Nortel Networks Corp. (Toronto:NT.TO - news) (NYSE:NT - news) said on Thursday it will further hone its focus on high-margin software to boost profits as its traditional telecom hardware faces increasing competition from low-cost rivals.
That software includes applications that let consumers make phone calls from their computer, for example, and middleware, the glue that links devices and applications to a network, or makes them work better.
Nortel, hosting an investor technology day on Thursday, said it is already spending about 80 percent of its research and development budget on software. About three-quarters of its sales and profits stem from software and services.
"I think you'll know Nortel as more a software company than a hardware company," in the future, chief research officer Brian McFadden told reporters.
"We are increasingly a software company ... we've kind of hit a tipping point."
Several analysts, who attended a range of demonstrations on Nortel's fiber-optic, wireless and wireline products, said they were underwhelmed by Nortel's high-tech road map. They complained the company's plan lacked a clear-cut path to growth.
"They need to be more selective. Nortel needs to pick a market that they can dominate," RBC Capital Markets analyst Mark Sue said.
"We can't all be masters. And telecom equipment, I think, is becoming a market where you have to have an expertise in one area."
Sue, who monitored a Webcast of the Ottawa event, noted that Nortel is still recovering from a protracted accounting scandal that hurt sales.
"You have to right the ship and then decide what you want to do and then select the best people to run that organization," he said. "I think they're still in the middle of trying to firm things up and maintain market share."
The company, which spent $1.9 billion on research and development in 2004, is increasingly boosting its engineering ranks in low-cost, fast-growth markets such as China and India.
Of Nortel's 12,000 full-time R&D staff, about 2,000 are in China, and 2,000 in India. Nortel employs a further 2,000 to 3,000 R&D staff in India on a contract basis.
Efforts to expand in China took a hit on Thursday, as mobile phone group Nokia (NOK1V.HE) announced a $111-million joint venture with China Putian Co. Ltd.
Nortel had been working on a similar venture with Putian, to develop and sell 3G, or third generation, wireless equipment for customers in China.
Nortel said on Thursday it would instead "collaborate" with Putian on field trials and that it plans "many more" partnerships in China.
"Nortel strategy in China was to partner to increase its likelihood of winning the 3G pie once the licenses were awarded. And Putian was supposed to be a good example of that," Sue said. "To do business in China, you do need joint ventures and partnerships."
The Chinese market for 3G gear for advanced high-speed networks is expected to be worth billions of dollars.