Lippis Report Issue 65: Nortel Marries Up

It´s been a very difficult time for Nortel and its customers, ever since the optical bubble burst in 2000. For six years there have been financial scandals, poor operating performance, re-statement of financials, multiple changes of executive management, SEC investigations, criminal allegations, layoffs of over 70,000 employees, lost market share, lack of focus, selling of assets and on and on and on. What a long strange trip it´s been for those Nortel employees and customers who have hung on. For investors, it´s been nothing short of hellish, as Nortel stock fell precipitously from a high of $80 dollars a share to $2 and stayed there essentially for 6 years. So can Microsoft change Nortel´s fortunes with its new innovative communications alliance? An alliance Steve Ballmer, Microsoft´s CEO says will be as influential and on par with Microsoft relationships with Dell, HP and Intel in the personal computing space.

Microsoft clearly sees opportunity in a beaten down Nortel, while the Nortel executive management team was ready to try something totally different. In Nortel´s 100+ year history, it has never partnered with another firm on the same scale it plans with Microsoft. As the old adage goes, dire times call for dire measures. Nortel will, in essence, end of life most of its enterprise IP telephony products over the next three to four years, as it aligns with Microsoft´s Unified Communications (UC) strategy. The deal is simply this; Microsoft gets a partner that knows voice communications and has an installed base of both enterprise and service providers in which to channel UC to market. Nortel gets sorely needed credibility, infusion of cash and a strategy.

In the short term the Microsoft/Nortel Innovative Communications Alliance or ICA is a big marketing and vision win. Microsoft has given Nortel customers something to cheer about. ICA finally gives Nortel a vision, a strategy, a roadmap in which investment will be guided with a hugely credible partner. In short, Nortel just married up.

Microsoft also gave Nortel customers clarity. The prospect of Nortel selling its enterprise business is shelved for the foreseeable future, putting that fear to bed for Nortel customers. Nortel customers can now wrap their minds and potentially wallets around a bold unified communications strategy that promises to improve business process efficiency by embedding communications deeply into business and office productivity applications. Nortel customers can and are taking this seriously, as Nortel´s ability to execute has been catapulted, thanks to Microsoft.

The long-term prospects of ICA are less clear. As I had written in the Lippis Report Issue 64, UC doesn´t get interesting until the summer of 2007; a long time in our industry. Part of ICA is that Nortel will provide professional services to envision, design and implement IP telephony solutions, but its professional services organization is just ramping up and can´t compete with Avaya and Siemens.

Nortel plans to generate $1B in revenue based upon its alliance with Microsoft over the next three years. The question is, is this $1B of new revenue or replacement revenue, as Nortel will be rationalizing its enterprise product set in an effort to align it with UC. In particular, what will happen to its desktop collaboration and messaging products such as CallPilot and the Multi-Media Communications Server (MCS) family as they overlap significantly with UC. MCS is Nortel´s presence manager, but so is Microsoft´s Communication Server 2007, raising the question will MCS survive and see the summer of 2007? How will Nortel´s Communications Server family and Business Communications Manager (BCM) change to support UC? Will these products retain their brands as they are re-designed with UC in mind, be retained and upgraded with UC connectors and features or simply be put into end of life?

After the euphoria of ICA subsides Microsoft and Nortel will be doing a lot of convincing that it has the products and professional services to deliver UC promises. There is so much work to be done here. Nortel´s sales force has to be trained to talk the language of executive IT management, an audience it´s not familiar with. How will Microsoft/Nortel joint customer presentations work? Who will open the door and close the deal? What door will be opened as Microsoft and Nortel customers reside in different parts of an IT organization? What is the migration strategy to UC through ICA and what will happen to existing Nortel products and customer investments?

UC is a great strategy and will change the market for the better and hopefully Nortel too. Nortel is in the precarious position of selling today´s solutions/products while simultaneously selling future vision that may not include its current products. A UC migration strategy that builds upon existing products or includes trade-ins is key for Nortel´s success. The more compelling its migration strategy the greater market share it will gain. Nortel had to calculate that it can execute a major product transition and jump to a new platform while not loosing share, thanks to Microsoft´s market prowlness. For Microsoft, UC is all additional revenue in a new market segment, it has nothing to loose other then the dedication of capital and human resources. In short, Microsoft´s main product line is not at risk which is the not the case for Nortel.

Sorting all of this out will take time. The question is can Microsoft and Nortel stall the market as Steve Ballmer has suggested by telling IT executive management to hold off on IP telephony deployments until he (i.e., Microsoft and Nortel) is ready. With a year before UC is ready and a huge to do list on the desk of Mike Zafirovski´s, Nortel´s President and CEO, Microsoft and Nortel will be focused on development and marketing while their competitors are executing and focused on sales and customer support. The clock is ticking. Microsoft and Nortel´s marriage through ICA may want to take a short honeymoon and get right to business.

2 Debates over Lippis Report Issue 65: Nortel Marries Up

  1. said:

    As a VOIP reseller, Nortel was at first an obvious choice due to their market presence and voice experience. However, after assessing their channel organization (poor), product line (BCM v1.0) and development capability (no cash) we selected other vendors.

    Microsoft has an excellent channel program and support system but a poor record in telecommunications (they are nowhere in fax and major VOIP vendors are porting to Linux away from Windows OS).

    Your point that it is a low risk play for Microsoft and a last chance play for Nortel is a good one. Microsoft+Nortel vs. Others? My bet is on Others.

  2. Art Rosenberg said:

    The enterprise market is not ready for UC, just as key technologies like federated presence are not ready for the market. The only pressing game in play at the moment may be “greenfield” installations that are trying to make “futureproof” decisions.

    So, as you suggest, it is “time out” for everyone to get their acts together and for the enterprise organizations to get organized and do their homework. And, that doesn’t mean just doing network assessments, either!

    See my long running syndicated web column, The Unified-View, for the operational perspectives of migrating to UC.