A tale of two IP comm companies

This week brought a tale of two companies in the IP communications space, and for one it's the best of times, and the other, well, you know the story.

Avaya announced Monday a $475 million stalking horse bid for Nortel's Enterprise Solutions division, providing further assurance that the Canadian telecom vendor's days as an independent entity are numbered. Meanwhile, Skype, which was founded just six years ago, announced another gangbusters quarter of revenue and subscriber growth. Its second-quarter revenue was $170 million, up $17 million and 9 percent from the first quarter, and it also added 37 million more users in the quarter. If it can maintain its current growth rates, Skype is poised to do more than $700 million in revenue in 2009 and end the year with more than 550 million users.

As Nortel delisted from both the Toronto Stock Exchange and NYSE earlier this year, eBay announced plans to have an initial public offering for Skype in early 2010.

Nortel reached a peak market cap of C$398 billion in September 2000, but fell to about C$5 billion less than two years later and never fully recovered after the telecom bubble burst, despite hopeful statements that it might.

Though the companies' products and core competencies couldn't be more different, I think as Skype begins to prepare to go public, it should keep in mind some lessons from Nortel's parabolic rise and fall.

One long-time Nortel-er told me off the record that he was very saddened to see the company breaking up and was angry about the way the company was "managed into the ground." Analysts I spoke to this week, while not ready to comment formally on the announcement, certainly agreed that some of Nortel's products were mistimed in the market and that management should carry some portion of the blame for the company's demise. All of these parties expressed hope, however, that the Enterprise Solutions Group and other divisions could thrive under a different corporate umbrella.

Here, Nortel does bear comparison with Skype, which is itching to be out from under eBay's control, as analysts have told me in the past. Apparently, the Internet auction giant's management team never quite knew what to do with Skype. Spun off as an independent entity, Skype would control its own roadmaps and development cycles, which would be critical as it manages its gargantuan user base while also making a play to enter the business market.

But while Skype's metrics are up across the board, and have been for several consecutive quarters, the company would be wise to study Nortel's demise as it prepares for life as a public entity. It needs to manage its many forays into disparate markets well, while also keeping a sharp focus on its margins as it adds millions of free users, because, as Nortel's demise reminds us, the higher you climb, the farther you stand to fall. 

- Pete