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Growth focus led to Nortel's turmoil

None of the big networking companies have had a good run during the past few years. The Internet bubble burst. Internet service providers folded. Telecom companies stopped buying equipment. Enterprises went into survival mode and slashed budgets.

But some were hit worse than others, and among the worst hit was Nortel Networks Ltd. In a recent report, Mark Fabbi, a vice president at Stamford, Conn.-based research firm Gartner Inc., argues that Brampton, Ontario-based Nortel's tendency to focus on growth areas at the expense of other markets led to its ill fortunes. But now, with a renewed focus on the enterprise, Nortel has a chance to come back.

Where did Nortel go wrong?
I think of Nortel like a horse with blinders on. It only saw one market and overcommitted. In the past, Nortel has been fickle. Whatever happens to be driving revenues gets all of the attention, and it forgets it has other viable businesses. For example, it got caught up in the optical market and became a dominant force at the expense of other viable markets. That is one of the reasons its downfall was harder. If it had had a more balanced approach, it would have continued to invest in the enterprise market, which has been much more stable. How would you describe Nortel today?
Right now, it has stabilized. While there is some turmoil in specific business units, the company is through the worst of the turmoil. Like most other telecommunications vendors, Nortel has gone through two or three years of cost cutting and inward focusing. Now the company has to start looking forward again and become more outward facing. And I am starting to see that a little bit. CEO Frank Dunn is beginning to come out and speak at events. The attitude there is starting to change. Has the company learned its lesson?
I'm not convinced. There is a lot of focus on the enterprise market, which is healthier than the service provider market. But I'd like to see proof that the company is not just going to bounce from one market to the next before I give them credit. They have a long pattern of doing that. I think only the future will tell if it has really learned its lesson. What is its role in the market likely to be?
Nortel will remain a player in the enterprise market. The challenge for everyone -- but Cisco -- is [learning] how to maintain market share. Nortel needs to get much more aggressive. There are about seven companies trying to be in the No. 2 spot. Nortel doesn't necessarily need to take on Cisco; it can take on the other companies in that market. If it can emerge with 10% to 15% market share, there is lots of opportunity for Nortel there.

With voice, the company has to get aggressive in going after other vendors' installed base. If all the company does is maintain its own customers, it is going to lose. What should users read into this?
If you are currently a Nortel shop, you should use competitive analysis to your advantage. The market is flat, and vendors are aggressively trying to win deals. There is not a huge difference in quality between vendors, but there is a huge difference in price. I've seen some quotes vary as much as 300%. In a network with 2,000 nodes, some of the price differences can be 100% or more. Nortel products are usually about 20% to 30% less than similar Cisco products. What are Nortel's strengths?
It is still the second biggest data infrastructure vendor, behind Cisco Systems Inc. And it is one of the biggest voice system vendors. It has a very large installed base. If it can learn how to market its products, the company can do better. The enterprise space is all about marketing, and it will have to focus there to do well.

It is also strong in the wireless service provider arena. It's one of the only players dealing in emerging technologies. It has some pretty big potential deals for third-generation wireless systems. Should IT shops be wary of Nortel?
No. I think the biggest risks with Nortel have passed. That was in 1999 and 2000, when all it thought about was the optical market. It needs the enterprise market. It's giving attention to the market and investing in research and development. Its overall finances have stabilized. It still has a sizable debt load, but it now has a positive cash flow. There are more positives than negatives.


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