Nortel Networks Corp. (NYSE/Toronto: NT) announced a juicy VOIP contract with Verizon Communications Inc. (NYSE: VZ), sending its stock up and adding more than $2 billion to the company’s market value over the course of the day (see Verizon Picks Nortel for Class 5 VOIP).

Verizon plans to deploy all of Nortel’s Succession line of VOIP equipment, including softswitches, media servers, and gateways, replacing traditional Class 5 switches from a variety of vendors, in its local and long-distance networks. Hosted VOIP and multimedia services aimed at residential and enterprise customers will be rolled out gradually, starting the middle of this year.

The contract, which is the outcome of an RFP (request for proposal) Verizon sent out in June 2003, has been awarded in record time, analysts say, as it usually takes the major carriers considerably longer to work through such big proposals.

The other striking part about this deal is that it was awarded to Nortel, in a part of Verizon’s network that also contains Lucent Technologies Inc. (NYSE: LU) Class 5 switches. Analysts say this is a major blow for Lucent, but hardly surprising given the setbacks the company has faced in the VOIP market (see Lucent Performs Softswitch U-Turn).

”Lucent’s made a lot of effort rebranding and repositioning against Nortel,” says Jon Arnold, VOIP analyst at Frost & Sullivan. "Taking a prime customer away is not a good sign for them."

Naturally, Lucent is downplaying the news. “Nortel is first with Verizon, but this will be a two-vendor game,” says Bill Price, a company spokesman. He points out that the deal is exclusive for 18 months only, meaning that Lucent has time to catch up and offer a decent migration strategy for its own Class 5 switches.

The deal raises other questions, specifically for the smaller, non-incumbent players in the market. Sonus Networks Inc. (Nasdaq: SONS) and Telica Inc. both had VOIP gateways deals with Verizon, but the deal with Nortel now makes these deals look much smaller. “These are going to become an increasingly smaller piece of the puzzle,” reckons Arnold.

That said, Verizon spokesman Ellsworth Edwards says the carrier is keeping an open mind about its VOIP technology partners. “Technology is changing very rapidly and this is a complex marketplace,” he says.

The deal isn’t quite done and dusted either. Nortel Networks and Verizon have executed an interim letter of agreement (LOA) covering the initial terms of the arrangement. The parties expect to replace this LOA with a five-year agreement within the next few months.

”The announcement today is indicative of the times we are in -- VOIP is hot and Verizon wants to be seen to be making the moves,” says Arnold.

For its part, Nortel says the deal represents the “most comprehensive” deployment of its VOIP technology in any network to date. It began deploying VOIP gateways in Verizon’s inter-city network and segments of the company's long-distance network in 2002.

Buoyed by the news, Merrill Lynch & Co. Inc. raised its rating on Nortel to Buy from Neutral, citing its dominance in this sector of the market (see Nortel Wins Cayman VOIP Contract, Nortel, BellSouth Team for VOIP, Nortel Wins China VOIP Deal, MCI Vouches for Nortel's VOIP, and Sprint Starts on Softswitches).

At 4 p.m. EST Nortel's stock was up 19.3 percent to $5.68 a share.

— Jo Maitland, Senior Editor, Boardwatch