks

Lucent Stands Pat

We've been scratching our heads (and other stuff) over here at Light Reading Central trying to work out whussup wit Pat Russo's move to the CEO spot at Lucent Technologies Inc. (NYSE: LU).

Here's what we do know:

    1: Pat just had a remarkably short Kodak Moment™.

    2: The transfer is notable more as an exercise in corporate nostalgia than in strategic thinking. (Yes, the appointment will score points with the Northern New Jersey grey-haired golfer set. No, it won't do anything to improve relations with Lucent shareholders – see Lucent's Next Leader).

What we don't know is Russo's plan for the company's optical networking product lines. Unfortunately, Lucent declined to let Light Reading interview Russo, so we couldn't ask her directly what she has in mind, but she's on record elsewhere as saying that she intends to continue the work of restructuring begun by Lucent chairman Henry Schacht.

Breathtaking vision there, Pat.

Since taking over the reins as interim CEO, Schacht has undertaken an all-out program of cutbacks at Lucent. On one level, that's a good thing, because it lessens the chances that the Big LU will go bankrupt.

On another, it's a very bad thing. That's because Schacht has been way too free with his hatchet. In the process of slimming down the company, he's favored maintenance of old stalwart technologies, while defenestrating the more cutting-edge stuff – IP, metro switching, scaleable ATM – on which Lucent's future depends. This is, of course, classic Lucent thinking.

Coincidentally enough, at the time the Lucent politburo handed down the CEO decision, Light Reading's paid research arm, Optical Oracle, happened to be putting the finishing touches to its latest report, due out later this week, entitled "Big Shots In 2002: Are They Ready?"

Allow me to precis the Optical Oracle’s findings on Lucent’s current product positioning in the carrier voice and data markets:

    Optical transport – Running in third spot behind Nortel Networks Corp. (NYSE/Toronto: NT) and Ciena Corp. (Nasdaq: CIEN). Ciena's hold on the no. 2 position is attributable to it being first with next-generation technology.

    Optical Switching – Getting spanked by Ciena (see: Optical Transport). Plenty of competitors, including Corvis Corp. (Nasdaq: CORV), Sycamore Networks Inc. (Nasdaq: SCMR), and Tellium Inc. (Nasdaq: TELM) are developing disruptive next-generation technologies.

    SonetCisco Systems Inc. (Nasdaq: CSCO) is cleaning up in the next-generation market, and Fujitsu Ltd. (KLS: FUJI.KL) is still a force. Lucent may have a decent shot if it moves some DMX product out the door. But it’s late to market.

    ATM – Still in good shape here. But Lucent just pulled the plug on its next-generation ATM switch development project (see Lucent Bags High-End Switch).

Detecting a trend here?

Any new leadership should be focused on getting Lucent back in a position of strength in several of these technology markets. But unfortunately, in the current environment, that isn’t going to happen. As a repatriated Lucent lifer, Russo is not the person to bring in the foreign DNA necessary to change Lucent’s technology and marketing culture and renew the product strategy.

Here’s my prediction:

    1: Russo will clean up the books further, assuage Wall Street and Lucent’s creditors, and make sure that Lucent stays on track as a lean, mean, bankruptcy-fighting machine.

    2: At the end of 2002, there will be a brief glimmer of hope, with a slight uptick in the telecom market. Carriers will buy a few more of Lucent’s rusty old Studebaker-like circuit switches and perhaps upgrade an ATM box here and there. The numbers will look a little better. Lucent’s share price will crack $10.

    3: Lucent shareholders will realize, belatedly, that the company has no growth plan. No core routers. No market-leading edge services devices. No IP data engineering talent. No next-generation optical DWDM switching platform.

    4: Clang!

In other words, the future now looks bleaker than ever.

At this point, it's worth asking why Lucent's Board of Directors, named by Fortune magazine as one of America’s six worst boards, picked Russo. The answer lies in the titans of industry who make up the board. They hail from Lucent, Agere Systems, Eastman Kodak, Lucent, Xerox, and Lucent (it's worth noting that Xerox and Eastman Kodak also made Fortune's Dirty Half Dozen list). This is not so much a Who's Who of the optical networking industry, as a "Who cares?"

Amidst all of the unknowns, most of Wall Street was typically tepid on Russo’s selection, issuing vague and faint approvals and head nods that sounded a little bit like, “Well, the Pinto's a decent car if you just think about how much mileage it gets – before you get rear-ended.”

Stevy Levy, at Lehman Brothers, is the only analyst saying what he's actually thinking. (Keep in mind that Levy also happens to be one of the few analysts that correctly called Lucent’s meltdown).

“While we continue to view Lucent as an extremely attractive turnaround investment opportunity in the telecommunications equipment market, Lucent's senior management team with only one notable exception is composed of ‘lifers’,” wrote Levy in a research note issued yesterday. “We are also concerned because Pat Russo's long-term vision is an unknown.”

Bingo. Give that man a cigar. And give the Lucent board a clue.

— R. Scott Raynovich, US Editor, Light Reading

Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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