Alcatel-Lucent’s Strategy-versus-Tactic Dilemma

Alcatel-Lucent released its quarterly numbers before the bell this morning, and their results illustrate the complexity of the business of networking these days.  Do we look at things tactically, as current financial markets do?  If we say “No!” to that, then can we agree on what a strategic look would offer us?  Let’s see.

Tactically speaking, what Alcatel-Lucent’s numbers showed was a company whose IP business did well while other sectors largely languished.  IP routing was up 15% in constant currency, IP transport (meaning largely optics) was up by 3%.  Given that many of Alcatel-Lucent’s rivals were seeing negative growth in these same areas, they didn’t do badly here.

Elsewhere things weren’t as bright.  Revenues in IP Platforms, the service and operations layer, were off 15%.  Access was off by 11% overall, and that includes wireless.  Revenues were down overall, and while the quarter was judged as good by the Street it’s because cost-cutting helped profit more than lower revenue hurt it.

The overall picture here is that Alcatel-Lucent is in fact delivering on its transformation, and I believe that’s true.  It’s also marching to the future one quarter at a time, and so it’s fair to ask whether the transformation is taking them to a future where numbers can continue to be positive.  That’s a much harder question to answer because it demands we look at the model of networking not today but perhaps out in 2020.

It is very clear that we will need bits in the future, so it’s clear that IP transport is not going away.  In fact, Alcatel-Lucent and the whole sector are delivering more bits every year.  They’re just not delivering a lot more bucks.  Optical transport doesn’t connect directly to service revenues, feature differentiation is difficult to sustain, and competitive price pressure can only grow.  IP routing is a smaller business for Alcatel-Lucent today than IP transport, so in order for the revenue numbers to turn around, IP routing has to grow significantly over that five-year period or Alcatel-Lucent has to find another growth area.

Where have we heard network operators telling us that their plan is to build more network routing?  Every major initiative operators have undertaken in network modernization has been directed at doing more with optics and less with IP.  IP is the layer where content traffic growth, regulatory changes, and complexity increases have created the biggest threats to return on infrastructure.  Can Alcatel-Lucent deliver radical new revenues from that space?  Not without something to push things along a different path.

That path would have to be buried somewhere in what the company classifies as IP Platforms.  The challenge IP has is that Internet is not highly profitable today, is getting less profitable every year, and probably can’t reverse that trend any time soon.  And the Internet is where most IP equipment goes.  Operators, to invest more in IP rather than continue to try to invest less, would have to earn more on their investment, to turn around the converging revenue/cost-per-bit curves we’ve all seen.

I’ve said in earlier blogs that I believe the future of the network will be an agile opto-electric substrate at the bottom, the cloud at the top, and virtualized L2/L3 in the middle, tied to more agile optics below and hosted in the cloud above.  That model might well end up spending more on L2/L3, but not on routers as boxes.  It would spending more on virtual routers, virtual functions, and servers to host them on.  Alcatel-Lucent does not make servers, and that’s the company’s big strategic problem.  They have to face off in the new age of IP beyond 2020 with network competitors like Cisco who have servers and can win something through the transformation to hosted services.  They also have to face off against IT vendors who present hosting options and even virtual routers/functions and don’t even bother with network equipment.  That means that they have to do really, really, well in SDN and NFV and the cloud but do it without having the automatic gains that being able to sell the servers would generate.  I commented in my analysis of how various classes of vendors would do in NGN that the network equipment types would have a challenge because of the natural loss they face if money shifts from funding physical network devices to hosting virtual ones.  Alcatel-Lucent faces that risk.

Which is why I find their performance in IP platforms troubling.  This is where the company needed double-digit growth, massive evidence that they were gaining traction in the service-software part of infrastructure where new revenues could be created, and from which symbiotic tendrils could be extended to pull through equipment.  So far they don’t have the financial signals to validate they’re getting traction there.

CloudBand is Alcatel-Lucent’s biggest hope, operations is next.  That’s because first and foremost we’re building revenues from future services by hosting stuff in the cloud, and second because what we’re not hosting there for revenue’s sake we’re operating from there to manage costs.  SDN and NFV are important because they represent technology and standards trends that define these hosting-to-service relationships and also frame the operations challenges that all future services will have to meet.

In the cloud/CloudBand area, Alcatel-Lucent has what I believe to be a strong product set and good capabilities, but their ability to describe what they have is extraordinarily weak.  Of the three vendors who I rate as likely being able to drive NFV to deployment, they are the only one for whom I have to stress the word “likely” because I just can’t get the details needed to offer an unqualified response.  And hey, Alcatel-Lucent, if you don’t sell servers you have to be able to present the cloud in some kind of awe-inspiring software package or you have little chance of being a player.

On the operations side, Alcatel-Lucent doesn’t match rivals Ericsson or Huawei in terms of OSS/BSS tools and capabilities.  They may have plans and capabilities to link the cloud layer to operations in a good or even compelling way, but those plans and capabilities are among the things I don’t have details on.

Could it be that Alcatel-Lucent is pushing on IP Routing as a segment because it’s where they have growth today, and holding back in areas like SDN and virtual routing that could be seen as a threat to their IP routers?  If that’s the case then they are betting that routers will carry the company in the future, and I have no doubt that cannot happen.

From the time when Alcatel and Lucent became Alcatel-Lucent, I’ve groused over their insipid positioning and weak marketing.  I’m still grousing, and I think it’s past time when the company deals with that problem.  People facing a major transformation of revenue and technology, as operators are everywhere, want to follow what they perceive a leader.  For Alcatel-Lucent, the time to qualify themselves for that role is running short.  Routing can’t sustain them forever.