This week, Alcatel-Lucent’s new CEO Michel Combes announced The Shift Plan, a three-year plan to reposition ALU from a “telecom generalist” to an “industrial specialist” in IP networking and broadband fixed and wireless access. Monsieur Combes, who came from Vodaphone, joined beleaguered ALU in February to replace outgoing CEO Ben Verwaayen. Combes’ shift plan is to prune underperforming lines of business to turn around the company’s declining fortunes. This will free-up R&D spend to invest in better performing IP routing and ‘ultra’ broadband access technologies like 4G mobile and fixed DSL/FTTC.
Such cuts are difficult but need to be done and should placate ALU investors with improved quarterly results, however I can’t help but wonder if ‘double-downing’ on ALU’s cash cows will be enough or if it needs to find greener pastures with rising stars? Other ‘old tech’ companies like Cisco, Juniper, etc. with healthier balance sheets and piles of cash have been investing in diversification. And new entrants like Arista and Oracle are targeting the ‘next generation’ telecom equipment market.
The reason for the shift is ALU’s (and others') customer base is planning major technology "packaging" changes that are moving surprisingly fast. SDN+NFV has become the battle cry of many public network operators, who are marching to the tune of “we won’t be fooled again” regarding vendor lock-in and new revenue sources. I’d wager that in the three years it will take ALU to complete “The Shift Plan,” network operators will have pivoted significant CAPEX spending to open, carrier-class data center equipment, not an area of great strength for ALU. In this new service provider environment, SDN-enabled switching will cap more costly IP routing, and purpose-built network appliances like controllers and gateways will become software instances on virtualized servers in carriers’ Internet data centers. ALU’s and others ‘service routers’ have promised to deliver new revenue sources to NSPs for years, but failed to deliver beyond basic broadband access and MPLS. However with just some added software, a carrier-class data center can start marketing cloud based XaaS offerings. The chickens will come home to roost.
Broadband access, both fixed and mobile, have a longer lifecycle as faster speeds and more connections are a sure thing for the foreseeable future, but that comes in waves and lower cost rivals like Huawei and ZTE will continue to pressure ALU’s margins. ALU spun-out Nuage Networks (see ESG Brief, Alcatel-Lucent Launches Nuage Networks for More Network-agile Data Centers, login required), initially positioned as a SDN+NFV multivendor data center integrator that could represent a ‘rising star’ for ALU, but it will need to find unaddressed niches that OpenDaylight doesn’t resolve, and there is a lot of uncertainty about ODL’s impact, particularly since Big Switch’s exit. But at the end of the day, ALU’s greatest asset has been the goodwill it has established with network operators. “The Shift Plan” will likely improve its balance sheet, but preserve goodwill? Unlikely since its profits will trump its relationships.
On the still distant converging vendor horizon, what other shoes do you think will drop?