By Wojtek Dabrowski
Soaring demand for games, video and music will stretch the Internet to
its limits, Canada's Nortel Networks Corp. says, and it expects
service providers will make big investments in its technology to avoid
But the telecom equipment giant, still struggling to turn its fortunes
round after the tech bubble burst, is treading carefully as it
prepares for what it sees as a looming buildout of capacity by
Massive overbuild of Internet bandwidth capacity helped lead to the
meltdown six years ago, and the company says it doesn't want things to
go wrong again.
"It's driven by caution, because none of us want to repeat the
mistakes of 1999 to 2001," Nortel's chief technology officer, John
Roese, told Reuters in a recent interview.
The mistakes he refers to saw billions of dollars in Nortel losses, as
well as tens of thousands of job cuts and a precipitous plunge in its
stock price. Nortel stock peaked at more than C$120 a share in 2000.
They are worth about C$2.50 a share today.
But perhaps ironically, Roese also believes the capacity bubble helped
service providers cope with the surge in demand for bandwidth that
came with the advent of online video Web sites like YouTube.com.
"The only reason YouTube didn't destroy the Internet is because there
was a bit of a bubble in terms of excess capacity out there," Roese
said. "But, boy, don't take that for granted."
Nortel believes its Metro Ethernet unit, which uses technology similar
to the one used to connect local, short-distance networks to build
Internet infrastructure, will soon draw carriers that need more
capacity and let them stay safely ahead of the demand curve.
This curve has been growing steeper as users demand more bandwidth for
online video, music, games and, increasingly, television.
"That's our underlying fear," he said. "If the industry cannot keep up
with the demand because we kind of take it for granted after the
buildout in the 2000 timeframe, if we ever hit a wall, the impact on
global economies, the impact on innovation is just profound."
He said market research into trends like Internet video had led the
Toronto-based Nortel to believe the surge in demand for bandwidth
capacity is real.
"Over the last six months we've absolutely convinced ourselves -- and
we think we have a lot of empirical data to back it up -- that this is
not a short-term trend," he said.
Tim Daubenspeck, who covers Nortel for Pacific Crest Securities,
thinks the company has got the right idea.
"I fully believe in the video thesis, both kind of over-the-top video,
browser-based video, as well as the coming Internet protocol
television trend ... as telcos push video to the home," Daubenspeck
"If you look at the bandwidth demand that video drives, it's an order
of magnitude more than what we're used to."
LOW-COST COMPETITORS AWAIT
Nortel faces competition, not least from low-cost Asian competitors
like Huawei Technologies Co. Ltd.. But it insists that its strength
lies in its people and their ability to plan, deploy and operate
networks and says Huawei cannot provide that.
Huawei declined to comment.
Daubenspeck agrees that there is a shift away from price as the
ultimate factor determining where a telecom company puts its network
"We've seen Huawei make inroads into the European market using cost or
price as a competitive advantage, but I think functionality and
performance is going to be increasingly important," he said.
"So just pure raw price is not going to be a differentiator like it was
a year or two ago."
He said carriers now favor vendors who can deliver a complete network
"In periods of dramatic technology change, which is what's going on,
being driven by things like video and the requirement to reduce costs.
You tend to go back to the guys who are more end-to-end, more
solutions-focused, as opposed to just a cheap-point product company."
Copyright 2006 Reuters Limited.
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