Why Nortel Tied Itself to Microsoft

Nortel Networks is attempting to stem a potentially serious erosion of IP-telephony customers, with company CEO Mike Zafirovski and other senior executives spending plenty of personal time with marquee customers pondering removal of their Nortel IP phones and PBXes in favor of competing products from Cisco, Avaya, and Alcatel.

Zafirovski claims Nortel is back on a growth track, having stanched the loss of customers and gotten out from under a cloud of uncertainty caused by a seemingly endless accounting scandal, multiple earnings restatements, repeated layoffs, decimated employee morale among surviving staff members, and a general malaise that threatened to move the company several steps closer to irrelevance in most of the markets in which it still competes.

Many market analysts remain skeptical of Nortel’s prospects, with Prudential analyst Inder M. Singh adding to the chorus late last week. In a research note, Singh opined that Nortel’s restructuring plan has not been well executed, making the company’s profitability targets unattainable in the near future.

Meanwhile, as an article from Bloomberg attests, Nortel is faced by necessity to focus more on retaining its current customers than on growing its business through the addition of new ones. That’s especially true in IP telephony, where numbers from Synergy Research indicate that Nortel has suffered a steady erosion in market share. In the first quarter of this year, Nortel held 12.2 percent of the IP telephony market, down from 13.9-percent market share in the same quarter a year earlier. At the same time, Cisco and Avaya gained share at Nortel’s expense. Nortel is fourth, behind those two vendors and Alcatel, in the overall market.

Is it any wonder, given the circumstances in which it has placed itself, Nortel has tied itself to closely to Microsoft in a unified-communications partnership that, while important to Microsoft, is of infinitely more significance to Nortel?

Microsoft might have needed Nortel to provide telephony credibility and reliability to its unified-communications master plan, which ultimately involves running all enterprise communications — email, instant messaging, telephony, conferencing, and collaboration — from a Windows desktop, but Nortel needed Microsoft even more. It still does.