Nortel lags where Tellabs finds success

It would be hard to find two network players that, over the years, seem more steeped in conservatism than Nortel and Tellabs. Both companies drew their past revenues from the big iron of TDM. But it would be hard to find two companies that, in 2005, diverged more in trajectory. Tellabs is beating industry players such as Cisco and Juniper Networks in stock performance, and Nortel is lagging.

Why is that? Well, three factors seem linked to success in the network-equipment space. They are strategic vision, customer engagement and management credibility. Let's see how Nortel and Tellabs measure up to each.

In strategic vision, Nortel decided to abandon the DSL access market in 2001, reentering it later through an alliance with Calix. This means that in the critical period when common carriers were preparing to deploy consumer broadband, Nortel had no offering at all, and during the deployment had only a partner offering. Tellabs, in contrast, purchased Advanced Fibre Communications, a DSL incumbent, and Vivace Networks, a new-generation packet-edge device. It's leveraged both into DSL access deals with carriers.

Also interesting is Tellabs' active membership in the IPsphere Forum, a group of carriers and equipment vendors working to define how common carriers can deploy IP in ways that preserve profit and ROI. Recent European equipment deals, including ones from France Telecom, BT and Telenor, seem to draw from the membership of IPsphere, which includes giants such as Lucent, Cisco, Juniper and Alcatel. Nortel is not a member.

In customer engagement, Nortel and Tellabs both have relationships with the common carriers, but Tellabs seems more capable of pushing those to the next level to expand outside its TDM incumbency. Its home page features a solution portfolio, a demand-driven family of products that targets the problem set the carrier is likely to identify with. Nortel's home page gives more space to its "This is the way . . ." branding campaign than to any product strategy or buyer need.

The real differences show in management credibility. Nortel has been paralyzed with accounting investigations, management changes and defections, Cisco execs who show up and then leave, Wall Street angst . . . you get the picture. In contrast, Tellabs has not had any accounting issues, it's had fairly stable management, its CEO took the reins last year with minimal drama and Wall Street seems to like it.

The management problem is perhaps the most challenging, because it has created a real loss of momentum for Nortel and demoralized many employees. Breaking the destructive negative cycle will be all the harder for this deterioration of morale, not to mention the loss of key people who just didn't want to take the risk that Nortel might be acquired. At Tellabs, morale is high, losses are minimal, and there is a sense of mission and progress.