Did Microsoft Bet on the Wrong Networking Partner?

As Nortel Networks (NT) continues to struggle, I'm starting to wonder: Did Microsoft (MSFT) bet on the wrong unified communications partner? Sure, Microsoft works with multiple networking companies -- including Cisco Systems (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 (NOVL)) to challenge or disrupt an entrenched leader (examples: Oracle (ORCL), Red Hat (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

Comments

[James Wilson:]

What ? Have investors gotten to lazy to even check and see what insiders are doing ? Are they buying, sellng, or cashing out the whole company leaving just a shell that struggles just to keep the doors open with screwy accounting ?
Bill Gates ran ads with Raymond for people to laugh at while he was selling millions of shares of stock daily !

Didn't that pahse anyone since it was happening in almost every company listed ?

2008 Nov 05 07:02 AM

[Remembers Well:]

Industry-watchers secretly knew Microsoft/Nortel was a bad idea on Day 1. Nortel's portfolio is OK at best and clearly not Microsoft's first choice. Avaya's Karyn Mashima gave a delightful interview a few years ago where she detailed Microsoft's strident overtures towards Avaya which were <smartly> rebuffed. Nortel viewed Microsoft as a white-knight who could kick-start an indolent product line.

Events really didn't unfold that way. Both sides talk about all the joint customers, yet there is scant detail on what they actually bought. A sure sign that the answer is "not much."

Then in March 2008, Microsoft snubbed Nortel in Contact Center by selecting the equally daft choice of Aspect.

And what does Nortel have to show for their cherished alliance? One edge router that has the Microsoft Mediation Server embedded into it. It still costs the same as the separate pieces, it's just in one box. Otherwise there is NOTHING Nortel can do with Microsoft that any other vendor can't...a condition I suspect we'll see with Aspect.

I'm sure there's a calendar on the wall at Microsoft checking off the days until the four year alliance is over. That will be about the same time that Microsoft OCS will be a "real" PBX and not need Nortel's beard anymore.

2008 Nov 05 10:17 AM

[BPerkins:]

Nortel represents the path of least resistance to a large global telephoney marketshare. Their struggle will translate into gains for MS. Remembers Well is right--In two more waves OCS has significant potential to disrupt the current Cisco, Avaya, Nortel telephoney landscape. For a billion dollars MS gained access to Nortel's biggest assets-their R&D and entrance into many new desktops globally.

MS will see a return on this investment. Nortel will have to redesign and redefine who they are.

2008 Nov 05 01:05 PM

[Kunst:]

MS = Morgan Stanley
MSFT = Microsoft

2008 Nov 06 02:04 AM

[Matt1979:]

It's very clear from your statement that you haven't a clue what you're talking about. As in Microsofts own advertising strategy written about in this blog it's not about hardware but about software and services. Nortel have exactly the same strategy moving forward. So edge router - who cares... that's not what it's about!

On the note of hardware however it is probably worth noting that the Nortel PBX is the only PBX certified for under the Microsoft certification program for dual forking, remote call control and direct SIP.


On Nov 05 10:17 AM Remembers Well wrote:

> Industry-watchers secretly knew Microsoft/Nortel was a bad idea on
> Day 1. Nortel's portfolio is OK at best and clearly not Microsoft's
> first choice. Avaya's Karyn Mashima gave a delightful interview
> a few years ago where she detailed Microsoft's strident overtures
> towards Avaya which were <smartly> rebuffed. Nortel viewed Microsoft
> as a white-knight who could kick-start an indolent product line.
>
>
> Events really didn't unfold that way. Both sides talk about all
> the joint customers, yet there is scant detail on what they actually
> bought. A sure sign that the answer is "not much."
>
> Then in March 2008, Microsoft snubbed Nortel in Contact Center by
> selecting the equally daft choice of Aspect.
>
> And what does Nortel have to show for their cherished alliance?
> One edge router that has the Microsoft Mediation Server embedded
> into it. It still costs the same as the separate pieces, it's just
> in one box. Otherwise there is NOTHING Nortel can do with Microsoft
> that any other vendor can't...a condition I suspect we'll see with
> Aspect.
>
> I'm sure there's a calendar on the wall at Microsoft checking off
> the days until the four year alliance is over. That will be about
> the same time that Microsoft OCS will be a "real" PBX and not need
> Nortel's beard anymore.

2008 Nov 06 02:55 PM

[Crank Monkey:]

Microsoft is a cash cow with little or no future growth.

2008 Nov 07 08:49 AM

[Jackson Cash:]

YES! Nortel = TRASH!

Just this week I've been forced to install a Nortel switch... and it had a BAD PORT! Who the hell sells junk with bad ports these days!?

It has been 8 years of hardware deployment (literally hundreds of switches) whereas I last saw a bad port.

For all those thinking that some strategic partnership could REALLY emerge for SIP, etc, think again.

Avaya is leagues better and will continue to be so.

2008 Nov 07 12:41 PM