Nortel: Why Cisco should be worried

Nortel president and CEO talks business

It's been a little more than a year since Mike Zafirovski left Motorola to take the reins at Nortel. In that time he has remade top management, raised the profile of Nortel's enterprise business, focused product development, slashed costs, instituted quality and ethics principles, and established sales and profitability targets. Zafirovski shared his thoughts with Jim Duffy on how things have gone and what's next.

Cisco says it is more focused on emerging technologies and market transitions than its rivals are. Why should Cisco worry about Nortel?

Cisco is a great company; I have lots of respect for them. Most people would say they are a very powerful sales and marketing machine, not necessarily an innovator. [But Nortel] is a very passionate company that really wants to make a difference, to be a great alternative. A company that has led in most communications, including the evolutions on IP. We are very committed to lead again and we believe we are bringing our innovation back to a core competency [with] smarter commercialization of that technology. And most important, a company that's going to make business simple and more flexible than any other company out there.

Your plans to reduce R&D spending to 15 percent from 17 percent of revenue means your total annual R&D spend will equal that of Cisco just in the service provider market. How do you compete when you're being outspent by that much?

We are very committed to being really relevant in all of the places where we participate. We are a strong No. 2 in [Code Division Multiple Access], for example. No. 2 in [enterprise] VOIP, No. 2 in Ethernet switching; No. 1 in carrier VOIP [and] in Metro Ethernet; No. 1 in packet switching and No. 2 in optical. One of the reasons we decided to exit [Universal Mobile Telecommunications System] is just for that reason: four or five point market share, maybe seven. We were so insignificant. The challenge for us is spending well. We are not underspending relative to revenues.

Some analysts view Nortel's absence in the current rounds of consolidation to be a detriment. Is consolidation necessary for Nortel's long-term survival?

We are in favor of consolidation. Fewer [carrier] customers presents some pricing advantages. Do we plan to grow inorganically? Yes, we bought Tasman Networks [for enterprise routing]. We bought [government integrator] PEC. We have the joint venture with LG [Electronics].

The Lucent and Alcatel combination is complementary [to both companies]. Lucent is big in CDMA, Alcatel is not, for example. Would bulking up or complementing some of our portfolio at some time in the future be beneficial? The short answer is: of course. We'll keep our eyes on it very much.

Do you have any specific goals or priorities for each line of business - Mobile, Metro Ethernet, Enterprise and Global Services - going into 2007?

We just spent two pretty long days on budgets. It's pretty exciting to think what we will be able to do with the enterprise side. And to take full advantage of the collaboration with Microsoft [on unified communications]. Also, we will be working very closely with companies like IBM to start introducing the concept of 'Nortel Inside.' [Nortel declined to elaborate on this campaign, which it plans to detail next year. Nortel and IBM already collaborate on development of IP Multimedia Systems applications using servers from both companies, plus IBM software.] Also we are quite bullish on what's going to happen with WiMAX.

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