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

by Olga Kharif

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.