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Nortel chief sees gradual market shift

Corporate users see the endpoint but don't know how to get there, says David House.

SALT LAKE CITY, Utah--The future is now, and later, according to Nortel president David House.

The veteran high-tech executive continues to pound the pulpit for a new type of network that treats voice and data traffic equally, using so-called packets to send both types of transmissions over a single pipe. His vision of convergence, like many others, is filled with promises of ample bandwidth and previously unimagined information mobility--a vision he hopes Nortel can provide with data equipment and phone expertise.

Convergence is a hot topic in the networking industry due to the fact that data-based traffic is overtaking voice traffic on most networks, leading to a change in the philosophy behind the construction of networks. Many phone and Internet carriers are attempting to add voice to data-based layouts in order to remain competitive. That, in turn, has prompted various networking equipment providers to alter their strategies to tackle the huge market for phone carrier upgrades.

But obstacles remain, such as data networking reliability and the very nature of a convergence market that has thus far been long on hype.

The "urge to converge" has been responsible for a series of tremors in the networking industry, kicked off by last year's merger of telco equipment provider Northern Telecom and data player Bay Networks, which created Nortel Networks. Lately, European firms such as Siemens and Alcatel have been breaking out their checkbooks, hoping to get a boost from data networking purchases.

Competitors Lucent Technologies and Cisco Systems are also busy refining strategies intended to address what is expected to be a booming market for equipment that can handle voice and data transmissions.

House was preparing for a keynote presentation at network software maker Novell's user conference, in which he trumpeted the benefits of directory services software. Thought to be the key to Novell's comeback bid, the software could play a key role in the Internet and carrier networks as the number of network-attached devices proliferate, House said. "There must be a directory capability," he said.

Nortel has entered into an alliance with Novell to integrate that company's NDS software with Nortel's switches, routing devices, and associated software.

House, formerly chief executive of Bay Networks, sat down with CNET to discuss the ever-changing state of the industry and where Nortel fits in. During the interview, he declined to comment on reports that Nortel's corporate networking business--comprised in large part by equipment from Bay Networks--is experiencing a shortfall for the company's current quarter, one that will be made up through sales in other portions of the company's sprawling communications business.

CNET What is a so-called convergence product or market exactly?
When I talk to corporate users, they all agree on the end point--where we will be 5 to 10 years from now. But the problem they have is they don't know how to get there, they don't know how to make the transition, they don't know how to evolve.

[Cisco's] John Chambers will tell them there's an old world and there's a new world--the old world is big and slow and expensive and monopolistic and bad; the new world is young and bright and nimble and innovative and creative and good. Leave the old world behind, and go to the new world. Just close your eyes and jump--just come to me. Lucent, of course, has exactly the opposite message: They say, when is a data network ever going to be reliable enough to handle your traffic? It's not reliable enough. Their answer to that question is Bell Labs will make it reliable enough, so just wait for us. We're working on this stuff and when it's ready we'll let you know. Just wait.

Neither one of those messages is what the corporate IT manager wants to hear, though I must say the conservative Lucent message is certainly much more acceptable because they don't have to do anything. They're saying, it's all right not to change and a lot of them like to hear that. Not many of them are buying "close your eyes and jump" though. When's Cisco getting rid of their PBX [phone system] on their campus? Don't ask people to go before you do.

How do you view the current competitive environment, especially in light of recent moves by European telecom equipment manufacturers?
This time last year, we were looking at what our strategic direction was and I was pursuing a direction of utilizing these companies as important channel suppliers. I spoke to all those guys at the highest level about a strategic relationship. What I concluded is the basic difference between the North American suppliers and the European suppliers is the number of PCs per capita and the number of Internet connections per capita is significantly higher in the U.S. than it is in the markets they serve.

European markets still have the geographic monopolies of the past in terms of market share. Germany has a lot of Siemens. France has a lot of Alcatels. There's a lot of history there.

One of the things that had a big influence with me in making the decision to do the merger with Nortel, is every year at Bay Networks we had a Internet service provider and carrier conference. Two years ago we went to this conference and everyone had a strong sense they had to add a significant amount of packet network capability because the circuit network was being flooded with packet traffic.

Packet networks are about 15 times more cost-effective than circuit networks handling packets, and they weren't going to be able to compete with a circuit switching structure for their future business. A year ago, it moved from their head to their heart. What I saw was all this panic--visceral, driving, possessing concern and fear. It went from being something they stated to something they emoted. That change happened in North America and I don't think that's happened to as strong a degree in Europe yet.

What does it say about the networking industry now that Nortel is now partnering with the two giants of the PC industry, Microsoft and Intel?
I think it's really an indication of the transformation of the communications industry from a vertical structure to a horizontal structure. It signals open platforms and interoperability at a level that hasn't existed in the business before. It signals the unification of networks--the combining of traditional telephony network--the best of it--with the best of the traditional data network.

Terabit routing. How important is this trend for Nortel, especially with regard to new-age carrier build-outs and telco upgrades?
Certainly, there's a phenomenal opportunity in the carrier space for routed networks. Today packet traffic exceeds voice traffic on long-distance public networks, and it's growing 10 times as fast and it's only a matter of time before it's 80 or 90 percent of the overall traffic. Yet it's all traveling over these circuit networks, which, as I said before, is not really cost-effective. So you've got all these people coming in, like Qwest and Level 3 and IXC and Williams, adding enormous amounts of fiber to carry packets.

For historic reasons, data travels a lot cheaper than voice. At first I don't think it was much of a concern, but now these guys are going to the long-distance carriers and saying, 'I want to be the carrier's carrier.' They're wholesaling capacity to these guys at rates that are below their internal cost. Competitors are saying, 'I'm in trouble.'

There's probably been some over-aggressive claims for what people will deliver versus time. But there's a whole bunch of start-ups--the Argon acquisition by Siemens is clearly aimed in this way. We have our own internal developments underway and we're also monitoring very closely the start-up activities. We've got an investment in Avici maybe that will pan out. There'll be a number of products here.