Telecom industry insiders say Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Microsoft Corp. (Nasdaq: MSFT) are preparing a broad-reaching alliance that will result in the French equipment vendor reselling the software giant's IPTV system.

Both companies declined to comment on whether or not a deal was in the works.

One industry executive, who requested anonymity, says news of an alliance between the two firms is imminent, citing a contact within one of the potential partners.

And another senior executive at an IPTV system vendor, who also wishes to remain anonymous, says the two companies are already working together, and that Alcatel came to Microsoft's aid when it was struggling to implement its system for a trial at Swisscom AG's (NYSE: SCM) Bluewin business (see Swiss IPTV Trial Hits 'Glitches').

Bluewin had not responded to questions as this article was published.

The two vendors have, to date, been competitors rather than allies, as both have been trying to win contracts to supply their respective IPTV middleware systems that enable service providers to manage the delivery of TV and video content over broadband access systems (see Alcatel Unveils Open Media Suite and Is Microsoft Finally Carrier Grade?).

But Alcatel, which has developed its system through a combination of acquisitions and internal development, has struggled to pin down major carrier contracts in the IPTV arena, and it has been dogged by rumors that its system is failing to meet the needs of large carriers (see Alcatel Denies iMagic Fadeout).

Microsoft, meanwhile, has also attracted criticism from its rivals, who doubt the software company's ability to deliver a carrier-grade product that works as well in operator networks as it does in demonstration suites. But Microsoft has the world's biggest IPTV middleware deal to date, with SBC Communications Inc. (NYSE: SBC). (See SBC Awards Microsoft $400M IPTV Deal .)

Alcatel is Microsoft's integration partner at SBC. It won the major equipment and services contract for the RBOC's next-generation network rollout, so the two companies are already working together (see Mais Alors! Alcatel Bags $1.7B SBC Deal ).

Sources have slightly different takes on the exact form that a potential Alcatel/Microsoft IPTV alliance would take. One source says Alcatel will OEM Microsoft's system, provide the appropriate professional services to integrate the system into carrier networks, and wind down its own software development.

"It makes sense if Microsoft's is a good solution. Alcatel should have done better with its own development, given its resources, but its strength is in hardware, not software. That's Microsoft's domain," says the source.

He believes the deal is done but that the fine details have yet to be signed off on. "They're probably still negotiating over exclusivity, and other contract matters," reckons the source.

But another industry insider believes Alcatel will maintain and continue to develop its own solution, offering Microsoft's as an alternative, depending on which one best suits service provider customers.

Either way, such a combination would create an IPTV powerhouse that would meet many of the needs of major carriers, which increasingly want to source their systems from a small number of large, financially-stable suppliers.

It would also create an even more formidable competitor for the other IPTV middleware system providers, including Siemens Communications Group (through its partnership with Myrio Corp.), UTStarcom Inc. (Nasdaq: UTSI), Kasenna Inc., Orca Interactive Ltd., Minerva Networks Inc., and Infogate Online Ltd. (See UTStarcom, Myrio Have Their IPTV , Siemens Gears Up for IPTV, Kasenna Announces TotalTV, Orca Demos Broadband TV, Occam, Minerva Test IP TV, and Infogate, Logicalis Partner on IPTV .)

— Ray Le Maistre, International News Editor, Light Reading