It only makes sense that as the service provider market consolidates, so too does the industry supply chain. With service providers focusing on broadband, enterprise customers and mobility, further consolidation is likely. With a smaller number of more powerful buyers of telecom equipment, it’s natural that there will be a smaller number of equipment vendors. Which brings us to Alcatel and Lucent.
It only makes sense that as the service-provider market consolidates, so too does the industry supply chain. With service providers focusing on broadband, enterprise customers and mobility, further consolidation is likely. With a smaller number of more powerful buyers of telecom equipment, it’s natural that there will be a smaller number of equipment vendors. Which brings us to Alcatel and Lucent.
Last month Alcatel and Lucent announced plans to merge and form the world’s leading communication solutions provider. Some highlights: The combined company will have a financial base and revenue of about $25 billion based on calendar 2005 results; the new Alcatel is still smaller than Cisco by some 17%, albeit Cisco’s main revenue comes from the enterprise market; the new Alcatel will be a global convergence leader with one of the largest and most comprehensive wireless, wireline and services portfolios in the industry, and one of the largest global communications R&D capabilities in the world. As for management, Alcatel’s Serge Tchuruk is to be nonexecutive chairman, while Lucent’s Patricia Russo will be the CEO, based in Paris. The companies will have equal board representation.
I’m skeptical this will work. I have not seen a successful merger of equals in our industry. Someone has to take charge, especially in a mixed cultural environment such as the new Alcatel. The result may be similar to Bay Networks, which was the merger of equals, Wellfleet Communications and SynOptics. Bay was never able to gain a footing to compete effectively with Cisco, the sole reason for the merger. Bay’s problems involved distance and cultural issues too, but within the same country. In the end, Nortel acquired Bay.
The new Alcatel will have its revenue nearly split between North America and Europe, with each contributing about 35%, and the remaining 30% coming from Asia, the Caribbean, Latin America, the Middle East and Africa. This and the Bell Labs resource differentiate the new Alcatel from Cisco, Nortel, Siemens, Ericsson and others. But Lucent will now be part of the French socialist state, with larger pension and retirement plans than its American and European competitors. There will be a 10% reduction in the combined workforce of 26,000 over the next three years. Chances are that most of this reduction will come on the U.S. side, as it’s more difficult to fire French employees.
This may be Cisco’s golden opportunity to aggressively take share in the service-provider market. It knows how to take advantage of a competitor when it’s in the fog of reorganization and restructuring. The communications world continues to move toward a converged voice, video and data model on IP, for which Cisco is so well positioned. (In a deeper analysis of the Alcatel-Lucent merger, Scott Bradner, Zeus Kerravala of the Yankee Group and Lippis discuss the pros and cons of the deal.)
Lippis publishes the “Lippis Report” newsletter, a resource for network and IT business decision makers. Get your free subscription at www.lippis.com. He can be reached at nick@lippis.com.
