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Alcatel-Lucent Builds Future Around IP

Ray Le Maistre
6/19/2013
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Michel Combes, the recently appointed CEO of Alcatel-Lucent, introduced his "Shift Plan" early Wednesday morning, detailing the strategy that he hopes will transform the company from a general telecom vendor into an IP and "ultra-broadband access" networking specialist.

The plan involves a focus on growth opportunities, a re-evaluation of the product portfolio, cost reductions, changes at the senior management team level … all the things one would expect from any new CEO at a struggling major player.

Combes, though, stressed that this is not "just another plan."

And he made it clear that the success or failure of the plan's implementation is entirely in the hands of the Alcatel-Lucent staff and noted that this has always been the case. "I could try to blame the world for our difficulties," he noted, citing regulators, customer spending strategies and macro economics as some of the factors that could be blamed for impacting AlcaLu's business. "But the truth is that we have all the opportunities in our hands. We have been slow to transform, we have missed product introductions, such as 10Gbit/s and 3G," and the company has tried to operate in too many markets and be everything to everyone.

The plan is extensive -- check out Alcatel-Lucent Unveils Shift Plan for the official news release -- but some of the key details that will interest Alcatel-Lucent staff, customers, partners and rivals are yet to be detailed, most notably details of the "Kill List" (the parts of the company up for sale) and the number of jobs that will be cut as part of the new restructuring process.

Overall, investors are happy with what they are hearing in terms of the plans for cost cutting and a focus on the areas where AlcaLu might actually deliver profitable growth, as the company's share price increased by almost 6 percent to €1.50 in morning trading on the Paris exchange.

So what are the highlights of the Shift Plan? Here's the breakdown in terms of technology, finances and people.

The product portfolio
The focus is on "IP Networking and Ultra-Broadband Access (mobile and fixed)," Combes announced, with 85 percent of R&D investments targeted towards those parts of the portfolio by 2015.

But this focus is actually quite broad, as IP Networking encompasses not only the products and developments coming from the vendor's IP Division, but also optical transport, IMS (IP Multimedia Subsystem) platforms (for VoLTE, for example), cloud enablement systems such as CloudBand and associated OSS and BSS assets, including the Motive customer experience solution, as well as consulting and integration services. (See AlcaLu Unveils Its Carrier Cloud Play.)

Combes noted that there is a real opportunity for AlcaLu to develop differentiated competencies around the integration of IP and IT technologies to support the cloud networking strategies not only of telcos and cable operators but also of the Web services giants such as Google and Amazon and large enterprises that will increasingly require carrier-grade IP networks. "Everyone should compete based on their DNA," he noted, referencing the importance of the acquisition of TiMetra in 2003 that brought IP routing, and key industry mover and shaker Basil Alwan, into the company. (See Alcatel & TiMetra Seal the Deal for a bit of history…)

Also worth noting here is that the optical focus not only includes WDM and coherent 100Gbit/s transport platforms but also the vendor's submarine networks business, which had been sidelined in recent months as a non-strategic asset.

It's this IP Networking portfolio that Combes is relying on for revenues growth and profitability.

It's also the part of the business where the CEO will encourage additional "in-house startups" following the example of CloudBand, which is being developed as the Network Functions Virtualization (NFV) proposition, and Nuage Networks, which has been developing software-defined networking (SDN) capabilities within the IP division and has even been referred to by senior executives as TiMetra Mark II. (See Alcatel-Lucent Has a Top-Secret SDN Startup!, Alcatel-Lucent Preps 'TiMetra Mark II', Alcatel-Lucent Spins Up Its SDN and Alcatel-Lucent CTO States the Case for NFV.)

The Ultra-Broadband Access portfolio, meanwhile, is expected to generate cashflow but not necessarily deliver increasing sales. It includes fixed broadband -- PON and vectoring products, with a focus on network assets and away from CPE (customer premises equipment) products such as ONTs for fiber access broadband end users -- and 4G mobile network products, particularly small cells where AlcaLu has been developing its lightRadio proposition. Again this comes with associated professional services but 2G and 3G mobile developments are now regarded as legacy and not worthy of further investment.

Combes clearly sees that his company has some real strength in some areas, especially around the IP routing developments, and can be competitive in certain markets with other parts of the portfolio, such as broadband. For example, Combes sees the U.S., France and China as key target markets for its FDD and TDD LTE network overlay proposition, with "selective opportunities" providing additional potential traction. And while AlcaLu is pretty much giving up on 3G and focusing on the deployment of flat, all-IP 4G networks with small cells dominating the radio access network, others in the mobile infrastructure space believe there's quite a long tail in advanced 3G technologies such as dual-carrier HSPA+.

So what will be sold or wound down? The CEO doesn't want to see any more investment in what he calls the legacy technology areas of PSTN, SDH/Sonet and 2G/3G mobile and believes there are pockets of developments that are no longer strategic -- for example, Combes is looking to sell the company's mobile commerce and "applications enablement" assets. The Enterprise division is also surplus to requirements but that has proven hard to sell during the past few years.

But Combes also noted that disposals could come from any part of the company, including the IP and broadband portfolios. "I won't be providing a list of assets to be sold … I wish to retain flexibility." That'll settle the troops…

The finances
By 2015, Combes plans to cut costs by €1 billion (US$1.34 billion), raise €1 billion from asset sales during the same timeframe and cut the company's debt pile by €2 billion ($2.68 billion).

He expects the IP Networking business to achieve annual sales of more than €7 billion ($9.4 billion) and an operating margin of more than 12.5 percent in 2015, up from sales of €6.1 billion ($8.2 billion) and an operating margin of 2.4 percent in 2012.

Sales targets are not specified for the rest of the company, but Combes plans to be generating operating profits of more than €250 million ($335 million) from the non-IP Networking assets in 2015, compared with an operating loss of €115 million ($154 million) in 2012.

The cost-cutting will be achieved by numerous measures (mostly around operational efficiencies) but will also include job cuts (see below).

None of this comes cheap. Combes says the Shift Plan will cost €1.23 billion ($1.65 billion) to implement during the 2014-2017 timeframe.

The people
Combes declined to provide any details about job cuts today, saying that his first conversations need to be with the unions. So fear and uncertainty within AlcaLu's four walls are the order of the day for the time being.

One person who is definitely leaving is CFO Paul Tufano, who will be replaced once the new plan is underway.

The CEO's main lieutenants are:

  • Basil Alwan, head of IP and transport
  • Andrew McDonald, head of IP platforms
  • Dave Geary, head of mobile/wireless
  • Federico Guillén, head of fixed products
  • Philippe Keryer, head of strategy and innovation
  • Robert Vrij, head of sales
  • Philippe Guillemot, head of operations and the newcomer to the top team
    (he joins on July 1)

Combes says this is not just another plan. It looks like he has two-and-a-half years to prove it.

— Ray Le Maistre, Editor-in-Chief, Light Reading

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Ray Le Maistre
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Ray Le Maistre,
User Rank: Light Sabre
6/21/2013 | 10:21:00 AM
re: Alcatel-Lucent Builds Future Around IP
And just to clarify, my reference to a focus 'away' from CPE was not intended to suggest that Alcatel-Lucent is abandoning the ONT market, just that the emphasis is shifting more to the network gear, the OLT. AS ALU specifies in its Shift Plan slides -- "In Fixed, product mix improvement driven by lower exposure to ONT and better geographical mix."
Rob
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Rob,
User Rank: Light Beer
6/21/2013 | 12:57:34 AM
re: Alcatel-Lucent Builds Future Around IP
What an idea. Uh,didn't we say we were going to focus on IP back when I was still there around the turn of the century? I guess it's just taken a while to get the message through.
wendyz
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wendyz,
User Rank: Lightning
6/20/2013 | 7:31:30 PM
re: Alcatel-Lucent Builds Future Around IP
Just wanted to provide a bit of clarification from Alcatel-Lucent on the reference to ONTs specifically. We are STILL committed to ONT development GĒō but we are going to be more selective in terms of addressing markets that are driven only by costs and are willing to accept lower quality and less featured boxes.
Ray Le Maistre
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Ray Le Maistre,
User Rank: Light Sabre
6/20/2013 | 3:33:46 PM
re: Alcatel-Lucent Builds Future Around IP
I think there's a limit to what ALU can hope to compete with in the cable space, which is already awash with video systems but could do with some fresh competition in the IP systems arena.
I think there's little doubt the Velocix capabilities have survived but the IPTV platforms (both ALU and Lucent had their own) got over-run by MSFT Mediaroom...
^ip4g^
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^ip4g^,
User Rank: Lightning
6/20/2013 | 7:43:45 AM
re: Alcatel-Lucent Builds Future Around IP
btw .. did not see or hear any talks about the Video business units within AlcaLu.... They were quite strong a Video SI usin MR (which is now with Ericsson though).... and they were indeed running a parallel soluion on Multi Screen using TP... and also some legacy video solutions of AlcaLu which would be killed by now .. and then of course they had the Velocix CDN.... The CDN would for sure be integral to the IP router products .....
What is interesting is that Michel sees Cable industry as a new ground for AlcaLu, but for their Router business and not for the Video middleware and VSI business.. so probably it is killed in their transition from a Generalist to being the specialist ,,,
^ip4g^
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^ip4g^,
User Rank: Lightning
6/20/2013 | 7:33:23 AM
re: Alcatel-Lucent Builds Future Around IP
no doubt that IP, Optics and Wireline Access are 3 strong portfolio of AlcaLu
^ip4g^
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^ip4g^,
User Rank: Lightning
6/20/2013 | 7:32:51 AM
re: Alcatel-Lucent Builds Future Around IP
but then he takes another 3 years !? 3 years looks like a common timeline for a turnaround (if it indeed happens)

This seems to be in line with Ben had indeed been doing .. So Networks & Platforms which was there earlier is nor 4 business units and Kreyer moving out of BU to a strategy role. So just some re-alignment as there seems to be no major sell of business line.
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