LUCENT CREEPS TO CONVERGENCE BY COMBINING TWO DIVISIONS

In combining its wireless and wireline divisions last week, Lucent Technologies not only furthered its efforts to streamline operations, it also took a significant step in its evolution from a vendor of products to a vendor of solutions and marked a milestone in the industry's path to convergence.

The announcement itself was unsurprising. Revenue from Lucent's wireline group, Integrated Network Solutions, has been sinking steadily for years, as weak sales of legacy optical and circuit-switching gear contrasted sharply with big-contract windfalls in the next-gen wireless business.

“The INS division has not logged a positive year-over-year sales comparison in this century,” said Jim Kelleher, Argus Research analyst.

But the corporate shuffle also gave Lucent's already-shifting identity a shove. “More and more, Lucent is looking like a wireless and services company,” wrote Steve Levy, Lehman Brothers analyst, in a research note last week.

The wall between wireless and wireline gear may be useless to a vendor that would prefer to offer comprehensive networking solutions, especially to developing nations building new networks with increasingly mixed technologies.

“The bulk of wireless networks includes more and more terrestrial wireline networks,” said Mark Sue, RBC Capital Markets analyst. “The commonality of parts between the two will only increase over time. Furthermore, the business of telecom is becoming that of integration and services.”

On the company's earnings call last week, Lucent CEO Pat Russo portrayed the firm's services focus as one defense against the cutthroat pricing of Chinese equipment vendors, some of which are beginning to add vendor financing to their enticements.

“We'll go into an emerging market and package [an offer] in a services model where we can get a network up and operate it for the customer,” Russo said. “We have a competitive advantage there that some newer entrants don't have.”

Russo also reiterated Lucent's growing interest in servicing other vendors' wares. An increasing portion of the company's service revenue is unrelated to Lucent products, she said. However, Kelleher believes there's a risk in becoming too focused on services at the expense of product innovation. Competitors with their own products can argue that they're uniquely qualified to service that equipment, potentially edging out rivals that have neglected to develop their own product portfolios. “You risk irrelevance if you're not doing both [products and services],” he said.

Lucent's current model doesn't appear dangerous, however; with its services segment still contributing less revenue than the INS segment and vastly less than the mobility segment. And Russo insists that continued broadband deployment will revive demand at some point for optical gear upstream.

Other vendors have similarly reformed their business units. Nortel Networks replaced its product divisions with two customer-centric groups — one for enterprises, one for carriers — last August. Siemens followed suit in September. But Yankee Group program manager Mark Bieberich believes Lucent's strategy isn't for every vendor. Alcatel, for example, would be unwise to combine its product segments since they're not suffering the way INS was, he said. Still, Bieberich agrees that Lucent's direction is one in which the entire industry is headed.

“The convergence of wireless and wireline networks in the long term is inevitable,” he said. “But we're really just at the beginning of that process.”