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The Nortel / Microsoft Alliance: A Savvy Move

“ with this alliance agreement … I think you can clearly say that Microsoft with Nortel is in the business not just of unified communications, but in the business of VOIP”

Microsoft CEO Steve Ballmer

I must have had a half dozen people (including my Mum!) draw my attention to the Microsoft (MSFT) / Nortel (NT) agreement signed yesterday.  I didn’t think much of it after reading the Jeff Raike’s Q&A which Microsoft published.  Raikes appeared to position the agreement as initially an R&D arrangement, with go to market strategy to be developed later. However, as details came out it was apparent that it was much larger.  My initial assessment was just plain wrong. 

The companies are entering into a four year strategic alliance.  Nortel will be Microsoft’s strategic partner for advanced unified communications solutions and systems integration. The two companies will form the “Innovative Communications Alliance” as a go-to-market vehicle, and Microsoft and Nortel will deploy the other’s technologies in their enterprise networks.

As Microsoft’s strategic systems integration partner, Nortel hopes to generate new revenue through service offerings such as convergence planning, integration, optimization, monitoring and managed services.
 
The more interesting component in this agreement, in my opinion, is the commitment to do joint product development.  The companies will form joint teams to collaborate on product development that spans enterprise, mobile and wireline carrier solutions. They will cross-license patents, and Nortel will deliver solutions that complement Microsoft’s unified communications platform, including enterprise contact center applications, mission-critical telephony functions, advanced mobility capabilities and data networking infrastructure. Nortel becomes a very important software development partner in Microsoft’s ecosystem, accelerating the development of that ecosystem and its value to their joint customers.  At the same time, Microsoft intends to continue the development of its Dynamics product line, which, with the addition of voice, may become very compelling components of these joint solutions.
 
They will jointly sell the solutions, from either companies sales force.  They will also build channels with systems integrators, resellers, and service provider relationships.  They plan to target a range of customers, including small and medium-sized business, large corporations and service providers.

With the exception of Microsoft’s original partnership with IBM, there has been only one other time in Microsoft’s history, that I can recall, that the company has struck a similar agreeement.  That was the 1993 Microsoft-Compaq Frontline Partnership, which still exists today, 13 years later.  That agreement saw Compaq and Microsoft undertake joint product development, build channels, and mutually deploy each others products.  At the time, Microsoft got a powerful OEM partner, and a huge boost to its nascent Solution Provider channel with Compaq’s backing.  Compaq, who wanted to target the mini-computer market with its enterprise servers, got a committed development and channel partner.  The fact that the agreement still stands today testifies to its enduring value to both companies. 

You have to admit that the Compaq partnership, and yesterday’s Nortel / Microsoft Alliance, are eerily similar:

  1. The companies will develop channels together.
  2. The companies will jointly develop products.
  3. The companies will deploy each others products internally.

Nortel, which has struggled to bring it’s unified communications products to market (and if you’ve ever experienced the MC5200’s wretched desktop software, you will understand why), gains an experienced, committed and resource rich software development partner.  Developing end user software is hard, and Nortel appears to have recognized that, after several abortive attempts to do it on their own.  Their product development efforts are going to be tied to the most powerful cash generation engine on the planet — the Windows/Office franchise. That can only help.

Microsoft, who has lacked credibility in the communications marketplace, gains one of the oldest and best known names in communications as a partner.  They gain access to a new channel to market, the importance of which cannot be understated.  And, they gain access to a large existing customer base.

Together, the two companies are strong enough to go after Cisco (CSCO), and that’s where the money is in IP communications today.

Just as the Microsoft / Compaq agreement wasn’t exclusive, neither does this one appear to be.  You wouldn’t expect it to be.  From Microsoft’s point of view, this agreement will accelerate the creation of the ecosystem of software development partners that are going to help make Microsoft’s unified communications platform a success.  They will want to spread that success to other hardware partners.  Despite not being the exclusive partner, Nortel can claim to be the most favoured partner, which is a great place to be.

This is a very smart, very savvy move for both companies. In particular, congratulations are due to Mike Zafirovski. This agreement won’t move Nortel’s stock today, but over the long term and well executed, it has the potential to restore Nortel’s fortunes in the market.

Note to the Microsoft PR team:  I am not the only person who dismissed the initial announcement as unimportant because the messages were incomprehensible.  See Bruce Stewart, Rob Hyndman, and Zoli Erdos.

{ 2 comments… add one }

  • Andrew July 19, 2006, 6:13 am

    Stock is up 5% so not too bad for a press release. I agree, this is all about channels and Mike Z., this is why they brought him in – I am not sure Nortel; pre-MikeZ. would have been able to agree on this and get it done.

    Very smart move, and I would think a pre-cursor to a M$ takeover of Nortel. The good news for developers in this space, is this might be the beginning of an open communication platform from one of the major vendors. I would like to be in the room when the M$ guys see the so called "API and developer program" Nortel claims to have. I would think it will radically change for the better..

    Developers, develop…..

  • Randy Charles Morin July 19, 2006, 9:46 am

    A good time to buy Nortel.

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