Marconi and the generation game

When BT did not select Marconi--which currently relies for around 25 per cent of its annual revenues on BT business--as one of the suppliers of its next-generation network equipment, the financial markets went into a collective swoon. Marconi's share price imploded, losing nearly 45 per cent on the LSE in one day. Rumours of a sale to Huawei or ZTE were rife. In a market where scale is key, can Marconi continue as Marconi?

"We are reviewing all strategic options," Mike Patton, the CEO of Marconi told reporters at a press conference mid-May. Can Marconi continue as a stand-alone company? "That is one of the options," says Parton.

However, he also expects to see consolidation. "I think that in five years' time, this industry will have 3-4 very large players," says Parton--though he did not rule out a role in the market for niche players. In the meantime, however, a key issue for Marconi is whether BT's decision has rattled other service providers. What has their reaction been?

"Most operators just want to understand the process of how BT made the decision it made," says Andy Evans the CTIO of Marconi. "I think that people understand if you explain to them the rationale behind it and think 'well, if I'm still getting good products and service from Marconi why should it affect me?'" Evans stresses that what tripped Marconi up was not technical performance--the softswitch BT tested was "exemplary" he says--but "commercial considerations".

Just how commercial the considerations were no-one is saying. There is, however, a great deal of speculation that the margins on the business could cut. Parton certainly indicated that Marconi could not have turned a profit on the business on the terms proposed. Ericsson won the bid for the i-node contract Marconi wanted and called it "a prestige project", a phrase that could be viewed in more than one way.

"In my experience, no deal, order or contract with this kind of importance has ever just been about financial arrangements," a spokesman for Ericsson says of the margins issue. However, he also stressed that servicing a network is another aspect of network purchasing (BT has yet to announce the service contracts), which suggests that vendors might not live by kit sales alone.

"I do think there will be a lot of vendor assistance in the migration to NGNs," says Evans of the service issue. "But the intent and the design of them is that they will, overall, be simple to operate once they are built."

Parton mentioned during the press conference that Huawei, which has a distribution agreement with Marconi, has strong software capabilities (SEI-CMM level 5, or the software equivalent of three Michelin stars). Ericsson also enjoys this through an outsourcing agreement with Wipro. Does Marconi intend to try to move further into the software market? "Certainly, in the future, the balance will shift very slightly more toward software," says Evans. "The reason for that is that softswitching is, essentially, a software solution. We would see that the switching side of networks is, essentially, becoming much more software-driven than hardware driven. The application side is, basically, going to be a complex software business. Having said that, the service providers will still have a need for transmission, routing and access equipment."

Transmission, routing and access is where Marconi currently makes its money and Evans does not expect softswitch revenues to blossom overnight. "We are right at the early days of a migration from TDM into IP-based switching," says Evans. Given that most of the new subscribers in the world will be on mobile networks, does Marconi aim to sell its softswitch to the sort of operators that, say, Ericsson targets? "The question is: 'will softswitches take on location and presence functionality?'" says Evans. "The answer is: definitely. We do see even fixed networks having a need to take on greater presence functionality. We have built our softswitch roadmap around IMS architecture and over the next 12-18 months we will be building more IMS functionality into our softswitches such that the softswitch will be capable of building mobile functionality. Having said that, whether it actually ends up being sold into a mobile network, or into a fixed network with presence functionality, is another question."

COPYRIGHT 2005 Horizon House Publications, Inc.
COPYRIGHT 2006 Gale Group