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Marconi in Turmoil

Light Reading
News Analysis
Light Reading
4/28/2005

For BT Group plc (NYSE: BT; London: BTA), today was its 21st Century Network D-Day -- Decision Day (see BT Unveils 21CN Suppliers).

For one of its long-term suppliers, Marconi Corp. plc (Nasdaq: MRCIY; London: MONI), it was also D-Day -- Disaster Day (see BT Shuns Marconi for 21CN). As a result of not being chosen for any part of BT's next-generation network plans, Marconi's share price plummeted by nearly 40 percent, and almost half the firm's U.K. workforce now face the prospect of losing their jobs.

Marconi had been expected to win at least a portion of the access equipment award, and by some, including the team at Lehman Brothers, it was fancied to pick up business in the metro and transmission categories as well. But it landed zip, and saw its share price on the London Stock Exchange fall by 190 pence, more than 39 percent, to 292 pence.

The news appeared to catch Marconi by surprise. "This was not the outcome we expected," says spokesman Skip MacAskill. "We went into this with our eyes open and felt our chances were very good, as we performed well in the technical trials.

"The outcome is a reflection of how the economics in the telecom sector are changing. Other suppliers had deeper pockets and went to levels we couldn't, in good conscience, match. We weren't prepared to go to a loss-making position. We had a threshold and we stuck to it, and we understood the consequences."

He adds that the impact on Marconi's business in the medium and long term means that up to 2,000 of Marconi's 4,500 U.K. staff are likely to lose their jobs. That figure could increase if Marconi's network services contracts with BT aren't renewed (see BT Renews $656M Marconi Deal). Marconi currently employs between 10,000 and 11,000 staff worldwide, according to the company.

And, MacAskill says, there's always the opportunity to win new services work from BT as a result of the 21CN project. "That's something we'd be interested in, and services already accounts for about half of our current BT revenues." About a quarter of Marconi's revenues currently come from work with BT (see Marconi Reports Q3 Results).

With BT so important to Marconi, though, shouldn't Marconi have gone to almost any lengths to maintain a long-term relationship with the carrier? MacAskill's response: "That's an easy stance to take when you're standing outside the company. We need to consider the value we can deliver to customers and shareholders when bidding for business. If we become a loss-making business then the shareholders are left holding the bag."

The news that Marconi is frozen out of 21CN came as a surprise to almost everyone, including Heavy Reading analyst at large, Graham Beniston. "BT's decision not to include the Marconi softswitch or multiservice access node [MSAN] is a major shock that will obviously have major repercussions. While the Fujitsu and Huawei MSANs are very good products, it does appear that price has been a major factor in this decision," says the analyst and former Marconi man.

The decision also came as a jolt to Marconi partner Sonus Networks Inc. (Nasdaq: SONS), which was in line to provide its media gateway technology as part of the Marconi package (see Marconi & Sonus Team for Next-Gen and HR Unties Sonus/Marconi Tie-Up).

Talking to Light Reading in London this morning, Sonus CTO Michael Hluchyj was clearly shocked (and dismayed) to hear the news. "It's a surprise," he says, "but Marconi will continue to be a good partner for us. We have other opportunities with them. Time will tell. There may be other opportunities with BT in the future."

The markets were more interested in today, though, as Sonus's share price fell 40 cents, more than 10 percent, to $3.44.

The stock performance of those vendors named as BT 21CN suppliers varied. Alcatel's (NYSE: ALA; Paris: CGEP:PA) share price suffered after its first-quarter results, masking any impact of its involvement in the metro category but omission from the access. It fell $1.21, more than 10 percent, to $10.55.

Siemens AG (NYSE: SI; Frankfurt: SIE), Cisco Systems Inc. (Nasdaq: CSCO), Ericsson AB (Nasdaq: ERICY), Lucent Technologies Inc. (NYSE: LU), and Juniper Networks Inc. (Nasdaq: JNPR) each saw a small dip, but Ciena Corp. (Nasdaq: CIEN) jumped more than 8 percent to $2.19.

— Ray Le Maistre, International News Editor, Light Reading

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22CN
22CN
12/5/2012 | 3:17:03 AM
re: Marconi in Turmoil
How credible and sustainable are the 21C vendors?

Ericsson are not in the Wireline business anymore. Obviously got a great salesforce in the UK.

Lucent let BT down with every contract. Good job Pat.

Huawei bought market share to get a foothold in wireline Europe? With no track record in Europe BT have surely taken a massive risk, not to mention UK security issues. Unless they are about to takeover Marconi!

Fujitsu gone with a loss leader to increase chances of more market share across EMEA? Look out France Telecom - entent cordiale to subsidise BT's 21C. Merci.

Speaking of the French - poor Alcatel - with only a few Timetra boxes. Oh well!

With Marconi supplying Cable & Wireless MSANs BT are the ones who may have made the wrong decision. OFCOM may be interested in Marconi's view of LLU in the UK and with 30 years experience of working with BT Marconi may be able to energise some interesting discussions with the regulator.

Only 95 years left to complete the 21C project. Way to go BT.

Today I'm a poor Marconi shareholder but my money is on Parton pulling Marconi around again.
altounji
altounji
12/5/2012 | 3:17:02 AM
re: Marconi in Turmoil
I agree, it is a very strange deceiosn by BT, they lost Marconi's Experieince, Loyalty, Dedication, and Understanding BT's more than any one else, and they did it in the worst possible way to Marconi. This is the tahnk you Marconi gets for serving BT for many years, something new commers will watch fo closely
OptoScot
OptoScot
12/5/2012 | 3:17:00 AM
re: Marconi in Turmoil
It will be highly political as well.. I foresee a Dept of Trade and Industry enquiry into this. I also think BT have just completely blown the goodwill they had built up with UK customers.
djrod
djrod
12/5/2012 | 3:16:59 AM
re: Marconi in Turmoil
Isn-t this what we see all the time nowadays?

Experience, knowledge, years of relationship being put away for pricing?

This is what happens when bankers are in control. Engineering does not prevail.

Way to go operators. When the faucet gets dry, everybody sells their shares and go stuff the money somewhere else more profitable.

Best Regards.
cyber_techy
cyber_techy
12/5/2012 | 3:16:58 AM
re: Marconi in Turmoil
Reading so many favourable analyses about Marconi, I almost bought their shares if it hadn't been for being busy at work think their shareholders will be seeing their worth tripling in a week. Proves that hard work (read web surfing) does pay.

-ct
selloff
selloff
12/5/2012 | 3:16:52 AM
re: Marconi in Turmoil
I don't want to disappoint you, you may trust a wrong guy. Maike Paton has let old Marconi shareholder lost 98.5% of money in Marconi. I am one of them, thousands of dollars worth of shares finally worth only $2, I did not say wrong $2. And finally I give it away to the broker.

I did not surprised that BT did not award contract to Marconi, it has gone through years of poor execution and no innovations. Honstly speaking, the bad companys should be gone, our society can have progress.

If you still think BT award contrat to Huawei is just because of low price, then you are still live in your dreams. Huawei's product are way advanced and innovative.

All of us should wake up and work hard to catch up !

gbennett
gbennett
12/5/2012 | 3:16:45 AM
re: Marconi in Turmoil
Comrades,
You have to remember that BT is a commercial business. It doesn't owe Marconi anything. The one big dependency BT has is on System X, the PSTN switches bought from Marconi. These still function as well today as when they were installed, but some of the components are getting hard to source. Most other SPs are suffering from the same issue with their legacy PSTN switch suppliers, which is one of the big drivers towards an open VoIP architecture.

And for the folks who hadn't noticed, there aren't many British accents at the top of BT these days, so national loyalty such as you still find with France Telecom and DT buying from Alcatel and Siemens just doesn't happen.

So let's cover a few of the points raised here:

- 22CN. Marconi squealing to OFCOM. Nope, it won't happen. Marconi is still highly dependent on BT for revenue and although they might be "disappointed" (nice use of understatement by Mike Parton) by BT's decision, they are not going to kill, or even attempt to wound the cash cow. Tomorrow is another day.

- altounji. You make it sound like BT owes Marconi something. Wrong attitude.

- OptoScot. Dept. of trade Enquiry. In your dreams :-) This is the government that let MG/Rover go to the wall three weeks before a General Election! What would the basis of such an enquiry be? Marconi has a good MSAN product, but couldn't meet the commercial terms BT laid down. OK, so you might make a case that the other suppliers are selling at a loss to win business, and Marconi decided not to do this. But that's Marconi's choice, and it's not like it's the first time something like this has happened.

- djrod. Years of relationship. Well, in the movies loyalty can count for something, but not in business. The equipment in the access portion of the 21CN is brand new (at least to BT). There's no track record or supplier history there. As you say, bankers (or at least bean counters) are calling the shots in this case. In some ways I have to sympathise with their position. BT Wholesale (the owner of the 21CN) is seeing increasing revenues from "New Age" services (over -1B in the latest quarterly report, and representing 25% of group revenue), but you can bet that the margins from these new services suck compared to legacy services. Somehow BT has to get the cost out of IP-based services so they can start making profits from them as PSTN minutes begin to decline (2% last year for BT), and private lines services are cannibalised by IP and Layer 2 VPNs.

- cyber_techy. The favourable Marconi analyses. I'm with you there comrade. I was tempted to buy some myself. Luckily procrastination kicked in :-) I'm sure you read the LR article from April 27th...

http://www.lightreading.com/do...

...IMHO this was an incredibly irresponsible statement for DKW analysts to make. Goodness knows where they got their information, but it was about as wrong as it gets. The Marconi stock price undoubtedly rose on the back of these remarks, and if there is going to be some kind of official enquiry I would say that this would be the focus. I hope none of the DKW guys (or their relatives or friends) turn out to have shorted Marconi stock last week! We don't have anything as proactive or effective as the SEC here in the UK, but there are some laws that cover this area, and occasionally they get dusted off and used.

- selloff. I think you're right on the money with your comments. Remember though that if Mike Parton hadn't done the debt refinancing, there wouldn't be a Marconi today. Having said that, over the past 20 years GEC, and then Marconi, engineered its products for BT, and BT alone. Other customer requirements were "deprioritised". If the BT products could be used by other SPs around the ETSI world (they were never engineered for N.America) then that was a happy accident. So Marconi engineered itself into a massive dependence on a single customer, and when that customer has a radical re-think of its network architecture, any commercial history is irrelevant. It's about price (number one), and functionality. It's tempting to dismiss Huawei as a cut-price import, but as we've seen the reality is that these are highly functional, and extremely inexpensive products that basically do the job.

Cheers,
Geoff
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