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Alcatel-Lucent is a telecommunications equipment vendor, the result of a 2006 merger between Alcatel and Lucent. With 2008 revenues of €16984 ($23640 as of company filings) one of the largest telecommunications vendors in the world, purveying wireless, wireline, convergence, and enterprise communications equipment.^[1] Based in Paris, France, the company sources revenue evenly from North America, Europe and the rest of the world.

Since the merger ALU has performed poorly, posting a 2008 net loss of $7.29 billion and a 2007 net loss of $5.12 billion. In addition, shares of ALU fell 60% in 2007 and a further 70.3% in 2008^[2].

Telecommunication equipment providers depend heavily on a small group of service companies such as Verizon Communications (VZ) and AT&T (T), which provide consumer services such a Internet access, wireless voice and data, and video. This dependence makes Alcatel-Lucent's business cycles somewhat volatile for several reasons:

• A win or loss of key customers may significantly affect their bottom line
• The company relies on the service providers' ability to create compelling products and services for the consumer

On the positive side, Alcatel-Lucent's broad offerings allow the company to sell a suite of products, services and upgrades, effectively locking in service providers for periods of time.

Alcatel-Lucent depends on continuous innovation in order to meet demands for newer, faster telecom products. While the company owns leading 40% market shares of CDMA (wireless) and DSL (Internet access) technologies, both are reaching maturity and may be displaced by newer equipment, which the company may or may not currently offer. The company has made a significant bet on third generation (3G) wireless, which allows high-speed concurrent transmission of voice and data over wireless networks. One potential threat to this technology is the emergence of WiMAX, a 4G technology that could potentially leapfrog 3G as wireless service providers migrate directly to this even faster, newer standard.

Company Overview

Alcatel-Lucent resulted from the 2006 merger of two large telecommunications equipment vendors, Alcatel and Lucent. Alcatel originated as an electricity company in 19th century France and picked up its telecommunications focus in the mid 1980s. Lucent spun off from AT&T and suffered a ignominious financial and legal history; while its stock prices soared in 2000-2001, it was later revealed that the company consistently misreported its earnings. Nonetheless, the merger of the two competitors into the Paris-based Alcatel-Lucent led to the creation of what is now one of the world's largest vendors of telecommunications equipment.

In Fiscal 2008, the company saw revenues of €16.984 B, and net income of –€5.22 B (about $23.64 B and –$7.27 B at the time of reporting, respectively).^[3]

Business Segments

Enterpise,9.4% of total Revenues

This includes including IP communication product offerings specializing in the education, finance, healthcare, and hospitality industries.^[4]

Carrier 68% of 2008 Revenues

Alcatel-Lucent's carrier-supply business focuses on wireline operations, wireless operations, and convergence business. The segment brought in €11.65 B and represeted about 68% of their revenues in 2008.^[4]

Wireline

Alcatel-Lucent's major network focus is in the wireline connectivity, representing 36.1% of total revenues in 2008.^[5]

DSL (Digital Subscriber Lines)

Alcatel-Lucent has a wide base of high-speed DSL networks already installed, and is one of the popular low-cost equipment vendors for newly developing networks. Lucent's dispersion in the DSL field could prove a competitive advantage, as its carriers and networks customers might choose to stick with the company when they decide to upgrade to broadband connectivity.

Broadband

As the worldwide leader in providing equipment for broadband network access--essentially very fast internet connections--Alcatel-Lucent has a new focus on supporting "triple play" technology, which allows transmission of data, video, and voice over the same network. "Triple play" bundles allow telecommunication service providers such as Comcast (CMCSA) to stream a cable television signal, Internet connection and VoIP voice services to a household using a single network line. Data transmission is much slower on DSL, making such multi-tasking impractical, if not impossible.

The technologies that Alcatel-Lucent supports as part of their triple play offerings include:

• Optical fiber networks which are faster and allow more data compared to traditional copper fibers
• Internet Protocol (IP) networking that provides faster data transmissions than traditional DSL

Triple play connectivity is driving a number of cutting-edge digital products, and Alcatel-Lucent is betting that the increases in speed and bandwidth from their broadband offerings will drive the development of attractive carrier services by companies such as AT&T and Verizon, further reinforcing demand for wireline equipment. Cisco is a major competitor in this arena.

Wireless

Wireless network carriers are undergoing IP service-based restructurings, and Alcatel-Lucent recently acquired Nortel and Fujitsu's wireless technologies to become even more involved in this trend. The company has established a full spectrum of third generation (3G) wireless technology, a field in which they compete with Nokia (NOK) and Sony-Ericsson. Wireless technologies represent 29.7% of total revenues.

Generational Upgrades

The current generation of wireless network, 2G, has small bandwidth and is relatively slow. It allows concurrent transmission of voice as well as small amounts of data over cellular networks. Alcatel-Lucent has a large base of installed 2G networks, but is currently upgrading a number of customers to 3G networks, which allows high-speed transmission of voice and data concurrently, as well as some video. 4G technology allows extremely high speed cellular transmissions of voice, data, and video at the same time - wireless triple play. Alcatel-Lucent has not invested much in 4G technology, choosing instead to focus on 3G innovation and installation.

CDMA

Alcatel-Lucent is the industry leader in 3G for CDMA technology, which allows the simultaneous, high-speed transmission of voice and data over the same data stream. Faster 3G technologies, like WCDMA, exist and while Alcatel-Lucent has a hand in each, other companies like Ericsson and Nokia are ahead in these areas.

Convergence

Convergence refers to a mix of technologies needed to allow a number of digital modules in a single application, accessible over any network on any multiple telecom devices. The promise of convergence would allow, for instance, a combination of voice, video and Internet data on a single conference call. Convergence technology is the smallest part of Alcatel-Lucent's carrier revenue, only representing 8.6% of total revenue.

Enterprise and Services, 9.4% and 20.3% of 2008 Revenue Respectively

The enterprise segment of Alcatel-Lucent provides telecommunications services for businesses, from call center networking to inter-business IP networking. Enterprise business represents 9.4% of revenues.^[6]

Their services sector deals with professional services like networking as well as maintenance, and is often sold in conjunction with carrier and enterprise equipment and installation. Services represent 20.3% of overall revenues.^[6]

Trends and Forces

Integration of Alcatel and Lucent

Economies of scale, leap-frogging competition, and reducing shared costs drove the 2006 merger between Alcatel and Lucent, positioning the combined entity as a equipment vendor across nearly every category of telecommunications. This business strategy allows the company to pursue most service vendors in the industry and minimizes losses of particular carriers or changes in specific technologies. Alcatel-Lucent now has a worldwide footprint, with one-third of its business in Europe, one third in the U.S. and one third in the rest of the world.

The company has continued cost-cutting initiatives, recently announcing a plan to cut worldwide jobs by around 12,500 positions. Integration risks include:

• Potential lawsuits from trimming Lucent's pension plans, which are very costly
• Ineffective leadership permutations as management from both companies have been trimmed, combined and thrown back into the industry
• Delays in layoffs or problems retaining or attracting key management and employees due to job uncertainty

The merger has thus far been a difficult assimilation and has raised concerns about the effectiveness of ALU management. In 2007, ALU posted a net loss of $5.12 billion. ALU has formed a 7 person management committee that will report to the CEO. ALU believes that this streamlining of management will help clear accountability and make for a more efficient management system.

The YouTube effect

The growth of online video -- from YouTube, BitTorrent, and increasingly Television Studios' own forrays onto the internet -- has already led to massive increases in the amount of data traveling across the internet. A single, 30-minute video clip requires many thousands of times the bandwidth that a single email message requires. As such, online video has already required that carriers spend massive amounts to upgrade their networks, and this spending has benefited Alcatel, the largest manufacturer of the optical networking equipment that carries data across the Internet. So far, however, less than 1% of video is delivered over the internet. If that were to grow significantly -- perhaps if television networks were to begin syndicating their shows online -- demand for routers would grow further. Also, Cisco forecasted internet growth between 2007 to 2012 and the company said internet traffic growth could increase as much as 46% per year, with a very large portion of that growth coming from video demand.^[7]

Digital Natives

The current generation of children are often referred to as "digital natives" because they have been surrounded by digital media applications from birth. As they grow up, digital natives may help drive growth of new networks as they demand ever-growing transmission speeds and capacities.

Developing Nations

Because of its powerful international presence, Alcatel-Lucent may be able to garner significant presence in developing nations that are adopting new wireline and wireless networks for Internet and cellular services. One significant example is the recent deal made with China's Datang Mobile to provide equipment for its 3G network expansion. Alcatel-Lucent is also a leader in terrestrial and submarine wireline networks, and this may prove useful as the increasing forces of globalization increase demand for intercontinental optical fiber networking to replace traditional copper fiber networking.

Betting on 3G

Currently, the major upgrades that Alcatel-Lucent has been pushing include:

• IP/PON wireline networking
• 3G wireless communications, especially CDMA, the format being adopted by many cell phone carriers that allow for higher throughput of voice and data

A major threat to the bet on 3G's universal adoption is the development of WiMAX, fourth-generation (4G) wireless technology being pushed by Nortel and Motorola. If carriers decide to upgrade from 2G DSL straight to WiMAX, or if new and developing networks adopt WiMAX, Alcatel-Lucent could be left behind.

Service Vendor Demand for Telecom Equipment

Alcatel-Lucent's products are not sold to a general market; much of its revenue is concentrated between a small number of telecom service vendors. Because there are so few telecom service providers and equipment vendors--especially in the wireless sector--there is a high concentration of revenue between firms. This tight ecosystem may lead to volatile cycles for equipment vendors as they are at the beck and call of a few key service providers, like Verizon and AT&T.

To insulate against this effect, Alcatel-Lucent has been aggressively playing the field by making deals with many major carriers, including international ones. Examples of recent deals include:

• A three-year agreement with Verizon to be their general supplier in all networking fields, including wireless, optical, and IP technology
• A 25% stake in 2Wire, who recently signed a deal to provide AT&T with triple play home gateways. The gateways are designed to streamline data, voice, and media applications throughout homes, and could signal a new service focus on bringing networking to consumer residences
• A deal with the Chinese Datang Mobile to provide China Mobile (Hong Kong) (CHL) with most of the equipment for its 3G network expansion

The fate of Alcatel-Lucent is intimately connected with the fate of the service vendors. If a carrier's market strategy shifts away from utilizing the products that Alcatel-Lucent specializes in (i.e. IP networks, optical fibers, and 3G technologies), business may drop adversely. That said, there are very few telecom technologies that are not produced by Alcatel-Lucent and its broad offerings offer potential to cross-sell a suite of products and services to customers.

Competition from Other Equipment Vendors

In 2006, ALU was the leader in wireline and number three in wireless technologies, Alcatel-Lucent is one of the world's largest telecom equipment vendors but competes heavily in specific sectors with Cisco Systems (CSCO), Ericsson, Nokia (NOK), Motorola (MOT), and other, smaller companies like Nortel Networks (NT).

And do not forget Huawei and other Chinese vendors, the main reason for the merger of Alcatel - Lucent. They have put so much price pressure on the market that Alcatel-Lucent had to scale up and save costs, and will have to continuously save costs in the future. Huawei spends large efforts in R&D, are market leader in Asia, but is also taken market share in the rest of the world.

References

1. ↑ ALU Form 20-F for Fiscal Year 2008, pp 5-9
2. ↑ Google Finance's Coverage of ALU
3. ↑ ALU's 2008 Form 20-F, section 1.1
4. ↑ ^{4.0 4.1} ALU's 2008 Form 20-F, section 2.1
5. ↑ ALU's 2008 Form 20-F, note 4
6. ↑ ^{6.0 6.1} ALU's 2008 Form 20-F, Section 6.3
7. ↑ Cisco: Internet Traffic to Boom