Nortel RIP

Architect: Santiago Calvatrava
BCE Place by Santiago Calvatrava

Once upon a time, every Canadian home sported at least one made in Canada Nortel telephone. Every telecom company in North America used Nortel’s DMS100 digital phone switch. Most major corporations and governments used Nortel’s Meridian corporate phone and data transmission systems.

It all started with Alexander Graham Bell inventing the telephone at his parent’s home in Brantford Ontario in 1874.

Northern Telecom began in Montreal in 1882 as the mechanical department of Bell Telephone Company of Canada.   Its first product was the Magneto 50 line switch board. By 1895, the mechanical department was spun off as the Northern Electric Company with headquarters in Montreal at 175 Rue Richardson in the Pointe St. Charles district near what is now Parc d’Joe Beef.

In 1877, control of the Bell Patent was sold by Alexander’s father Melville Bell to the predecessor of AT&T.   Western Electric designed and manufactured AT&T’s phone equipment.

The factory manufactured telephones, switch gear, wire and cable plant. By 1914, Western Electric owned 40% of Northern Electric. Northern Electric for the next 50 years was a branch plant producing Western Electric products for Bell and seven Provincially owned Canadian Telcos.

By the early 1960’s, a technical revolution in handling phone calls in the Telco central switching office was underway.   Research by Northern Telecom in Ottawa with investment by Bell drove the transition to digital switching.

Operators were no longer required to pull a plug out of a socket and plug it into another socket.   Instead, the new switching computers enabled the new 10 digit dialing plan we take for granted today. I remember in Winnipeg hearing Whitehall 5-9555 on the radio in a florist commercial.

By 1971, all Northern Electric and Bell Research and Development was merged into Bell Northern Research (BNR) located in Ottawa.

By 1972, Northern Telecom developed the SL-1 phone switch PBX for use in corporate phone systems.

By 1995, Nortel sold 3,000 systems along with the desk phones. The flagship product was the DMS100 central office telephone switch used by the Telco’s to handle large call volumes. Phone companies around the world purchased the DMS100. The DPN data packet network was the gold standard for reliable data transmission demanded by banking applications.

In 1995, the Nortel brand and logo was born.

By 2000, Nortel achieved a market capitalization of $398B, employed 94,500 people and traded on the New York Stock Exchange under the symbol NT.

In January 1999 Nortel declared bankruptcy and ceased operations by June 2009.   Market capitalization fell to $5B. 70,000 workers lost their jobs, pension plans were decimated and investments large and small took a big hit.

Nortel was a global success. What went wrong?

The late 90’s were boom times for the telecom industry driven by deregulation and the conversion of copper phone lines to fibre optics.

Nortel was an equipment vendor in this boom and its stock price rose to unsustainable levels.

In 2005, Gary Daichendt and Gary Kunis were hired from CISCO as CEO and Chief Operating Officer.

Upon an exhaustive review, the “two Garys” concluded that Nortel was falling behind on innovation.   No plans were executed to invest in a new product pipeline and exit markets where Nortel was not the market leader. By June 2005, the two Gary’s were gone.

Huawei and ZTE Corp were Chinese electronics contractors that Nortel and other used to manufacture Nortel’s high-end products.   Huawei and ZTE began making their own version of the DMS100 at a lower price. Telco’s started buying the Chinese switches. Huawei made a takeover offer for Nortel, but the deal fell through as well as other merger proposals.

Nortel wasted five years without inventing a new core revenue stream. The technical leaders rested on the laurels and took no risks.

Under CEO John Roth’s watch, an accounting scandal developed which shuffled earnings which would not be earned until a time in the future. Earnings for 1998, 1999, and 2000 Earnings were fraudulently reported. Meanwhile 70 executives were paid $43M in bonuses after laying of 60,000 in 2003.

Roth also went on an acquisition spree and bought Bay Networks in a market where CISCO had already gained market dominance. Nortel had always built its product line from the ground up and had no experience in integrating acquisitions into Nortel.

It cost Nortel $400M to clean up the mess. Meanwhile over 10,000 pensioners were facing losing their entire pensions to which they contributed over so many years. It took six years to receive a settlement. Retirees got 40 cents on the dollar. Pension funds belonged to the pensioners yet somehow became a corporate asset to be claimed by creditors.

The accounting scandal defocused the board when attention should have been focused on creating new products such as Voice Over IP and wireless phone enabled phone systems that span from the Telco to corporate phone networks.

As the company was winding down, only lawyers and executives with bonuses cost the pension fund $2B.

If there is one thing that I can point a finger at is the failure to install a culture that demanded that Nortel continually adapt. Yes, Nortel developed great products in the 1990’s.

Resting on its laurels won’t do. There was no next product to fill the pipeline. Every IT company must innovate and take enormous risks on the future. It may collapse but without the hope of the future, there is no future.

The second failure is the failure to check executive greed.   The restatement of earnings generated fraudulently earned bonuses.   Earning bonuses to wind the company down and sell off assets is also undeserved.

Canada needs companies like Nortel to drive the future.  Where are they?

Additional Reading

Nortel Failed To Capitalize on It’s Market Position