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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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twill009 12/5/2012 | 3:48:19 AM
re: Nortel Sees $1B From Microsoft Alliance This relationship makes a lot of sense in concept but it is super annoying that they throw out a $1b figure to generate attention. It is an obvious attempt to compensate for the lack of other specifics in the announcement.

Also, it would make sense for MSFT to do this with every PBX and LAN networking vendor, so if I was Nortel i would not harbor any illusions of a 'special relationship'.
donniall 12/5/2012 | 3:48:18 AM
re: Nortel Sees $1B From Microsoft Alliance Mike Zafirovski says: 'We see the sector hitting an inflection point based around convergence [and have chosen] an offensive play" to deal with that change ......We see a lot of functionality moving into software, so we are aligning with the leading player in that space."

That would be considered a pretty insightful observation - if delivered a decadade ago. That someone should be 'touting' that observation in 2006 - and a CEO at that - is pretty-much mind boggling .....
didhesaythat 12/5/2012 | 3:48:17 AM
re: Nortel Sees $1B From Microsoft Alliance Nice to see that Nortel is probably the last Pbx vendor to announce a partnership with MSFT... Avaya, Mitel, Siemens have all had PR in the past with MSFT.. didn't NT also announce a strategic partnership with IBM not that long ago that also included R&D? Of course that was last year's CEO that did that... Maybe the NT alliance is more than the other, but of course NT will be walking the fox into the hen house too... MSFT only cares to control the desktop and this is the next (Pbx) logical extension...

-dhst
High-Tide 12/5/2012 | 3:48:15 AM
re: Nortel Sees $1B From Microsoft Alliance You are not correct in your facts. Nortel has had a partnership with MS for a year now - with the CS 1000 pbx supporting the MS Live Communication Server front end. It is true that MS has partnerships with 3 others - Mitel, Avaya, Cisco. There are unique capabilities with the Nortel play - (like being able to place AND receive calls via soft phone - I need to find my notes - but this was straight from MS).

The new alliance is a strenghtening of this relationship, with cross-licensing of patents and a go-to-market plan to lead with each other's products.

I think it is a very bold move - instead of letting new players eat our lunch, this is a strong partnership embracing the future. Nortel has had multi-media , unified communications, and unified messaging via the MCS/CS 1000 / Call Pilot for over four years - UM for at least 8 years.

I think Mike Z's point is that the mainstream businesses are ready to embrace these technologies - which so far are not widely adopted. There is a huge market, and partnering with MS will grant Nortel access to potential new customers.

To you naysayers, I say "enough!" with the piling on - Nortel is a much better company than you give credit, and the new leadership is world class. Let's see what the next 18 to 24 months bring and let that be the proof.

HT
lightbulb0 12/5/2012 | 3:48:15 AM
re: Nortel Sees $1B From Microsoft Alliance i could not remember what Nortel is good at or what their focus are now. this announcement, i am relunctant to call it a deal, gives Nortel a badly needed publicity and maybe some revenue, i dont know if imaginary 1B is possible. as far as microsoft, well, they were not serious the first place. they lay their eyes only on google, nothing else.
ozip 12/5/2012 | 3:48:14 AM
re: Nortel Sees $1B From Microsoft Alliance Has anybody considered that Microsofts motivation is probably improving the lack luster sales of Live Communication Server. This platform, based around SIP, released about 3 years ago was promised as the center of enterprise communication. In addition to providing integration between Office, IM and sharepoint, it was supposed to integrate voice.

Perhaps Nortel were willing to take the step beyond the blah, blah marketing partnerships that basically consists of connecting vendor A to vendor B in a dark, damp and dusty lab and claiming victory.

This is probably the only deal that Nortel could have done to pose a crediable threat to the Cisco (and less so Avaya) domination of the Enterprise VoIP migration market.

OZIP
didhesaythat 12/5/2012 | 3:48:13 AM
re: Nortel Sees $1B From Microsoft Alliance Tide,

The other players that have integration with LCS (soon to be OCS) can do everything that you stated that NT supposedly can do. In my estimation, NT sold their souls to the devil for some PR... yeah they're sharing R&D and IP... however, can you tell me whatever became of the IBM alliance that had the same framework... eventhough it was geared toward the SP space?

I'm not trying to pile on, as a former emoployee I have a shitload of shares underwater still, but I just don't see the long term viability of a MS partnership this close... They basically traded away their future... do you really think MS is going to let Call Pilot be deployed when they now sell voice messaging as part of their UM portfolio? All that MS really needs NT for is digital and analog dial tone... BUT MS has partnerships with all the other vendors as well... do you really think someone will rip out an Avaya switch, Alcatel, or Siemens just for call center and other higher level routing? Maybe, if NT is giving away the ports, but then don't you want profitabliity with the stuff shipping? In my view this is a move to protect the NT base accounts that have been ravaged by Cisco and Avaya the last 3 years... NT would have been better off selling the Enterprise business to MSFT and developing a plan to excel in a couple lines of business instead of many. For that matter, MSFT could have bought Avaya if they were really serious about this space, as was mentioned before they're still focused on Google, they're just sticking their toes in this market with radical cheap pricing to see if they get any takers... without taking note of the Cisco failures when they first started in this Ent Telephony space that your stuff has to work as what the client had before...

-dhst
High-Tide 12/5/2012 | 3:48:09 AM
re: Nortel Sees $1B From Microsoft Alliance In regards to the same capabilities - that is not true. "Only Nortel has a GÇ˙twinningGÇÖ engine
To allow information workers to actively
Select to answer inbound calls on their phone
or their computer" - this is what I was referring to - right out of the MS LCS presentation. This is important for those wishing to use a soft phone when mobile, verus a physical IP or digital/analog set.

The IBM partnership is alive and well - Nortel is not putting all it's eggs in one basket. The alliance with IBM will produce product early 2007.

The market is much larger than what you envision - nobody expects an embedded Avaya/Mitel/brand x customer to flip their hardware over this or any other advancement - that rarely happens, in my experience. The key is to capture those shops that are MS. I have several customers who are gaga over this - while others barely notice.

Who claims leadership in VoIP is also suspect - Nortel has three different research groups naming them number one. Cisco clearly has number one mind share. Who to believe?
didhesaythat 12/5/2012 | 3:48:01 AM
re: Nortel Sees $1B From Microsoft Alliance Tide,

Not going to debate you on the "twining" as there are more that one way to skin a cat ;-) so I don't believe there is an edge to that... anyone can spin it...

However, your following premise:

"The market is much larger than what you envision - nobody expects an embedded Avaya/Mitel/brand x customer to flip their hardware over this or any other advancement - that rarely happens, in my experience. The key is to capture those shops that are MS. I have several customers who are gaga over this - while others barely notice."

Do you not think that the shops that are MSFT already have a NT, AV, CSCO, SMNS, Lucatel alredy there??? You have several EXISTING NT accounts that are gaga... again NT building an offer that only targets an entire market segment of their own customers instead of a market segment... Just like the 1 Meg Modem (DMS only), IP Centrex (DMS only), Call Pilot (Meridian... I think that changed recently though)

I wonder what this does for the rumored AV, NT, Siemens JV!
High-Tide 12/5/2012 | 3:48:00 AM
re: Nortel Sees $1B From Microsoft Alliance I simply offerred a proof point to my earlier comment - not trying to spin anything. The customers I was referring to who are excited are not voice customers - they are data customers!

There is a huge market of small and medium business customers who rely upon overpriced centrex-like services - these customers often have only basic services. Customers that fall into this category that also are Microsoft shops present a whole new market opportunity.

A final pointed remark - if a competitor made this agreement with MS, the pundits would be calling Nortel an "old maid" again - as in the recent LR article regarding the Nokia/Siemens merger. Damned if you do - damned if you don't? Thankfully, NT leadership is a lot more optimistic than you are.
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