The Road Ahead For Alcatel-Lucent and the Mobile Industry

In the weeks preceding the 2012 Mobile World Congress, the industry’s annual meeting in Barcelona, Alcatel-Lucent made headlines for a variety of reasons. It announced its first profit since it was formed by the merger of France’s Alcatel and the U.S’s Lucent six years ago. It revealed a plan to license its 29,000 patents, a strategy that could reap the company more than a billion dollars in additional revenue. And news leaked that Sprint Nextel could be the first operator to adopt radically different networking gear developed by Alcatel-Lucent called lightRadio that cuts equipment costs in half, saving space and energy usage.

But the French telecom equipment maker also made the news for other reasons. The company continues to slash jobs and on February 10, the same day it announced positive fourth quarter results, angry union representatives were swarming around the company’s Paris headquarters to protest a company-wide wage freeze, an indication that the market outlook for 2012 is not as rosy as Alcatel-Lucent or the industry as a whole would like. Tensions between operators and so-called over-the-top players show no sign of easing and many operators are delaying upgrades to fourth generation (4G) technology. Against this backdrop, Alcatel-Lucent Chief Ben Verwaayen, a scheduled speaker at the Mobile World Congress, met with Informilo Editor-in-Chief Jennifer L. Schenker to talk about the road ahead.

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Q:  Niklas Zennstrom, the co-founder of Skype, wrote a guest essay in this magazine about over-the-top and traditional players. He acknowledges that the companies providing infrastructure have to make money and says the two sides have to work together. What are your thoughts on this issue?

 

A: Without layer one and two, very little will happen. So the first thing is, when it comes to layer one and two, whether you like it or not, there has to be investment and we need companies to take the risk. It is a kind of a no-brainer that all the rest of the stuff can no longer just rely on the fact that today's network can be expanded and expanded. At a certain point in time it will break. So, we need to have the basic infrastructure, which is a commodity, but  a necessary commodity. The rest is mobility and cloud, and on top of that, innovation can take place in every single part of the value chain. I don't believe any more in the version and the model. There will be multiple models. So I would say differentiation is the name of the game. If you want to delight the customer, allow people to do different things.

 

Q: What kind of business models do you see evolving?

 

A: There's only one thing that works: delight the customer. If the customer has a choice, you have the potential to differentiate pricing and to extract a better margin, because that is the fundamental rule in the market: if I like it, I'm willing to pay for it. Over-the-tops better get used to the fact that network players will also become platform players, since they're going to provide service capabilities that are essential to that environment. Security matters. Privacy matters. Location matters. The ability to manage your devices matters. The ability to be somebody's agent matters. We will see a moving away from simple file transfer, volume-related businesses, into a true service environment.

 

Q: So what is the path forward?

 

A: If I were the one regulating this industry I would say, what is needed is layers one and two — I need to find a model to dig up the street and do the things that are necessary. Some countries are re-nationalizing, like Australia. Some other countries have a kind of national plan. I think we in Europe should get our act together and say ‘we're going to dictate layers one and two.’  Our issue is that we have verticalized the market, with 27 regulators in 27 markets. They all do something different, and then we call it Europe, and on top of that we have a European policy. Fine if you want to do that, be my guest: 2020 (the year Europe expects to meet its goal of providing all households with broadband connections of 30 megabits a second) won't happen. That's a bad thing. Economies are going digital, that's where Europe should be focusing. If you look at it with that perspective, why wouldn't you build the infrastructure that's needed for it? Why wouldn't you give the people the capability to have the tools?

 

Q: But who's going to pay for that?

 

A: The present players will pay for it, if you give them enough of a return.  Digging up the street is digging up the street, you can calculate what it costs: you simply put it in the wholesale price. That's it. And because everybody pays, the whole market pays, and at the end of the day the consumer pays. But everybody pays.

 

Q: Right now it is not obvious how operators will be competitive in areas beyond connectivity.

 

A: If you want a golden bullet, it isn't there. But I tell you there are very entrepreneurial companies. Give them some space.

 

Q: Let’s turn to Alcatel-Lucent. You had a good fourth quarter, and no one else did. How did you manage to do that?

 

A: I think if you step back and look at 2011 for Alcatel-Lucent, it wasn't a dramatically different story than what we said 2011 would be. What was different was that Q3 wasn't as good as we'd hoped, and Q4 was not as bad as people feared. If you then level it out, 2011 was a doubling of profit from 2010. This is a company that's restructuring. We still made only 4% return and that is simply not good enough to make all the necessary investments. So, it's an ongoing story. What I'd like to do is put it in perspective a bit. The financial markets reacted very violently after Q3. And they rallied at the first news of Q4. I would have hoped the markets would take a somewhat longer view.

 

 Q: On the mobile side, not surprisingly, Alcatel-Lucent has done well in the US where Lucent has traditionally been strong but analysts predict it will be much tougher to do well in other regions.

 

A: We're doing extraordinarily well in Latin America. Quarter after quarter we're growing 20-30%; we're doing very well there in full competition with everybody. Everywhere the footprint changes, there is something going on. Because if nothing changes, why change the supplier? So something needs to change: change in technology, change in business environment, change in management focus.  If you look around the world at where things are changing — in China, in the US, in Latin America— we're doing very well. If things don't change that much, we don't do very well.

 

Q: People in the market question whether companies like Alcatel-Lucent and Nokia-Siemens have the scale to compete globally with the Chinese. This has led to rumors in the market that the two companies could merge.

 

A:  That's the beauty of the market. There are always rumors. So what does scale mean? If I look at where we are: on IP, we are number two in the market and growing and taking market share. If I look at optical, we are number one or two. Then there is 4G. Everybody has to go through the painful change from where we were. The industry will take another 12 months to get through that transition. If I look at wireline, we are clearly the number one in the market, but you know what? Who cares? Is this a market where you can make money? Well, you have to look to the next generation of technology, because the previous one, the DSL business, is not a great one to be in. If I look at wireless, I would say in LTE we are clearly among the top two; we have technology that was seriously tested and came through with flying colors, so it's a great base. Our pipeline with lightRadio is the best pipeline in the industry. So we'll see. Where are we today? Probably number four. Is that a good position to be in? No. 

 

Q: And the road ahead?

 

A: I would say we didn't fully accomplish what we said we would do in three years. But we're almost there. And the good news is that there's a pipeline of innovation now in the company that gives me great hope. That said, we have many very unhappy employees…very happy people of course, but also people unhappy because we take action. We change locations, we change technologies, we change the way that we operate, so it is for lots of people a continuous story of adaptation. And that's not easy. And the message I have for people is there is more adaptation to come. Because the essence of this industry is going to change. The last three years in the company was all about building what we call high capacity networks to deal with the explosion that you have today of data and video traffic. That was the market’s task between 2009 and 2012. Now the task revolves around personalization: how to get the mass of people individually served in a digital environment. It's not enough to build capacity and access, now you need to build the ecosystem around them. So it's a platform business now, the idea being that you have software and services that allow me as an individual to decide what I want and not have the service provider decide for me. This transformation will take place in the coming two to three years and we plan to be at the heart of it.

 

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