Will Nortel unite with Cisco to take over voice, data and multimedia?

Rethink IT, August, 2004

In March, one of the highlights of the VoiceCon conference in the US was a debate between Nortel and Cisco on the hot topic of voice over IP (VoIP). The fiercely contested debate on how to approach VoIP illustrated all the differences of approach between a company coming from the switch market and one with a pure IP heritage. But behind the aggressive words, two other things were clear--that these companies are increasingly treading on each other's toes and threatening each other's core markets; and that they could both come to each other's aid as the enterprise networking and telecoms markets converge around IT.

So it came as no real surprise, a few months later, when rumors hit the markets that Cisco was interested in acquiring its Canadian rival. Cisco is on an upward path after suffering--though less so than others--in the telecoms slump, but it is very open about needing new markets and technologies to bolster its position. Nortel, though showing signs of financial recovery earlier this year, has now been beset by financial scandal and may be finding its strong technology strategies hampered. A company with Nortel's technological innovations and telecoms base, with Cisco's cash and enterprise strengths behind it, could prove an unbeatable combination in addressing the needs of the corporate converged network--voice and data, wired and wireless, all-IP.

Cisco CEO John Chambers sparked the takeover rumors in June when he said in a speech that he would "love to have Nortel as a partner". Although he seemed to be thinking in terms of a strategic partnership rather than outright purchase--"I don't know how to do large acquisitions," he said. "Never say never," he added mischievously.

OPEN TO DISCUSSIONS

William Owens, Nortel's president and CEO, said he had not talked to Chambers about partnerships but would be open to discussions. A summit between the two CEOs around the same time added fuel to the fire and, whether or not such a deal comes true, certainly focused thoughts on the likely developments that will take place amid the drive to convergence.

This has brought two reasonably separate sets of companies into collision with each other--those serving wireline and wireless telcos and service providers, such as Nortel, Lucent, Nokia and Alcatel; and those focused primarily on enterprise data networks, dominated by Cisco. Of course, the two do overlap already. Cisco built a major telco business around its internet/IP data technology and is also a leader in enterprise voice over IP, while Nortel, Lucent, Alcatel and Fujitsu have enterprise network businesses. Even mobile equipment suppliers like Nokia are now targeting this space, though from a mobile enterprise perspective, and Nokia has said that, if its corporate strategy succeeds, it would expect to make Cisco a major competitor.

But the convergence of voice and data systems around IP has greatly increased the overlap. Nortel and the others are pushing their voice technologies into the data center, while Cisco is eyeing service providers that are increasingly dependent on data rather than voice for new revenue and increased margins. It is easy to see the argument for Cisco and Nortel to combine their very different strengths and take a leadership role together rather than seeking to divide the market.

The VoIP debate at VoiceCon illustrates clearly the differences of approach and the contrasting expertise of the two giants. Nortel is a traditional voice switch vendor, with products based on circuit-switched technologies, or time division multiplexing (TDM). But it also has products that adapt these traditional networks to IP. Cisco, meanwhile, sells pure IP products to handle voice, treating it as just another data stream. A number of VoIP vendors fall into the Nortel camp, including Avaya and Alcatel, while Cisco's approach is emulated only by smaller players like 3Com. The picture is further complicated by wireless VoIP, with Airespace a key player because it OEMs its voice-optimized wireless switches to Nortel, NEC and Alcatel to integrate with their PBXs. Also important here is a partnership between Motorola, Proxim and Avaya.

NOT IMPRESSED

Cisco's representative at the debate, Michael Frendo, vice president of voice systems engineering, fired the first shot, likening the Nortel-style technologies to driving a car with a horse tied to the rear--just in case the car fails. "Can I drive 50mph with my horse tied behind me?" he asked.

Philip Edholm, CTO of enterprise solutions at Nortel, responded, acknowledging that a company can go with a pure IP system when updating a voice network, but questioning whether it should. He said a long list of Cisco customers have installed Cisco IP voice capability only to back off, including Merrill Lynch.

Edholm also contended that Cisco's approach to VoIP omits the idea of a 'softphone', which does away with the need for a handset.

The quarrels over VoIP are just one illustration of Nortel's strengths and weaknesses when addressing the enterprise--it provides a strong track record in voice and in large integration projects but has not achieved dominance or mindshare in pure IP, which could put it on a wrong foot as the world moves that way.