Technology

Nortel and Microsoft Take Aim at Cisco


The telecom-gear maker is teaming with the Redmond giant on offerings in unified communications. Nortel's aim: cut into Cisco's market lead

Microsoft (MSFT) CEO Steve Ballmer and Mike Zafirovski, the chief executive of troubled telecom-equipment maker Nortel Networks (NT), unveiled on Jan. 17 the first fruits of their six-month-old partnership.

Amidst a media blitz in New York at Rockefeller Center's legendary Studio 8H, home to Saturday Night Live the companies' dynamic CEOs announced three new products and services due to arrive in 2007. But ignore the choice of venue—the new offerings are nothing for Nortel's rivals—particularly Cisco (CSCO)—to laugh at.

As this new partnership in so-called unified communications indicates, Cisco's going may soon get tougher. For years now, the networking giant has been the leader, with a 35% market share, in unified communications, the tech-heavy way of describing technology that links phone and computer systems, allowing workers to instant-message, call, video-conference, and e-mail each other seamlessly from PCs and phones (see BusinessWeek.com, 12/18/06, "Introducing the iPhone—But Not from Apple"). That market, reaching $1.3 billion globally last year, is poised to grow 8% in 2007, 15% in 2008, and 30% in 2009, when mass adoption hits the accelerator, according to consultancy WinterGreen Research. Rivals, Nortel among them, are vying to erode Cisco's lead and gain a bigger slice of the growing market.

Other market players—Nortel, IBM (IBM), Alcatel (ALA), Siemens (SI) and Avaya (AV)—have long offered unified communications products. But some of them have gone through major tribulations in the past few years that may have detracted from their focus. In 2006, Alcatel was acquiring Lucent in a $13.4 billion megamerger. Nortel was fighting off the last of its accounting troubles and, under new CEO Zafirovski, was seeking to swim out of a sea of red ink.

High-Margin Opportunities

But now, many of Cisco's smaller rivals' troubles are drawing to an end—and these companies are getting down to business. Take Nortel, for example. While the company lost 59 cents per share last year, it should earn 67 cents in 2007—and then more than double that in 2008, figures Ari Bensinger, an analyst with rating service Standard & Poor's (Standard & Poors, like BusinessWeek, is part of The McGraw-Hill Companies (MPH) ) (see BusinessWeek.com, 8/9/06, "Nortel: Here to Stay").

What's more, these smaller players have lately been forming partnerships to take on Cisco in unified communications, expected to become one of the fastest-growing telecom-equipment segments around. Not only that, but there's an added incentive to pursue this fledgling market: All the new gear and capabilities are expected to require plenty of high-margin services support.

Indeed, Nortel just announced it's opened 20 centers designed to demo the technology to customers, and it will open 80 more such centers worldwide by mid-2007.Zafirovski hopes that the centers will help grow Nortel's services business, he said during a Jan. 17 conference call related to the Microsoft news.

Proliferation of Products

Warring camps are already forming left and right. Last October, Avaya and routers maker Juniper (JNPR) extended their longstanding partnership to work on a branch-networking product, integrating a router with voice communications. That product will become available in the first quarter of 2007. Then there's the camp of Nortel and Microsoft, which also aims to introduce a similar product this year. Already, Nortel-Microsoft claim to have "dozens of new customers and hundreds in the pipeline" for the new products the duo has produced, Zafirovski said during the conference call.

Cisco claims it's had many of the capabilities Nortel and Microsoft brag of, such as integration with the Microsoft Exchange server, for years. So does Avaya. Yet Nortel claims it will offer tighter integration with Microsoft Office and other applications. And these are just the first products to come out of the partnership.

The Microsoft-Nortel partnership, and others like it, will likely spawn a barrage of new products in the field. Already, Cisco plans to unveil some unified communications products, on which it's staying mum, this quarter, says Barry O'Sullivan, vice-president for IP communications at Cisco.

Microsoft Covers All Bases

The battle for unified communication could also result in substantial price drops for related gear and software. While prices could fall only some 2% this year, in 2008 they could dip 8%, figures Susan Eustis, president of WinterGreen Research. On the plus side, the lower prices could help make the capability more attractive to additional corporate buyers—and expand the market. Today, only some 5% of corporate phones are capable of unified communication, according to consultancy Dell'Oro Group. And the market has been slow to take off: "Everyone is interested in unified communications, but demand is not there; companies are still trying to figure out their return on investment," says Alan Weckel, an analyst with Dell'Oro.

One sure winner? Microsoft, which has formed partnerships with nearly every player in this market (see BusinessWeek.com, 07/19/06, "Microsoft Tries to Find Its Voice"). While the Redmond (Wash.) giant appears to be tight with Nortel, it's also a partner of Cisco's, for instance. "We've gotten a joint roadmap with Microsoft, we meet once a month," says O'Sullivan. What remains to be seen: whether that will be enough for Cisco to stay ahead.


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