Microsoft/Nortel committed to marriage, but future is cloudy

Microsoft, IBM and Cisco will ultimately dominate Nortel, Avaya, Alcatel, Siemens in unified communications arena

Nortel's rocking financial situation and announced layoffs this week of 1,300 people likely won't have much short-term impact on the company's four-year unified communications alliance with Microsoft, including before the deal's expiration in 2010, according to experts.

But the long-term outlook is that users will likely see vendors such as Microsoft, IBM and Cisco rise to the top of the voice pile via their UC platforms built around integrated software applications and middleware.

"I'm not saying Nortel will be killed off; they have a great opportunity to build value on top of Microsoft." says Zeus Kerravala, an analyst with the Yankee Group. "What you are seeing is a transformation akin to the transformation from the mainframe to Windows. Back then you had huge hardware giants like Honeywell, Burroughs, Univac, and they all kind of went away. Nortel, Avaya, Alcatel, Siemens -- these guys are the mainframe giants of this generation. One or two of them may survive but certainly not all of them."

Kerravala says Nortel's current trouble shouldn't impact its partnership with Microsoft in the next 16 months, but he thinks by 2015 the alliance will be gone.

He says Nortel's challenge is to prove not only that it will be around long term but that it can complement the Microsoft platform and be a strategic partner.

"I do believe that the traditional PBX is becoming a development platform and the winners and losers will be defined by those that create a viable development community around it. Who is good at that? Microsoft," Kerravala says.

The frenzied interest in UC is no surprise; IDC predicted in March that sales of UC gear will top US$17 billion in four years.

Nortel and Microsoft were in front of that curve. They forged a partnership in 2006 that resulted in what they called the Innovative Communications Alliance (ICA), a plan to jointly develop, sell and roll out UC and VoIP technology to corporate customers over a four-year period.

The deal involved professional services, cross-licensing, joint products, sales and partners.

Nortel originally was mentoring Microsoft into its voice age, experts say, but Nortel clearly saw that the telephony game was changing.

At the signing of the ICA deal, Nortel CEO Mike Zafirovski said, "We wanted to change the trajectory of [Nortel's] enterprise business. Our new relationship with Microsoft represents an opportunity to create well over $1 billion in revenue for Nortel in the next [several] years [with] the combination of [Nortel] professional services, voice products and data pull-through [sales] from our customers."

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Judging by Nortel's US$3.4 billion loss announced last week, it doesn't appear that the returns have been up to Zafirovski's prediction. Nortel officials declined to discuss the partnership in terms of dollars.

Nortel has been betting that telephony is going to software and the company is eyeing a short-term future of integrated infrastructure and a long-term play for adding vertical applications and scalability enhancements on top of the Microsoft platform.

Both Microsoft and Nortel say their relationship is going full-steam ahead and both have numerous other irons in the UC fire.

In fact, Nortel has a deal with IBM/Lotus for hosted UC using the Lotus Sametime client on the front end, a deal that mimics one Nortel announced with Microsoft in June.

And Microsoft, which aligns as closely with Siemens and Mytel as it does Nortel, is not standing still. In October, it unveiled its UC/voice platform Office Communications Server (OCS) 2007 R2 and said it would ship officially in February 2009, although it is likely to be available before year-end.

The significance to Nortel and other Microsoft partners is an OCS 2007 R2 feature called Session Initiation Protocol-enabled trunking that allows a direct VoIP connection between an Internet telephony service provider and Microsoft's Office Communicator client without requiring on-premise gateways like Nortel supplies.

"The 2010 expiration of the [ICA] deal seems like a good time to reassess where the market is going," says Larry Hettick, an analyst with Current Analysis.

Despite Nortel's troubles, Hettick says it and other telecom vendors need to support Microsoft's UC interface -- Office Communicator.

"The telecom vendors have given up on the GUI interface," Hettick says. "In terms of Microsoft, do they need Nortel? They don't need them so much as they need support from all the IP PBX vendors for integration."

So far, ICA has been fruitful, including 10 ICA products in the market and 1,100 joint ICA customers, according to Nortel officials.

The pair also has opened up collaboration centers, technology centers with live ICA demonstrations. And they have established ICA demonstration centers around the world.

But beyond this Microsoft doesn't want to peer into the future.

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"Our relationship with Nortel is strong and customer interest in our joint solutions remains high," says Craig Schuman, director of business development and strategy for the UC group at Microsoft. Schuman cites new customers such as Telefonica Moviles Argentina, Nueva EPS and Conagra.

"Nortel remains a strategic partner for us in the UC space. Past that, we can't comment on any future business discussions."

Nortel officials say that ICA is servicing customers as intended by offering product integrations to support UC.

"We are committed to ICA," says Ruchi Prasad, vice president and general manager of ICA for Nortel. "We have a four-year relationship with Microsoft and we have made a tremendous amount of progress."

Prasad says Nortel has put its investment into three areas: integration, investment protection for users, and transformation.

"The industry is at a critical point, but our focus is on customer value. We are on track," he says.

But future development at Nortel will be challenged after the company said this week it will cut spending on R&D by 9 percent to US$377 million.

The cuts will affect the company's transformation into software and voice applications given what Zafirovski said last year at VoiceCon that the majority of the company's R&D is focused on software -- with 75 to 80 percent of development dollars going to writing code, rather than developing circuit boards, line cards and handsets.

"I think some people under estimate Microsoft in voice," the Yankee Group's Kerravala says. "I know they are a new vendor, but this is the market moving to software, the ICA is temporary relationship.