Based in Brampton, Ontario, Nortel Networks (Nasdaq: NT) provides a wide variety of networking products to customers around the globe, including public and private enterprises, Internet service providers, and telecommunications carriers. In fiscal 1998, the company posted earnings of $1.07 billion on revenues of $17.6 billion. We talked with Nortel Executive Vice President Clarence Chandran about the company's direction, its optical Internet vision, and where the Internet goes from here.
TMF: Could you start off by describing what you are trying to do at Nortel?
Chandran: In a sense, it's building the high-performance, profitable Internet. That really is where we are focused.
Let's say that you are an aspiring computer science student in Silicon Valley and the year is 1992. You are asked to write a program. The program is a dynamic, real-time, self-loading dictionary. [It contains] every word on every file on every disk on every computer across the entire planet. [And you are to] put the whole thing on main memory on a single computer to allow the world's population to do interactive searches. And, oh, by the way, continuously update this in real time.
"When you are blindsided by technology, when a base technology leaps ahead in a dramatic fashion relative to any other technology, this always redefines what is possible."
If it was 1992, [the program] would probably crash and burn. But this isn't 1992, it's 1999. That program started in Palo Alto and became the Internet search engine, that's when it sprang onto the scene. Brute force and technology application and massive processing power were used to create the kind of offering customers wanted to communicate with each other. So when you are blindsided by technology, when a base technology leaps ahead in a dramatic fashion relative to any other technology, this always redefines what is possible. And it drives the basic fabric of how distributed systems will be built. It blindsides all of us.
Today, let's imagine for a minute that you have a million people with cable modems -- a not too outlandish thought -- a million people that have one megabit DSL [digital subscriber line] and 100,000 people who have access to ethernet in their hotel rooms. If you shake up this cocktail mix and you project, say, to the year 2003 or 2004, you'd find that you have a billion Internet users, probably a billion wireline users, and several hundred million wireless users, with some of these double counted.
By the year 2003 or 2004, you'd see the requirements for bandwidth grow by a factor of 100 or 200. And we fundamentally believe that in order to do that, you will need an optical Internet. That's really what is going to give you the kind of capacity and reliability and scalability that is required on that network. And that is why we are focused on building the high-performance, profitable Internet.
That's where the money's going to be, and that's where we are going to be. You have to continually disrupt the market in order to achieve this. The optical Internet and our leadership in this area is delivering precisely that.
We announced earlier this year that in the middle of next year we will be deploying 160 colors, each color representing 10 gigabits, on a single fiber. So that's 1.6 terabits. We also announced in Geneva recently another breakthrough in respect to the optical Internet. This had to do with announcing our 6.4 terabit optical highway, which is 6.4 terabits per fiber, 14 to 80 gigabits the line rate, forward error correction that's absolutely best of class, ensuring purity of transmission 10 to the minus 15th error rate. In plain English, one error in one quadrillion bits, so that's one error in roughly a 20-mile stretch of beach. [There will also be] services that will drive this in such a way that we create a kind of scalability for applications to occur.
In the optical backbone and emerging services for enterprise and carriers and applications services providers, we see us working with a whole range of partners. One of them, for example, is EMC, the data storage company. What we see there is the immediate synergies between combining EMC's storage systems with Nortel's optical systems. Today, for $10,000 you can probably go and buy one terabit of storage. If you apply Moore's law to that -- and we're beating Moore's law at Nortel in terms of optical development -- that storage system could cost you $100 not too far down the road. So that's storing 1,000 movie titles, allowing you to watch them at anytime you want -- absolutely destroying the notion of private time and allowing you an immense amount of freedom.
"We want to ensure that the Internet data center of tomorrow where all of these things will be managed, transactions occur, where Web hosting will occur, where Web streaming will occur, runs as safely as a bank."
The other piece we see here as an engine is what we call the wireless Internet, or essentially the Web in your pocket. We just made the first video-to-video mobile call. In other words, we had a mobile handset with a screen and using Nortel wireless Internet network we were able to place a video call on a mobile phone. We did that with our partner Panasonic.
We're absolutely focused on building the Internet so that it scales, where it provides you with bulletproof reliability, where it allows you not so much always on, but really pushes the Internet as being always there to plug into as opposed to always on. It's a much higher notion. When you plug into it, it's there. That's what we are trying to build.
TMF: For an investor who might not be up-to-speed, no pun intended, with all of the technologies and the physics involved in optical networking, how would you suggest an investor protect against being blindsided in this industry in the coming years as changes come about?
Chandran: Other than invest in Nortel? (Laughter)
TMF: What are the major moving parts that we should keep an eye on?
Chandran: The major thing to keep an eye on is the fact that optical networks really is rocket science. You're talking about lasers that are pretty small, microscopic. [Let's] look at what's happening in just 10 gigabit systems, which are the large, long-haul systems. We're using 10 gigabit systems in metropolitan areas, by the way. We saw the requirement for 10 gigabit systems as recently as five years ago. People at that time thought we were nuts, with respect to who would ever want this capacity? What investors need to look at is the total system capability to deploy this. This is not just about components, this is not just about intellectual property rights or the latest box technology. Where [investors] have to go is how does all of this come together and how is this managed.
Picture in your mind three layers. The layer at the very bottom, let's call that infrastructure. Infrastructure is where the Internet runs. If you come up a layer, you imagine service-enabling solutions, to name it broadly. This could be Internet or telephony or any kind of service-enabling solution. Think of this as what makes the Internet profitable. The layer above it on our three-layer cake is applications. This is why you use the Internet, for an application -- to purchase something, to conduct a transaction, to order a ticket. So applications are why you use the Internet, service-enabling solutions are what makes the Internet possible, and enabling infrastructure is what the Internet runs on.
If we paid any attention to the announcement Nov. 2 that Ford and GM are going to take their entire supply chain management system and put it on the Web, you're taking a pretty huge economic force and putting it on the Web. Can you imagine what is required to ensure that is always on and always able to plug into? Millions of parts being ordered, millions of cars being manufactured, millions of customers waiting for delivery of automobiles. You need to have not only a fail-safe component, leading-edge fiber, a network management system, [but] you need the whole solution deployed from a services provider and a carrier such that you can count on it.
That's really where Nortel is focused, building network solutions for the creation of the high-performance, profitable Internet and doing it from an optical infrastructure point of view, from a wireless infrastructure point of view. We want to ensure that the Internet data center of tomorrow where all of these things will be managed, transactions occur, where Web hosting will occur, where Web streaming will occur, runs as safely as a bank.
"We're moving to an organization that is not as much focused on technology but very much focused on the customer and the market and the application of the technology."
TMF: What do you think are the main competitive advantages that Nortel has right now over its competitors?
Chandran: We've built well over 2,000 networks around the world, large and small, wireless, optical, and wireline. Some of the customers we've built networks for [include] the Society for Worldwide Interbank Financial Transactions, an organization called SWIFT, which does all of the financial clearing for all of the banks around the world. That network is provided by Nortel. The international agency for the clearing of airline tickets, that network is provided by Nortel. The Federal Reserve network is Nortel. The New York Stock Exchange is Nortel.
There isn't a company in the world that has that unmatched breadth and depth of capability in building networks of all types. We're privileged to have some of the most global and innovative customers, large and small. We have tremendous experience in building networks, we have a tremendous relationship with our customers, we are focused on continually disrupting technologies with innovation. Most importantly, we have a track record of implementing it such that it creates value for our customers and allows for a payback.
TMF: In valuing a fast-growing company like Nortel, it seems to me that traditional yardsticks such as price-to-earnings ratios and the like are pretty much useless. What are some of the measures that you use internally to judge the value of the business?
Chandran: We look at momentum and what the momentum drivers are. Things that we absolutely focus on [are] our earnings growth and our top-line momentum. The coming together of Internet and telecom and television all seem to converge in a sweet spot that gives us a tremendous leverage for our capabilities. We pride ourselves on being the first mover. We always like to be a first mover in building businesses that relate to our areas of strength, and those are networks. When we acquired Bay, we were the first company to do that kind of [multibillion-dollar data networking] transaction. When we moved with respect to saying that the Internet needs to be 99.999% reliable the way that the voice network is today, that got attention.
The issue is not so much that voice was free, the issue was that voice is irrelevant because it's going to be data that is going across these networks. When data is such a precious commodity with respect to running businesses and constitutes information, you need to ensure that the network is not choked by Old World barriers, Old World modems, Old World infrastructures. We needed to find a way to allow customers to leverage their investments and migrate to an IP world. So we looked at momentum and internally we could provide for that. So we look at those drivers from a business point of view.
TMF: The big news in data last week was the new software and price cuts for data routers that you announced, an area that is dominated by Cisco Systems (Nasdaq: CSCO). What should investors think of these moves?
Chandran: Basically, it really is a commodity. And where this is going is where value is going to be created, not where high prices are charged for something that is a commodity. In terms of the ability of these networks to scale, one of the things we find that is really interesting about this is that two-thirds of the traffic on the Internet are what's referred to as these HTTP packets. Ninety percent of the people on the Internet go for the same 10% of content and less than one-third of the problems with a website have to do with that website itself.
Where the problems exist are in the Old World choke points in the Internet that are represented by these Old World routers. They've got to be removed, they've got to be replaced by carrier grade, scalable, o