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Nortel weakened by failure of Huawei venture

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Comment Four months after announcing an important joint venture with China's Huawei, Nortel quietly announced in an SEC filing that the plan had been cancelled.

This makes it more likely than ever that the struggling Canadian company will look for a partner – and perhaps an acquirer – to shore up its wireless infrastructure business, since the end of the venture looks like a major blow to its chances of getting back into the converged broadband access market.

Although Huawei loses what could have been a valuable entry point to the US market, which is proving hard for it to storm, the failure of the plan is more negative for Nortel, which is in danger of missing the boat in several key growth sectors, including multi-network broadband access and IPTV.

Nortel reported a wider first quarter loss, while still promising accelerated growth for the rest of the year, and at least is finally up to date with its accounting filings after years of scandals and restatements. It posted a loss of $167m, or four cents a share, compared with a loss of $104m, or two cents a share, a year earlier. Revenue slipped to $2.38bn from $2.39bn. Analysts were disappointed, having expected a loss of one cent on revenue of $2.54bn.

The main factor was excessive costs, said the company, and new CEO Mike Zafirovski has undertaken a complete review of the company's operations and is now implementing a series of changes, including drastic cost cutting and identification of key markets in which to expand.

One of these seemed to be broadband access, a $9bn sector that Nortel virtually abandoned a few years ago – a move it is widely thought soon to have regretted - and was looking to re-enter by offering Huawei's products.

This is a sector where Huawei flourishes, and it was one of the DSL and multi-service access suppliers named for BT’s $19bn 21st Century Network project. The joint venture, majority owned by Nortel and based in Ottawa, Canada, was to have developed "ultra broadband access solutions" for the global service provider market, with the aim of kickstarting Nortel's broadband business again, and helping Huawei in its ambitions to gain significant presence in the Americas and other western markets.

Apart from joint marketing of a converged product range, the key R&D aspect planned to create a next generation multi-service access platform designed specifically to enable carriers to converge their voice, data, video, fixed wireless (such as WiMAX), and, in future, mobile network traffic on a single IP network.

The resulting products would have built on Nortel's voice and optical networking strengths and Huawei's broadband technology and manufacturing efficiencies, and provided a platform for selling other key products such as Nortel's IMS (IP Multimedia Subsystem).

Analysts fear that backing away from access will exclude Nortel from the related IPTV market, where Alcatel-Lucent look set to dominate.

In a research note, analyst Chris Umiastowski of TD Newscrest wrote: "Has the ship sailed already? Our sense is that Mike Z feels that Alcatel and Microsoft will be a powerful force on the IPTV front; so we are definitely left with questions on how Nortel can best participate in this market."

It seems that the venture was announced at an early stage because Nortel hoped to influence some large potential customers who were going through their decision process on access – but which have subsequently picked other suppliers.

If Nortel believes it is too late now to make a major impact on broadband access and IPTV, it will need to rely more heavily on its wireless infrastructure and IMS ranges, and with this market consolidating in the wake of the Alcatel-Lucent merger plan, it seems more probable than ever that the Canadian company will look for its own buyer or joint venture partner.

Rumors persist that Nortel will make an acquisition of its own to boost its wireless operations, especially as Siemens', and possibly Nokia's, infrastructure units could be up for sale. But it is hard to see how Nortel could stretch to such a purchase, and it is more likely that it will be snapped up itself – by Cisco, Ericsson or even Huawei itself.

Copyright © 2006, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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