Scott Moritz

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Lucent Dims Softswitch as Red Ink Flows

Scott Moritz

The sales-starved telecom equipment maker is preparing to close down its advanced phone-switching development, say people familiar with the plans. The move comes as Lucent and its rivals struggle with heavy losses brought on by falling sales and costs that remain massive despite repeated cutbacks.

Lucent is shutting down most of its softswitch program, a move that could affect more than 1,000 jobs, these people say. The softswitch is a line of products that held great potential for network upgrades but ultimately delivered very limited commercial success. Analysts and Lucent insiders say the company's optical networking group is also likely to be trimmed if not entirely dismantled, as demand for futuristic fiber optic gear has all but vanished.

A Lucent spokeswoman said the company is reviewing its product portfolio, but she declined to comment specifically on the softswitch and optical units. Analysts and one softswitch customer say that given the dire state of the industry and Lucent's need to cut its losses, it would come as little surprise if the company were to bail on the effort. Lucent fell 2 cents to 77 cents Thursday.

No New Switches

Welcome to the new networking reality, where telcos are saying no to new gear, say industry wags. Old phone technologies are being nursed along, and new solutions are largely going unbought.

"Given the state of the market and the predictions for no immediate improvement, it's not hard to understand why there's no technology advancement right now," says Sam Greenholtz, an analyst with the telecom research and consulting firm Communications Industry Research. "Customers are only adding to existing systems, and hardly anyone is doing a lot of planning for big new systems."

"Lucent had developed a lot of things for the future, but that's a future that's not going to happen," says Chris Nicoll, head of networking analysis at CurrentAnalysis.com, a Sterling, Va., research and consulting shop.

Lucent has officially said it is looking to cut its 53,000-employee staff size by 7,000 or more, but sources familiar with the plan have said top management is preparing more drastic reductions that would bring the total to 35,000 or less.

Where It's Going

The entire communications gear industry has been on a prolonged and painful scaledown since the collapse of the late-'90s Net building boom. For Lucent, the current cuts continue a red-ink reduction mandate that started a year ago when the company began to exit all unprofitable products and businesses and focus on its major customers.

"This might not be a bad move for Lucent -- in fact, they may be hearing from their customers where the marketplace is going and that it will be a few years before they need this kind of equipment," says CIR's Greenholtz.

Softswitches are known as the essential next step in network evolution. These next-generation boxes help connect traffic from old-wire phone systems to the Internet.

Last year, seeing no demand overseas for its most advanced softswitch, the so-called 7R/E, Lucent softswitch chief Dave Geary told managers that the company was killing all its international 7R/E work. As a result, some U.S. softswitch customers such as Broadwing (BRW) aren't exactly surprised to hear that Lucent is now throwing in the towel here.

Broadwing illustrates part of Lucent's conundrum. The Cincinnati telco was the first U.S. customer for to buy a part of Lucent's 7R/E two years ago. But Broadwing has not returned for more softswitch gear.

Broadwing's network chief Dennis Hinkel is sympathetic to Lucent's position. "We were always talking with them about the next step for us," says Hinkel. "With 90% of our access lines being handled by Lucent switches, they were clearly the first in line to get the business."

But it appears Lucent couldn't afford to wait.

That doesn't necessarily doom Lucent's future, says Lehman Brothers analyst Steve Levy. Killing products today, says Levy, doesn't preclude acquiring companies with the right products at some later date.

To be sure, investors long for the day when Lucent can find its path out from under too many products, to the luxury of having too few.