Microsoft/Nortel Committed, but Future Is Cloudy

Nortel's rocking financial situation and announced layoffs this week of 1,300 people likely won't have much short-term impact on the company's four-year unified communications alliance with Microsoft, including before the deal's expiration in 2010, according to experts.

But the long-term outlook is that users will likely see vendors such as Microsoft, IBM and Cisco rise to the top of the voice pile via their UC platforms built around integrated software applications and middleware.

"I'm not saying Nortel will be killed off; they have a great opportunity to build value on top of Microsoft." says Zeus Kerravala, an analyst with the Yankee Group. "What you are seeing is a transformation akin to the transformation from the mainframe to Windows. Back then you had huge hardware giants like Honeywell, Burroughs, Univac, and they all kind of went away. Nortel, Avaya, Alcatel, Siemens -- these guys are the mainframe giants of this generation. One or two of them may survive but certainly not all of them."

Kerravala says Nortel's current trouble shouldn't impact its partnership with Microsoft in the next 16 months, but he thinks by 2015 the alliance will be gone.

He says Nortel's challenge is to prove not only that it will be around long term but that it can complement the Microsoft platform and be a strategic partner.

"I do believe that the traditional PBX is becoming a development platform and the winners and losers will be defined by those that create a viable development community around it. Who is good at that? Microsoft," Kerravala says.

The frenzied interest in UC is no surprise; IDC predicted in March that sales of UC gear will top $17 billion in four years.

Nortel and Microsoft were in front of that curve. They forged a partnership in 2006 that resulted in what they called the Innovative Communications Alliance (ICA), a plan to jointly develop, sell and roll out UC and VoIP technology to corporate customers over a four-year period.

The deal involved professional services, cross-licensing, joint products, sales and partners.

Nortel originally was mentoring Microsoft into its voice age, experts say, but Nortel clearly saw that the telephony game was changing.

At the signing of the ICA deal, Nortel CEO Mike Zafirovski said, "We wanted to change the trajectory of [Nortel's] enterprise business. Our new relationship with Microsoft represents an opportunity to create well over $1 billion in revenue for Nortel in the next [several] years [with] the combination of [Nortel] professional services, voice products and data pull-through [sales] from our customers."

Judging by Nortel's $3.4 billion loss announced last week, it doesn't appear that the returns have been up to Zafirovski's prediction. Nortel officials declined to discuss the partnership in terms of dollars.

Nortel has been betting that telephony is going to software and the company is eyeing a short-term future of integrated infrastructure and a long-term play for adding vertical applications and scalability enhancements on top of the Microsoft platform.

Both Microsoft and Nortel say their relationship is going full-steam ahead and both have numerous other irons in the UC fire.

In fact, Nortel has a deal with IBM/Lotus for hosted UC using the Lotus Sametime client on the front end, a deal that mimics one Nortel announced with Microsoft in June.

And Microsoft, which aligns as closely with Siemens and Mytel as it does Nortel, is not standing still. In October, it unveiled its UC/voice platform Office Communications Server (OCS) 2007 R2 and said it would ship officially in February 2009, although it is likely to be available before year-end.

The significance to Nortel and other Microsoft partners is an OCS 2007 R2 feature called Session Initiation Protocol-enabled trunking that allows a direct VoIP connection between an Internet telephony service provider and Microsoft's Office Communicator client without requiring on-premise gateways like Nortel supplies.

"The 2010 expiration of the [ICA] deal seems like a good time to reassess where the market is going," says Larry Hettick, an analyst with Current Analysis.

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