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Author: DirtyDingus Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5026  
Subject: LONG: Nortel Opticals - A startup only bigger Date: 1/22/2000 5:29 AM
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As many of you know I work for Nortel. As it happens I'm primarily involved with the enterprise data products - in other words the bits where we go head to head with Cisco. But every now and then I also get involved in discussions with other parts of the business and I thought TMFers might be interested in my impressions of the Optical business bits as I have had some recent dealings with them.

To put it bluntly Optical is paying the bills for the rest of us. I'm not saying we are in bad shape exactly but the carrier optical products are what are getting the huge growth and the big margins. Essentially we dominate a few critical highly profitable sectors of the optical market place. Now if you were in a position of dominance and essentially also in a position where not only you cannot quite make enough product quickly enough to satisfy everyone but also your choices about which carrier to deliver to first may mean one gets that critical first-mover advantage you might get complacent. The really good news is that the optical division is still thinking in start-up terms. Various bosses have said that Nortel plans to implement the "Nortel" law of bandwidth - twice the capaicty and half the price every 9 months and the optical division are the ones that have to delievbr on that claim.

It might not be surprising if they were resting on their laurels and planning incremental improvements - but they aren't. Without going into details I will say that they are looking to create those inflection points and/or discontinuities which mean everyone has to rethink prices and strategies. For example part of our discussion was: assume a business plan from a service provider who wants to charge $1/megabyte/month. So If you want a 10mbps ethernet conenction you pay $10 a month for internet access or business-business intranet, if you need 1 gbps between two data centers you pay $1000/month. If you have a business plan like that how much can said provider afford to pay for his equipment and how much of what sort of equipment does he need? and can we provide this today? (answer - maybe) and what do we need to do to make this viable in a year from now?

While I won't say that Nortel will execute perfectly the fact that people can and do look sufficently outside the narrow box approach to think about business plans for stuff that can't be done yet is a great indicator that Nortel will get the majority of things right in the future. What does this mean for other optical players? I think it means this: if you aren't thinking radical change you might as well shut up shop, because your current high margin, high bandwidth box is going to look like overpriced low bandwidth junk in a couple of years. And if you don't have a coherent stratgey you will be relegated to a niche. This may be more dangerous because the niche may be extremely profitable short-term. But long-term your niche will disappear into the tornado. And rememebr we are moving at internet speeds here so long-term means 3 years from now tops. Now for the scary bit - the customer who gets the business plan hint for the right plan from Nortel could put some (other) very large companies at risk if they execute correctly. At present we know who the big boys are: MCI, Qwest, Level3, C&W, Global Crossing etc. But how much of their revenue would be at risk if someone implemented a plan like the one above and went live this time next year? What would the impact of this level of bandwidth availability do to the internet? would web-hosting go out of business? what would this mean for cache-servers? for all the other things that assume end-user bandwidth is limited? and what would such levels of bandwidth availability do to other companies doing business selling equipment for the internet?

Dirty Dingus
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