Sprint deal to give Nortel much-needed confidence

Despite the financial pummelling Nortel Networks has endured throughout 2001, the company managed to pull itself off the ropes somewhat earlier this month by concluding a hefty US$1.1-billion contract with Sprint Corp. It’s a deal that analysts say should go a long way to reassuring customers and employees that the Brampton, Ont. manufacturer isn’t going down for the count.

The deal is with Sprint’s local phone unit, a pact that Nortel says is proof-positive of its strong efforts and focus in three key areas.

“We have taken strong action to ensure that we could adjust the company to meet the challenges of the industry,” said Dan Mangelsdorf, vice-president of carrier voice over IP (VoIP) marketing in Raleigh, N.C. “Where we have focused the company is around three areas: the wireless arena, long-haul optical and metro.”

Mangelsdorf explained that within the metro piece of the Nortel puzzle is a strong focus on its metro optical portfolio, intelligent Internet, VoIP and its enterprise portfolio.

“The reason we brought all of those together is because they are so synergistic to allow service providers to build very cost-effective, reliable metropolitan area networks,” he said. “The Sprint deal is a good proof point that we have invested in the right areas. Voice over IP is going to be a high-growth market going forward. Sprint and other carriers around the world see that with VoIP, what they can do is get sustainable cost reductions in offering voice services.”

Within the contract, Nortel is set to provide its VoIP product line, including switches and gateways, to extend packet technology from Sprint’s main network onto individual lines. According to Sprint, the company plans to transform its network to a packet-based network over the next eight years.

Mark Quigley, market research director for Kanata, Ont.-based the Yankee Group in Canada, said the deal is “very significant” for a number of reasons.

“The money is nice. US$1.1 billion is not insignificant in scope. I think more importantly than that, when you see a deal of this magnitude with an old, established player in the market, it says something about the company. I think it tells their existing customer base, as well as their employee base, that Nortel is not going to disappear. It is going to be around. Despite all the problems they have had, it continues to be business as usual.”

Quigley noted that the timing of the deal couldn’t have been better. He said that this is a strong message to the investment community that Nortel still has the key relationships in place and that it is going to continue to sell products and continue to do what the company has been doing for the past 30 years.

Although the deal with Sprint promises to boost confidence in Nortel, evidence of the company’s troubles remain. Last month Nortel announced plans to hold a series of auctions to get rid of thousands of pieces of manufacturing equipment originally designed for its diminishing fibre-optics business. Nortel denied that the auctions may forewarn of possible plant closures.

Quigley said that sell-offs of this kind happen more frequently than people realize.

“The fact that [the auctions] are happening now in the wake of what has been going on in the telecom world, it gets more attention,” he said. “Once we saw the financial markets begin to take a dive, those companies who were investing money no longer had the money to invest. The 360Networks of the world had to very quickly stop network deployment because they didn’t have the cash any longer. That had a dramatic effect on the kind of demand Nortel actually had to deal with, as opposed to the demand they thought they had to deal with.”