A while back, Mark Evans and yours truly both read a Globe and Mail Saturday feature interview with Bell Canada CEO Michael Sabia.  I meant to pick up on this thread but the work caught up with me, until today, while Googling around at work trying to uncover some Canadian telco data, I accidentally came across a great find.  Like the saying goes - some great findings are truly accidental - and this was no exception to that adage.  I discovered an editorial that Dr. Yves Rabeau wrote in the Financial Post back in August of 2004.  Dr. Rabeau has impressive credentials, including a Ph.D. in Economics from my alma mater (MIT) and is Professor of Business Strategy in the Faculty of Management Science at UQAM and Director at the MEI - Montreal Economic Institute). 

More importantly, at the bottom of the web page article, I discovered a link to an excellent discussion paper authored by Dr. Rabeau that I wanted to share with TF readers.  The study is called "The Schumpeterian Wave in Telecommunications: Policy Implications", and it is a must read.  At the time of my discovery, I made an instant connection to the Schumpeter reference in the Sabia interview with the Globe and Mail.  Joseph Schumpeter (shown in the photo) struck again - the Austrian economist that so greatly influenced the economic development theory and coined the famous term "creative destruction".  Schumpeter is not only Sabia's favorite economist, but also an inspiration for Dr. Rabeau's paper. 

The "Schumpeterian Wave" is very well described in the discussion - long waves of innovations both create and destroy wealth.  However, the net long-term effect is positive, because innovation eventually brings productivity gains which enhance the living standards in the economy.  Of course these innovation cycles bring about some major turmoil - new firms and existing ones that can adopt the new technologies can thrive under this environment, whereas others eventually vanish because they cannot make the necessary adjustments. 

But the central theme of the paper is to determine whether, if telecom regulation were in tune with the changing technology and the competitive landscape, this could have limited excesses such as the telecom speculative bubble.  More importantly, the study also raises a few very important questions about what role the CRTC should pursue, and whether or not the goal of achieving a healthy level of competition in the local markets is a realistic one.  The big question asked is - while trying to balance the interests of new competitors with those of the incumbents, will the CRTC end up in an "economic impasse" (where it seeks to create a competitive regime that is not naturally cost-effective) that will also curtail the flexibility of the incumbents? 

Nortel finally announced its Q2 numbers, and they came in strong, jumping 12.6% QoQ totalling $2.86 billion, ahead of Wall Street estimates between $2.67 and 2.70 billion.  Regionally, the numbers were strong in North America (US and Canada) but fairly flattish overseas. 

Enterprise revenues jumped considerably (33% QoQ), due to the recognition of previously deferred revenues (~$100 million) related to specific PBX software upgrades in the U.S. and Europe.  However, no mention of the much anticipated MPE9000 IP router (also known as the Neptune), and the book-to-bill ratio came a bit under what was expected (0.84).  More importantly, almost all the Nortel enterprise voice (PBX/IP PBX) competitors had great quarters: Cisco, Avaya, Mitel, Inter-Tel and Aastra.

On the wireless side, CDMA was the bright spot, with performance being driven by EV-DO sales to players such as Bell Canada, Sprint and Verizon.  However, the GSM revenues were lower, due to the completion of a major contract in Europe and lower than anticipated sales to BSNL.  Finally, wireline saw declines in long-haul optical and traditional circuit switching for voice and ATM switches for data, although these drops were compensated by higher sales in VoIP switches and metro optical gear.  It would have been nice to see more detail on the Verizon Class5 switch replacement project.

All in all, a good quarter, considering the recent turmoil, but there is $1.3 billion worth of debt coming due in early 2006, and more visibility on the company's strategy will be helpful for most investors.  Despite the jump in revenues, Nortel turned in an EPS of 1 penny, so cost cutting will need to continue.