Handicapping the Nortel VoIP Triple Crown

After months of speculation, the stalking-horse race for Nortel Networks Ltd. 's VoIP carrier business appears to be finally nearing the gate. (See Report: Stalking Horse Stampedes Toward Nortel's VoIP Biz .)

Even though the migration to VoIP is happening at a relatively slow pace, a strong market opportunity remains, and therefore, the auction should attract significant interest. For example, the latest version of the Heavy Reading "IP Network Transformation Quarterly Market Tracker" identifies more than 168 million Class 5 lines in operation in North America, with only 22 percent of these currently served by VoIP, and the remaining 132 million lines still served by TDM.

Since some of these TDM switches have been in service for more than two decades, at some point these lines will need to be converted to VoIP. And since Nortel's TDM and VoIP footprint is so profound in this market, this race represents a one-time opportunity to inherit an enviable stable of pedigree customers, including AT&T Inc. (NYSE: T), BCE Inc. (Bell Canada) (NYSE/Toronto: BCE), Comcast Corp. (Nasdaq: CMCSA, CMCSK), Cox Communications Inc. , Telus Corp. (NYSE: TU; Toronto: T), and Verizon Communications Inc. (NYSE: VZ).

Not surprisingly, the auction is rumored to be gaining attention from all the major VoIP stables, including Alcatel-Lucent (NYSE: ALU), Ericsson AB (Nasdaq: ERIC), Huawei Technologies Co. Ltd. , Nokia Networks , and Sonus Networks Inc. (Nasdaq: SONS).

For Sonus, perhaps the Seabiscuit analogy is most appropriate. While facing larger and more powerful competitors, Sonus has shown on several occasions that it can run with the pack and win by some nimble footwork at the end. The biggest challenges Sonus faces are coming up with the finances required to win the business if the bidding accelerates; and integrating the technology and a much larger team of engineers. Therefore, of all the candidates, the stakes are clearly highest for Sonus. If successful, it will become a much stronger player with an established portfolio of applications it currently lacks to help ramp up revenues. However, if it gets boxed in during the integration exercise, the end result could be disastrous.

In contrast, the other thoroughbred participants, while not in make-or-break mode, all have strong reasons to consider involvement. Given its heritage, Alcatel-Lucent already has a massive TDM footprint and strategic VoIP deployments, so expanding the business and assuming the Nortel footprint would make it the undisputed dominant player and help to shore up its declining North America carrier revenues. (See Hard Times for Alcatel-Lucent.)

Standing beside it in the other gates are potentially Ericsson, Nokia-Siemens, and Huawei. Of these, Nokia Siemens in my estimation still remains a serious contender. Even though it has sent conflicting messages about whether it would consider other non-wireless-based lines of Nortel's business, this opportunity represents a strategically important second chance to raise market visibility in North America. (See NSN May Buy Other Nortel Assets.)

In contrast, although Ericsson and Huawei are considered less-mainstream competitors in this market, based on footprint captured in the "IP Network Transformation Quarterly Market Tracker," both are extremely opportunistic, continue to break into new accounts, and should not be discounted. (See Huawei, Ericsson Get a Piece of Comcast's IMS Action .)

Rounding out the field are potentially some smaller participants, including a mix of private venture firms and vendors hoping to defy the odds. One of these is Genband Inc. While unlikely to participate in the bidding outright, since it has shifted focus away from applications and switching, considering the relationships it has forged with Alcatel-Lucent, Nokia Siemens, and even Nortel itself, it appears favorably positioned to purchase Nortel media gateway technology and footprint from any victorious bidder willing to sell for the right price. (See BroadSoft Buys Genband's M6, Genband Gets a Gateway to NSN, AlcaLu, Genband Cozy Up, and Nortel Resells Genband Gateways.)

The exception in this scenario could be a successful bid from Sonus. Since Sonus remains a market leader in this segment, it seems unlikely that it would elect to directly sell the business to a competitor. Then again, Sonus could also potentially emerge as a challenger to Genband to purchase Nortel's portfolio as part of a plan B, post-auction-loss scenario.

While the final stretch awaits, one thing is certain: The race to win Nortel's third and latest line of business to hit the auction block will come down to the wire, and change the face of the VoIP landscape in North America forever.

— Jim Hodges, Senior Analyst, Heavy Reading

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