The true cost of R&D

Implications: As was the case years back when ISDN and other carrier technologies first started coming out of the factory, the vendors have always argued, - economy of scale will always bring real returns - there is always a minimum entry price - stay in or work a partnership It would seem that having exited UMTS and partnering on WiMAX, there is still not enough operating margin to generate the cash for world scale R&D. Nortel is seeing the impact of technology complexity and also a global business plan - that entry is limited to a select few.

Analysis: Having stated that revenues will drop 4%, thats $80m cash that is no longer available to the business. If an R&D program is $80m, and you have a few of them - then something has to go.

So exiting WiMAX for a partnership to leave a $100m R&D program focused on LTE made sense until the revenues dropped.

We have to assume that a 4% drop in revenue on a costed basis (ie 96% of revenues covered costs) that this loss in cash hits straight to the heart - R&D.

So in one way this is a good call - but also a difficult one for customers to swallow.