Nortel bets big R&D dollars on 'hyperconnectivity'

(Figures in U.S. dollars unless noted)

By Susan Taylor

OTTAWA, May 9 (Reuters) - Nortel Networks NT.TO NT.N is no longer hitching its hopes on the anemic telecommunications market, but instead investing a big chunk of its $1.7 billion annual research and development budget in "hyperconnectivity".

The communications equipment maker told analysts on Wednesday it is preparing for increasing demand, as the growing connection between people and machines breeds bigger networks that need more sophisticated features.

"For a number of you, the question remains: can Nortel grow? I am very convinced," said Chief Executive Mike Zafirovski. "Hyperconnectivity will be to communications what the Internet was for information." Nortel, facing tougher competition from companies who have merged and low-cost rivals from Asia, its targeting its efforts on 4G (fourth-generation) wireless technology, unified communications, and ethernet networks.

That comes amid richer spending on emerging technology, which increases to 20 percent from 10 percent of the R&D budget by year's end. Spending on current technology will increase to 60 percent from 35 percent, while the budget for older, legacy equipment is slashed to 20 percent from 55 percent.

"Hyperconnectivity is real. It's happening now," said Chief Technology Officer John Roese in a presentation to about 75 analysts. "It will be a slow roll-out that ultimately sneaks up on us."

In Europe, for example, mobile phones now outnumber people, and by 2010 there will be 100 billion Internet commerce transactions worldwide, he said. In the United States, more than 70 percent of all cars manufactured in 2007 will have iPod connections, he added.

"Our strategy in this hyperconnected world is ... about addressing the IT market and trying to get a percentage of it," Roese told journalists separately. "I'll take 5 percent of the IT market over 100 percent of the voice market any day of the week." A rich information technology market in the trillions of dollars contrasts with a much smaller and shrinking telecoms market where voice line prices are dropping, said Roese.

Nortel is better positioned than its rivals, he argued, because it has picked the "best dance partners" for alliances that will help it crack the information technology market, including Microsoft Corp. (MSFT.O).

Under the Microsoft pact, announced in July, the companies will work together to make communication services simpler and more convenient by linking office phones with computers. Nortel expects to drive more than $1 billion in new sales over the four-year deal.

Roese, who celebrates his first anniversary at Nortel next month, said it is a positive sign that Nortel rivals such as Cisco Systems (CSCO.O) are also talking about hyperconnectivity.

"When you have the only game in town you may not actually

(be a catalyst for) the industry," he told reporters. "It's not going to be a one-horse thing. We're not going to be the only people in the world who can deliver on the vision."

Toronto-based Nortel has been cutting costs and trying to boost revenues as it tries to return to profitability. Last week, it said the worst was behind it, but more work remains.

After the tech collapse in 2001, Nortel became the poster child for telecom sector woes as it posted billions of dollars of losses, slashed thousands of jobs, and shut buildings around the world. It was later hit by an accounting scandal and shareholder lawsuits.

($1=$1.11 Canadian)

((Reporting by Susan Taylor, editing by Rob Wilson, Reuters Messaging: susan.taylor1.reuters.com@reuters.net, tel: +613-235-8385)) Keywords: NORTEL TECHNOLOGY/

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