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As Nortel Networks (NT) continues to struggle, I'm starting to wonder: Did Microsoft (NASDAQ:MSFT) bet on the wrong unified communications partner? Sure, Microsoft works with multiple networking companies -- including Cisco Systems (NASDAQ:CSCO). But Microsoft's most strategic unified communications partner is Nortel -- a company facing yet another fiscal crisis.

Admittedly, Nortel has a lot of assets across unified communications, enterprise networks, telecom, etc. But this blog entry from SeekingAlpha highlights the grim state of Nortel’s business. The company’s stock is trading at about $1.30 on Nov. 4, down from a 52-week high of $19.50. Ouch.

Some pundits expect Nortel to announce a strategic reorganization or layoffs when the company discloses financial results November 10. That’s all speculation but here’s a hard fact: Microsoft in July 2006 hitched its wagon to Nortel as part of a four-year strategic partnership in the unified communications market.

Familiar Strategy

At the time, the Microsoft strategy seemed smart. Over and over again, Microsoft has partnered with the No. 2 company in a market (other examples: Sybase (SY), Novell (NASDAQ:NOVL)) to challenge or disrupt an entrenched leader (examples: Oracle (NYSE:ORCL), Red Hat (NYSE:RHT)).

Gradually, the Sybase relationship allowed Microsoft to bolster its own SQL Server database to compete against Oracle on some fronts. And the Novell relationship has convinced some CIOs to standardize on Windows and Novell SUSE Linux rather than Red Hat Linux.

Proud Partners?

Now, consider the situation with Microsoft-Nortel. Imagine Microsoft or its technology partners going into a CIO and pitching a Microsoft-Nortel unified communications solution.

Technically, the solution may be strong. But the CIO will likely ask:

  • How healthy is Nortel?
  • Will Nortel be around in a year or two?
  • Who will support this solution if Nortel disappears?
  • Is Nortel focused on me or are they focused on fixing their business?

Sure, it sounds like I'm spreading fear, uncertainty and doubt (FUD) about Nortel. But we all recall how far Nortel fell during the dot-com implosion. Well, bad economic times are back -- and Nortel wasn’t exactly healthy before the current economic turmoil started.

Microsoft’s Options

Some folks are calling for Microsoft to acquire Nortel’s VoIP business. But there are four reasons why that will never happen.

Here’s the clearest reason of all: Microsoft’s VoIP advertisements evangelize unified communications software layered in on existing network hardware. Surely, Microsoft doesn’t want to acquire that hardware component from Nortel.

Rather, Microsoft will hedge its bets. The software company already has a lukewarm relationship with Cisco Systems. And Microsoft is quietly working with smaller VoIP partners like ShoreTel.

It’s safe to say Microsoft will press forward with the Nortel relationship while pursuing disruptive mobile and wireless technologies that it can fold into the unified communications strategy.

By mid-2008, more than 2,500 Microsoft partners had earned their “Unified Communications Solutions” competency. And in Nortel’s defense, more than 200 customers recently participated in the company’s Advanced Technology Summit.

But fiscal strength -- rather than technical merits -- is Nortel’s biggest challenge at the moment. I wonder: How many of those Microsoft partners are willing to pitch Nortel solutions during customer calls?

Disclosure: none

Source: Did Microsoft Bet on the Wrong Networking Partner?