Should Canada bail out Nortel?

Posted by Ian Bell

Ian Andrew Bell is a Techvibes Guest Contributor and this post orginally appeared on his blog.

GigaOm had a piece earlier this week written by Venture Capitalist Allan Leinwand asking whether Canada should bail out Nortel. He asks: “But is preserving the country’s technological heritage reason enough to spend millions in taxpayers dollars?”

I think that the answer to the question is contained within the question. There is no such thing as technological heritage … only a technology’s future. Once a company has ceased to innovate with effectiveness, market forces must be allowed to run their course.

Nortel, whose turnaround CEO Mike Zafirovsky appears to be a bit of a jet-setter, was a global source of technical innovation for most of the last century, peaking in the 1980s. Its DMS line of switches grew to become the dominant means by which incumbent local exchange carriers rolled out circuit-switched voice networks; and the means by which long-distance companies expanded their reach globally.

This gave the company a lot of cash to throw around, chasing R&D with aplomb, but it wasn’t spent wisely and efforts to embrace IP were insincere and too little too late. What Nortel failed to see coming was the enormous destruction of value that would occur when Voice became just another application on IP networks — and the opportunity to build massively expanded value by building new applications over that infrastructure. Even as recently as a few years ago Nortel has been tremendously innovative, however their solutions have failed to reach into the marketplace as they were targeted at a single customer group — the incumbents — who themselves are flailing and sputtering.

They also have a broken corporate culture. This happens when organizations get fat and lazy … and political. I watched that culture attach itself, like a parasite, to Cisco in the late 1990s as we were hiring entire teams from Nortel and moving them to North Carolina and San Jose.

The issue of a bailout should be (but isn’t, since the Canadian taxpayer is already subsidizing the company’s operations to the tune of $30M) irrelevant: Nortel has strong market and asset value still and should not need it. The company suffers from the burden of expectations, both of the marketplace and of irrational shareholders; and from the criminal efforts of loathsome executives who tried to feed that beast rather than confront reality.

When AOL’s executives realized they had an overvalued asset with little-to-no real growth prospects, they limpet-mined themselves onto a depressed company with unrealized value. That’s what Nortel could have / should have done several times in the past 15 years, but didn’t.

The chalice of innovation in telecommunications in Canada has passed on to RIM (neither of whose founders ever worked for Nortel — a rarity in the technology industry in Canada!). Is the company wobbling simply as a casualty of the current economic cycle, or because of a deeper cancer and an endless stream of financial scandals? Would $30M in investment be better spent on Nortel or on RIM, in the long term?

My guidance is: embrace the bankruptcy. It’s an opportunity to restructure the business, re-orient the strategy, clear out the dead wood, and reset irrational expectations. Nortel could yet again be an invigorating business, but shoring up the business that it is today is no way to get there. In the meantime, Nortel has served its purpose in stimulating innovation in Canada and acting as an apprenticeship program for our country’s technology leaders. Let it run its natural course.

Company:
Nortel
Website:
http://www.nortel.com
Location:
Toronto, Ontario, Canada

Hundreds of millions of people, Fortune 500 companies, and government institutions around the world trust their networks to Nortel's reliable and secure solutions. Nortel is a recognized leader in delivering communications capabilities that make the promise of Business Made Simple a reality for our customers. Our next-generation technologies, for both service provider and enterprise networks, support multimedia... more


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Ian Bell

Ian Bell

Ian Bell is a veteran founder of multiple startups in Silicon Valley, New York, and Vancouver. Selected as an Apple Research Fellow at Simon Fraser University in the early 1990s, he has been developing leading-edge consumer internet technologies since before there was a consumer internet. He has served in key Product Management roles with larger companies such as Telus and Cisco Systems and is... more




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