Nortel Networks gets back on track

For more than two years, Nortel was almost paralyzed by an accounting scandal that forced the departure of several top executives, including its CEO. It also prompted probes by U.S. and Canadian regulators as well as criminal investigations. With the scandal behind them, executives at the company say they're focused on developing next-generation technologies and new markets.

John Roese, Nortel's chief technology officer since June, sat down with CNET News.com to talk about how the company is positioning itself, post-scandal.

Q: What has changed at Nortel over the last several months?
Roese: Well, the most obvious thing is that the black cloud of scandal has been lifted. Nortel is a great company with great potential, but it was misdirected for the past five years.

When Mike Zafirovski came in, he assembled a new team of executives. And immediately, we set about putting a stake in the ground in markets where we knew we could be successful. We decided we wanted to focus on the next generation of wireless--4G. So we started by divesting the UMTS (Universal Mobile Telecommunications Service) business. We only had a 5 percent market share in that market, and there were 15 competitors. So it wasn't a great business for us to be in. Getting rid of the businesses that weren't making us much money freed us to go after other markets, like 4G wireless, more aggressively.

But 4G wireless hasn't even been defined by the International Telecommunications Union. How can Nortel say that it's going to be a leader in 4G wireless?
Roese: You're right--the ITU hasn't codified 4G yet. But any carrier will tell you that 4G wireless will be based on OFDM (orthogonal frequency division multiplexing) and MIMO (multiple input, multiple output) technology. It will be more data-centric than 3G wireless. It will be based on IP (Internet Protocol) rather than TDM (Time Division Multiplexing). Nortel has been an innovator for the past seven years in developing wireless technologies that are based on these underlying technologies.

There's been so much talk about WiMax being the next generation of wireless technology. Do you think it's overhyped?
Roese: WiMax is coming, but it's not something people can buy today. Sprint's announcement that it will be deploying WiMax has moved things along. They've said 100 million people will have access to their WiMax network by the end of next year. And Intel has said it will put WiMax in Centrino chips. They did the same thing when they seeded the Wi-Fi market, and look what happened.

Sprint is already a Nortel customer. Why wasn't the company involved in its 4G wireless announcement? Sprint announced Motorola and Samsung as partners.
Roese: It was absolutely a missed opportunity. Traditionally, Nortel hasn't been a very good marketing company. We really are ahead of the market in terms of productizable WiMax products, but no one knows it. We treat a lot of technological innovation as science projects rather than thinking of ways to market them. As soon as I realized what we had in WiMax, it was too late to be involved with Sprint's announcement.

Sprint's philosophy has always been to use multiple vendors. They've named a few already, ones with big marketing dollars. But when the network is deployed, they'll be using other vendors.

In what other markets does Nortel see opportunity?
Roese: We see that the enterprise market is out of balance. There is a paradigm shift going on, and we see this as a big opportunity.

But hasn't Cisco Systems pretty much won the enterprise networking market?
Roese: No, I don't think they have. If the enterprise market stayed the same, then maybe I'd say Cisco has won. But the market is actually starting another cycle.

The last battle was around security and high performance. You can tell you're at the end of an era when you can't tell the difference between different company's products, because they've become commoditized. And that's where we are right now in terms of security and performance. But our belief is that the market will change. And the enterprise is going to get hyperconnected.

What do you mean, "hyperconnected"?
Roese: Desktop PCs aren't the only things connected to the corporate network anymore. Now there are thousands of devices, like manufacturing equipment and security cameras, all connected over Ethernet at 10 megabits per second and 100Mbps speeds. This means you need to rethink the entire network, since many of these nodes exist in hostile environments, on factory assembly lines or outside. So they aren't the kinds of machines you put a Cisco security agent on.

And you think that Nortel is well-positioned for this market?
Roese: We are already the clear No. 2 competitor in the enterprise market. We're a pretty distant No.2, but we're still No. 2. Now we're at an inflection point in the industry, and we have an opportunity to participate in a new networking market.

What's been you're biggest challenge coming in as chief technology officer?
Roese: I think the biggest challenge is getting the word out about all the great technology we have here. Every time I turn over a rock, I find some fantastic technology that no one ever knew about. Honestly, before I considered this job, I thought that Nortel wasn't doing anything new. The truth is, we are ahead of the curve in several areas, like optical networking and 4G wireless technology.

We really have to change the culture of the company. As CTO, I need to establish a technology vision and then evangelize that vision to create a market for the technology. I've been trying to drive the R&D folks to think about what they do in terms of creating products. That hasn't been the way people at Nortel have thought in the past.

In 1990s, the sale was about the technology. But now our engineers need to answer questions about how the technology solves business problems. Our friends at Cisco are masters at talking in business terms. And now we have to do that.

What is Nortel doing to help solve these business issues?
Roese: Well, we are starting to form partnerships, which is something we didn't do much of before. We formed a partnership on voice over IP with Microsoft. Now, when you walk into a CIO's office arm-in-arm with Microsoft, it's no longer a choice between Cisco and Nortel. Instead, it's Cisco versus Nortel and Mircosoft.

The telecom industry is going through a massive wave of consolidation. The telephone companies--Nortel's customers--are all buying each other. And now longtime competitors, such as Alcatel and Lucent Technologies, are getting together. What's this mean for Nortel?
Roese: In general, the carrier consolidation is rarely good for suppliers like us. But with our competitors consolidating, we are seeing some interesting opportunities. If you're in the middle of a huge integration exercise as part of a multibillion merger, you don't spend time with customers to find out what their needs are. And instead of inventing new technology, you're busy trying to integrate product lines and cut costs.

You might have noticed that you aren't hearing Siemens and Nokia (which are partnering), or Lucent and Alcatel, talking about what they're doing in WiMax or 4G, because they don't have the time to focus on a new technology. The ones you are hearing from are Motorola and Samsung, and neither of those companies are involved in a big integration exercise.

I think it's a good thing that Nortel isn't involved in anything like that now. Multibillion-dollar mergers are distracting. I've been through it. It's not easy, and it's a huge time suck.