Partnership with Microsoft gives Nortel a boost as CEO Zafirovski predicts a $1 billion revenues boost

July 18, 2006

5 Min Read
Nortel Sees $1B From Microsoft Alliance

Nortel Networks Ltd. pledged its future to the enterprise sector and gave its investors something to cheer about today as it announced a broad marketing and technology partnership with Microsoft Corp. (Nasdaq: MSFT) and the creation of a new division. (See Nortel, Microsoft Team Up.)

Nortel and Microsoft have created the Innovative Communications Alliance as their "go-to-market vehicle" to provide the software company's unified communications software and Nortel's enterprise products, most notably its enterprise voice technology (PBX). [Ed note: Isn't a "go-to market vehicle" usually a horse and cart?]

In addition, Nortel will create a global systems integration division to back up the partnership. (See Microsoft Unveils Convergence System.)

The duo will target all sizes of enterprise users with applications such as VOIP, call processing, unified messaging, conferencing, and so on, for mobile, desktop phone, and PC platforms.

The move follows a tie-up between the two companies in Korea announced late June. (See LG-Nortel, Microsoft Team.)

Nortel CEO Mike Zafirovski told a conference call today that he expects Nortel to generate up to $1 billion in incremental revenues as a result of the partnership during the next three years. Taken evenly over each of those years, so $333 million a year, that would be a hike of just over 3 percent on its 205 revenues 0f $10.5 billion. (See Nortel Reports Q4 2005.)

"The enterprise sector is a core market for Nortel. We see the sector hitting an inflection point based around convergence [and have chosen] an offensive play" to deal with that change, Zafirovski says. "We see a lot of functionality moving into software, so we are aligning with the leading player in that space."

And the Nortel CEO sees this as a major leap of faith for his company. The convergence of IT, IP, and telephony in the enterprise sector involves "taking the functionality of telephony into software, and that's a big step for a company like Nortel."

Having closed below the $2 mark Monday, at $1.96, Nortel's share price rose $0.11, more than five percent, to $2.07 in late afternoon trading Tuesday, giving the vendor a market capitalization of $9 billion.

The relationship, initially for four years, revolves around a quartet of initiatives. First, the cross-licensing of intellectual property, which, noted Microsoft CEO Steve Ballmer, will involve his company having to make some payments to Nortel, though he declined to divulge further details.

Second, the company will form joint development teams to develop new products and applications. This will involve, initially, the delivery of advanced telephony servers that can communicate with Microsoft's desktop software, and will be followed by new jointly developed applications in 2007.

Third, Nortel is creating its systems integration division.

And last of all, both companies will invest in a joint sales and marketing initiative. "This is all about having an aligned offer, where we can jointly talk [to customers] about a communications solutions set," stated Ballmer.

Why not simply buy Nortel, asked one questioner on the conference call? That gave Microsoft's Ballmer the chance to trot out a cliché not heard (we hope) since the late 1980s: "We need to find a way to make one plus one equal three." Ouch.

"Nortel is a great company that has very different expertise from Microsoft," Ballmer says. "We see this is in the same way as our relationship with Intel Corp. (Nasdaq: INTC). That partnership has flourished with us being separate companies." We're sure he used the word 'synergy' too, but, surprisingly, neglected to mention that the two companies would "push the envelope."

He did add, though, that Nortel's particular strength in the relationship is its knowledge of voice technology. The partnership means enterprise users can migrate to and deploy software-based unified communications systems with the help of an experienced voice firm, he stated.

Infonetics Research Inc. analyst Matthias Machowinski says that, on the surface, the relationship "is a positive, probably more so for Nortel, but you have to wait and see what it will produce. There have been so many of these relationships -- some work out and some you don't hear about again. Microsoft already has relationships with [other PBX] vendors, such as Mitel Networks Corp. and Siemens Communications Group . But this is quite a deep relationship and involves product development and not just the resale of each others' products."

Machowinski also notes that this relationship will take Nortel to a place equipment manufacturers find it tough to reach -- the desktop. "Most IP telephony applications will require a presence on the desktop, and that's something Microsoft has all over the world. Getting clients onto the desktop is a tough challenge for the hardware vendors. Microsoft is the company they all want to partner with."

But it's not a just a one-way street, adds Machowinski. Nortel has TDM and IP voice technology experience, "and a huge customer base -- Nortel has sold a lot of PBXs down the years," says the Infonetics man.

The move comes as Zafirovski fights to put his strategy in place and pull Nortel out of the slump brought on by its accounting woes and management overhaul. (See Nortel CEO Maps Out His Vision, Nortel Still Haunted by Accounting Woes, Nortel Cuts 1,100 Jobs, Zafirovski Adds Another GE Exec to Nortel, and A Roese Is a Roese Is a New CTO.)

It also comes only weeks after industry scuttlebutt placed Nortel in talks with Siemens and Avaya Inc. over a possible enterprise collaboration. (See Sources: Siemens, Nortel, Avaya Mull JV.)

— Ray Le Maistre, International News Editor, Light Reading

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