DRIP PORTFOLIO
Nortel Revolutionizes Networking

Nortel Networks has created a software package for routing data that can be placed on almost any electronic device. Instead of being tied into costly proprietary hardware routers, manufacturers of different products can include the code directly on the devices they manufacture. The effect of this is opening up the router market to become a commodity, somewhat comparable to the introduction of the IBM PC in 1981. This could help make Nortel an interesting Drip stock.

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By George Runkle (TMF Runkle)
July 17, 2000

Here at The Motley Fool, we've written quite a bit about Nortel Networks (NYSE: NT). In particular, we've written about its wireless and optical networking strategy. An intriguing story that we haven't gotten into yet is Nortel Networks' Open IP Environment.

What is Open IP Environment?

Nortel has created routing software that can be embedded on any appliance. On its website, Nortel suggests that this software can be used in the following market segments:

  • consumer electronics
  • core networking devices
  • embedded processor market
  • handheld devices market
  • server market
Reading through the technical descriptions of this software, it seems that Nortel is turning routers into a commodity. With Nortel's technology, it appears that routers are no longer hardware-dependent. So, to satisfy my curiosity, I contacted John Bednarek, Director of Marketing of Open IP Environment at Nortel Networks. John and I talked at length about the possibilities of this new software.

John said that you could draw an analogy of this product with the old word processors vs. the personal computers (PC). For those of us over 40, we can remember proprietary word processors that came with their own software. If you bought a Wang word processor, you got Wang software. That was it; you didn't have much choice in the matter. Then PCs appeared on the market and you could get word processing software for them. No longer were you tied to a certain equipment configuration — you could choose what you needed from what was available.

John says that the same applies with Nortel Networks' Open IP environment: The common software architecture can apply to different devices. This software can enable routing capabilities in devices ranging from high-end multiservice switches to refrigerators and automobiles. He mentioned that Nortel is not stuck with legacy software originally written for specific hardware. Nortel has written software that is open (it can reside on any platform), is modular (the customer can pick and choose components), and is scalable (it can work on many devices).

One interesting bit of information that relates to Nortel's wireless strategy is that it has an alliance with ENEA OSE. ENEA OSE provides the operating systems on handsets that are manufactured by Nokia (NYSE: NOK) and Ericsson (Nasdaq: ERICY). The opportunity exists for adding more functionality such as access to the Internet with security and quality-of-service guarantees. And Nortel can bring this functionality faster to the market since Open IP Environment is so modular and can be easily incorporated into any product architecture.

Also, a lot of traditional customers are buying into Open IP Environment technology. Manufacturers' products ranging from multiservice switches to high-end routers are using this to get products to market faster based on open standards. John said that this product brings interoperability with different network protocols, which will allow devices to work together better.

What does this all mean to us? It means that every device we own that connects to the Internet can function as a router, providing not just communications to the network, but enabling other applications with quality-of-service guarantees, management, and security. The network card on my computer can become a "router"; the palm-top device you use to check your e-mail can be a router; and your refrigerator can, too. We keep talking about an intelligent refrigerator — what would it do? Possibly track the food you have in it, and order new food as your supplies dwindle. I digress, though.

Beyond the consumer market, the Internet service providers, telephone companies, and others are no longer held to a proprietary system of routers. And the cost for all begins to drop while the computing power rises. Nortel's John Bednarek mentioned that until now the router market has not followed Moore's Law — where computing power doubles every 18 months (and costs typically get halved, although that isn't part of the law). Nortel Networks is bringing this about, and it has a growing list of alliances and customers, including Intel (Nasdaq: INTC), Motorola (NYSE: MOT), Microsoft (Nasdaq: MSFT), IBM (NYSE: IBM), and Hewlett-Packard (NYSE: HWP).

In closing, I find this rather ironic. Nortel Networks and Lucent Technologies (NYSE: LU) have been held back in the telecommunications market because of their ties to legacy systems of switches. However, because Nortel Networks was not tied to a legacy of lengthy and complex router code, they are able to leapfrog the competition in the router market, which will become ever more important as we move to IP networks. All of this may help to make Nortel, which has a fee-free dividend reinvestment plan, a more attractive technology investment for Drip investors.

Suggested Links:
Nortel Rings Up a Double, 7/03/00
Rule Maker Criteria Run on Nortel, 6/13/00
Nortel discussion board
New! Motley Fool Research Internet Report on Wireless

Drip Portfolio

7/17/2000 Closing Numbers
Ticker Company Day Chg % Chg Price
CPBCAMPBELL SOUPUnch.Unch.$27.88
INTCINTEL CORPUnch.Unch.$146.69
JNJJOHNSON & JOHNSONUnch.Unch.$91.81
MELMELLON FINANCIAL CORPUnch.Unch.$38.25

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip -.00% -.00% 3.28% 35.33% 75.81% 20.90%
S&P 500 .00% .00% 3.81% 2.77% 60.84% 17.33%
S&P 500(DA) .00% .00% 3.81% 2.77% 63.47% 17.97%
S&P 500(DCA) n/a n/a n/a n/a 31.16% 9.55%
NASDAQ .00% .00% 7.06% 4.35% 170.53% 39.75%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/199722.9909INTC45.671$146.69221.18%
11/14/199715.019JNJ78.956$91.8116.28%
11/5/199834.9399MEL34.051$38.2512.33%
4/13/19988.337CPB54.179$27.88-48.55%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/199722.9909INTC$1,050.02$3,372.48$2,322.46
11/14/199715.019JNJ$1,185.84$1,378.93$193.09
11/5/199834.9399MEL$1,189.74$1,336.45$146.71
4/13/19988.337CPB$451.69$232.39($219.30)
  Cash: $0.08  
  Total: $6,320.33  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.