by Alan J. Weissberger, aweissberger at sbcglobal dot net

This question was asked to IEEE ComSoc SCV members.

In the current issue of Barrons, Rich Pzena, principal of Pzena Investment Management states:

"The telecommunications industry is in turmoil right now because of the merger of Alcatel and Lucent. Competitors are using it as an excuse to try and gain share. Alcatel-Lucent [ALU] is not going to let them ruin the business. This is a great business. There are only a few suppliers, and not many customers. The customers have big installed bases and tend to continue buying on their chosen platforms. In comes a competitor and says, these guys are merging and you don’t know what is going to happen. I’ll give you my product for free if you switch to my platform, and then I’ll get recurring revenues. A number of those offers are being made, and the incumbent has to match them. You have a price war.

Barrons:  But how long can that last?

It can’t last long term. That’s not prudent. It would just lead to lower earnings and no market-share shifts. In the end the price war will abate and Alcatel-Lucent will be successful in reducing costs as per the merger plan."

All respondents agreed, except one member who stated:

"Alcatel was and is a politically driven company, with people at its helm who went through the same French management school as all their presidents and all CEOs of any of the big French companies. That is now overlaid on top of what used to be an admittedly dysfunctional Lucent, but it sure has not made it any better."

Another member commented that:

"I am seeing similar price war situations in segments of the semiconductor industry for years and also the logical expectation always is "It can’t last long. That’s not prudent" – unfortunately it does (last long) because somehow everybody seems to be able to secure funding for such a loss situation under the assumption "it can’t last much longer – and I can win it", hence it\n lasts. As for ALU, I think they will prevail for mentioned reasons but I have never seen prices come back after and cost reductions by synergies take effect slower so (everybodies) business plans are taking major hits."

Opinion:

This author agrees with the Barrons’ assessment of Telecom in Turmoil. Not only Alcatel-Lucent, but Ericsson, Motorola, and Nortel continue to announce disappointing results. We believe that Chinese telecom equipment manufacturers Huawei and ZTE are putting tremendous pressure on prices and squeezing profit margins for all players. It seems like Cisco is de-emphasizing the traditional service provider market, in favor of routers and telepresence/video conferencing gear.

Tags: telecom, turmoil, Weissberger