Analysts divided on what Nortel should do with CDMA business

Many question the path Nortel Networks Corp. is taking to reinvent itself, and nowhere is it more present than on what the Toronto-based telecommunications equipment maker should do in the wireless arena. While it is clear the industry is preparing for the arrival of fourth-generation networks, two analysts are divided on what Nortel should do with its legacy CDMA business. "They need focus and investment," Ronald Gruia, principal analyst for emerging telecom at Frost & Sullivan, tells Report on Wireless. "And one thing that could potentially be a good move would be to cash out of the wireless business." The reasoning is that Nortel's CDMA business is still extremely profitable, yet overly focussed on the US market and with questionable long-term appeal. The sale of this business could provide cash to leverage acquisitions for 4G deployments. "4G Long Term Evolution (LTE) deployments don't need CDMA," says Gruia, "and it's clear that this is where wireless is going." Mark Tauschek, senior research analyst with London ON-based Info-Tech Research Group, isn't so sure about Nortel getting out of the CDMA game. He is hesitant to recommend a divestiture of the CDMA business. "Nortel is fully aware that CDMA is going away, but they have 500 wireless carrier customers, and they are also involved in LTE," says Tauschek Although the company isn't on the LTE standards committee, a few weeks ago at CTIA Wireless 2008 Nortel and LG Electronics presented the world's first demonstration of LTE over the advanced wireless services (AWS) spectrum. About 18 months ago, Nortel sold its UMTS access business to Alcatel for US$320 million. Announced in September 2006, the two companies reached a definitive sale agreement in December. While it's not yet clear what Nortel is going to do with its profitable CDMA operations, and despite it's involvement in the evolution of LTE from concept to reality, the company isn't pigeon-holed in wireless. In terms of global opportunity, WiMAX might represent significant upside and provide one of the more interesting windows of opportunity for Nortel. "The WiMAX Forum will test and approve five GHz unlicensed WiMAX spectrum," says Tauschek, "That'll come. Sprint is waffling back and forth, but there are a lot of implementations. India is going to blanket the whole country, and recent tests have shown transmissions over 50 kilometres through scattered foliage." It's not like Nortel is standing still. The company is moving forward on the enterprise and carrier network side. In the past month Nortel has announced a unified communications solution - the Software Communications System (SCS) 500 - for Dell and IBM platforms, as well as an innovative migration path to 40 Gb/s off of existing 10 Gb/s networks. This latter technology, which is expected to apply to 100 Gb/s migrations as well, is based on applying radio frequency encoding techniques to optical networks, and should be a boon to carriers. Despite these announcements, however, Nortel is getting flack from all sides, with some pundits even claiming the company is spending too much on research and development. Yet Nortel, which spends 15% of revenue, or $1.7 billion, on research and development, has to compete with Cisco which, though spending only 12% on R&D, can invest over $4 billion given that its revenue is now topping $35 billion. In fact, Nortel's proprietary technology for the migration to 40 Gb/s is a direct product of this research, and may represent a shot in the arm to optical sales, which are presently only growing at 5%. "We were able to leverage three layers of expertise," says Helen Xenos, metro Ethernet marketing manager for Nortel. "We have optical propagation experts, wireless transmission experts, as well as our component design team." This technology, which is set for a global roll-out, was developed in Ottawa, though there are no announced Canadian customers as of yet. "It is compelling technology. The UC announcement is also positive, but these efforts get little interest among investors," says Gruia, adding that real value will be seen in a turnaround in Nortel's wireline and enterprise businesses, given that wireless has the lowest valuation compared to its industry peers. Tauschek believes Nortel CEO Mike Zafirovski is on the right track - he just doesn't have a lot of time. "Since Zafirovski took over in 2005 he has had the right idea: Nortel can't be all things to all people. They need to focus on what they are good at, and to some extent they have tried to do this," he says. To illustrate the complexity of the challenges Nortel faces, Tauschek sees the announcement of the migration path to 40 Gb/s off of10 Gb/s networks as "almost table stakes", given that it is almost entirely a data centre play. It's not all doom and gloom for the telecom equipment maker though. Like Gruia, Tauschek is optimistic about the carrier and enterprise space for Nortel, as well as the telephony space in general and that fact that Nortel will start selling its own wireless LAN gear.

Analysts divided on what Nortel should do with CDMA business

News | April 21, 2008

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