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A comeback strategy for Lucent

By Thomas Nolle
Network World, 01/29/01

In 1999, Lucent was the shining star of carrier network equipment, with a market position that seemed beyond the reach of any competitor. Today, Lucent's stock is in the . . . well, whatever, and everyone is wondering whether the company can even survive as an independent firm. Who is the new Lucent CEO? We don't know. What is its overall strategy? We don't know that, either. Like the old song goes, "We don't know nothing." Or do we?

We know to whom Lucent sells most of its gear - regional Bell operating companies. In a time when Wall Street has cut the flow of capital to nonincumbent carriers, and interexchange carriers are struggling to survive, RBOCs have shown profit, revenue and stock growth. In short, Lucent has powerful friends.

We know Lucent has a strong ATM product line, acquired from Ascend (which acquired it from Cascade). Its ATM products are installed in large and profitable data service networks, from AT&T to SBC Communications. Because facility carriers in general, and RBOCs in particular, have a propensity for deploying ATM products, the value of Lucent's ATM assets can only increase over time.

We know that Lucent has a dominant position in the voice market, with its 5ESS switches. Granted, nobody is buying Class 5s in large numbers, mainly because Class 5 sales are related to growth in the number of households - a figure that isn't growing very fast. But if there are any successors to Class 5 switches, the company that sold the original ones surely has an inside track. And remember, voice services are the revenue engine that funds public networking worldwide by an eight-to-one margin.

We know Lucent is "behind" in optics, too. But what does that mean? Is the guy who's first in a race toward the edge of a cliff ahead or behind? We have no idea what revenue sources might justify a large expansion in optical capacity. We therefore have no reason to believe that the current optical boom is anything more than Wall Street running another pyramid scheme. I believe optics will crash, and that leads to Lucent's big chance.

Lucent's competitors are highly exposed in the optical space. Lucent's "error" there has caused the company to pay a terrible credibility price for what may prove to be one of the smart decisions of 2000. If I'm right and optics is overhyped beyond any possible fulfillment, Lucent will stand tall (even at $20 a share) in a market of New Age, Wall Street-created midgets when the bust happens.

Still, being a tall turtle isn't the same as being an eagle. OK, Lucent, you didn't spend your time splitting lambdas and spewing photons at Bell Labs. What were your eggheads doing instead?

A company can make a negative bet on the optical space, but markets aren't won and customers are not sold on nonproducts. Where is the alternative strategy?

Incumbent carriers aren't as interested in the Internet as a new revenue source as in expanding their proven revenue sources. Would an RBOC with a free rein in the competitive marketplace jump onto a technology that earns no competitor a profit, or try to steal competitors' profitable services? IP routers don't create frame relay, ATM, transparent LAN or any of those other boring services that have given RBOCs a 33% sequential revenue growth in the data space.

What does create them is a product set that Lucent has been selling to these same players all along.

For example, if national frame relay service were sold today, wouldn't the first move of a New Age RBOC with no national service restrictions be to deploy new infrastructure to sell that service?

But that doesn't necessarily mean that IP isn't important for Lucent. Facility carriers sell non-Internet versions of IP VPNs under the name "managed services." For that, Lucent recently purchased an IP service switch player - SpringTide.

On the surface, that's not necessarily a big deal. Nortel Networks did the same thing with Shasta, after all, and Lucent might have been only counterpunching with an old rival. But it's also possible that Lucent will finally tie its SpringTide edge effectively to its Ascend and Nexabit core, and produce (dare we hope) a strategy.

Even big companies can make a fatal mistake, and for Lucent the mistake wouldn't be as much a failure to invest in optics as a failure to show its core buyers a non-optical-dominated vision of the future. Put up, Lucent, or you may get shut up.