CIBC World Analyst Almost Gets It Right on Embattled Nortel

In a report published today by Canada’s The Globe and Mail daily newspaper, Allan Robinson notes that CIBC World Ittai Kidron, an analyst with CIBC World Markets Inc., takes a dim view of Nortel Networks.

Saying Nortel lags behind its competitors in many markets, Kidron calls Nortel a "turtle in a rabbit race." The analyst also said the company’s operational restructuring and product rationalization plans are taking longer than expected.

I have not been impressed by the recent pronouncements of Nortel’s senior executives, including the company’s CTO, John Roese, who doesn’t seem to have a coherent understanding of what the company ought to be doing to address the requirements of its existing and prospective customers.

Kidron seems to think Nortel can find success in two markets, Metro Ethernet and VoIP. Perhaps that is an accurate assessment, but I view Nortel as a serious threat only in Metro Ethernet. Even then, I think that business could do better in other managerial hands.

Over the long haul, I see Nortel losing ground in VoIP, especially in the enterprise IP PBX market, where it continues to struggle against Cisco and Avaya and might also be vulnerable to incursions by open-source Asterisk VoIP systems offered by vendors such as Digium and Fonality.

Notwithstanding its high-profile partnership with Microsoft relating to IP-based unified communications, Nortel looks set to lose its relevance in the enterprise. Even its relationship with Microsoft stands to deliver far more benefit to the Redmond software giant — which wants to feed off Nortel’s telephony expertise and credibility until it has the knowledge and perceived mandate to integrate VoIP functionality into Windows softphones — than is likely to accrue to Nortel.

If you want some insight into where Nortel might find itself in the future, look no further than the following excerpt of remarks that Microsoft CEO Steve Ballmer made on July 18, when appearing with Nortel CEO Mike Zafirovski and others to announce the Microsoft-Nortel partnership.

Said Ballmer:

In my own view I kind of liken it in a sense to something very important that we were involved in now probably almost 20 years ago with Digital Equipment Corporation when we really aligned what we were doing in e-mail. We didn’t just interoperate, and four or five years later we had millions of seats of Exchange deployed, and frankly Digital had been the most important partner we had had to get there. And so I think the notion of aligning, having strong go-to-market and mutual product development will be mutually beneficial for us and for our joint customers.

Even though Ballmer implies that Microsoft’s email partnership with Digital Equipment Corporation (DEC) was mutually beneficial, history suggests that Microsoft, with its market-dominating Exchange, benefited far more from the relationship than did DEC. If Ballmer is correct in drawing an analogy between the relationship Microsoft had with the DEC and the partnership it has formed with Nortel to bolster the IP-based telephony aspects of its unified-communications offering, then Nortel will serve as a convenient stepping stone for Microsoft, a partner from which Microsoft will learn and then leave behind.

So, what should Nortel do?

With the current executive leadership, the company seems capable of competing effectively only in the Metro Ethernet space. It is losing ground to major rivals in enterprise networking, losing ground in VoIP, losing ground in wireless — despite protestations that it will find renewal in WiMAX — losing ground in security (where it has become indifferent), and generally looking like a company whose better days are well behind it.

Maybe Nortel’s brightest future is in a piece-by-piece divestiture of the company. At a time when I believe Cisco is susceptible to market-share losses in enterprise networking, surely somebody could do a better job than the current Nortel management of making headway in that market with Nortel’s product portfolio. The same applies to Nortel’s VoIP and wireless products and technologies, as well as its MAN and optical-networking offerings.

We keep hearing promises about a turnaround, a reversal of fortune, at Nortel. Perhaps it’s time, though, to take a cold, hard look at what’s really happening. Nortel’s shareholders and customers deserve better than what the company’s nominal leadership has done and continues to do.

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