Nortel's Nadir

LOU BEACH FOR TIME

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For example, if BCE hopes to bring back some of the old luster to its valuation, analysts say, it must turn back advances made by cable operators and invest billions of dollars in network upgrades. Nowhere is this more urgent than in the province of Quebec, where Videotron Ltd. has coaxed 850,000 customers away from Bell Canada since launching its cable phone service four years ago. That figure is expected to top 1 million in 2009, driven in part by Videotron's ability to attract subscribers to a discounted triple-play bundle that combines voice, cable and high-speed Internet. "We're prepared to fight for new business," says Robert Depatie, president and CEO of Videotron, a division of multinational media company Quebecor Inc. Videotron plans to roll out a wireless network covering Quebec and parts of Ontario.

In a world where the distinction between cablecos and telcos has become meaningless, cable operators have an advantage because it's cheaper and easier to retrofit their networks to support voice than to retrofit telephone networks for video and high-speed Internet. The sharp decline Bell Canada has sustained in its core fixed-line business is mirrored in telcos around the world. In the U.S., cable companies added 4.9 million voice subscribers in 2008, bringing their total to 20 million. By contrast, AT&T, Verizon and Qwest lost 10.9 million voice customers last year.

Nortel, a former member of the BCE family, was able to use an earlier power shift that made long-distance competition possible to become a global leader, but it failed to repeat that with cable phone and wireless broadband. Nortel continues to make money on CDMA networks, a wireless protocol still used by many providers worldwide. But in 2007 it sold its GSM division, the 3G standard for the most advanced mobile communication, to rival Alcatel-Lucent SA.

The future is not, however, much brighter at Paris-based Alcatel-Lucent, the largest maker of fixed-line networks. Alcatel merged with Lucent Technologies in 2006 in a move intended to grow market share, but it has since axed from payroll 17,500 employees, including its ousted American CEO, Patricia Russo, in what has turned into a restructuring and cultural nightmare. "There are no bronze medals in the telecom-equipment market," says analyst Duncan Stewart of Toronto-based DSAM Consulting. He says Silicon Valley's Cisco Systems and Sweden's Ericsson have the biggest market share, fattest margins and most cash to see them through this downturn.

But even telecom service and equipment suppliers that are prospering have reason to be worried, knowing they are in the crosshairs of free voice providers that want to render the industry as they know it obsolete. The biggest threat to the old order is probably Skype Ltd. of Luxembourg, which has attracted more than 405 million customers since it launched software in 2003 that allows free long-distance calls over the Internet. eBay paid $2.6 billion for Skype four years ago because it believed the free voice operator would mesh well with its auction business. It didn't. Now eBay is spinning off Skype in an IPO, after taking a $1.4 billion write-down. Still, Skype is profitable and growing, and it rolled out an Apple iPhone app, much to the consternation of carriers everywhere.