Nortel’s descent into Chapter 11 was the source of much gossip, speculation and “there but for the grace of God” gestures at MWC 2009. The knockdown of a top-tier vendor (and the granddaddy of the Canadian high-tech sector) brought out the expected brave statements from the Nortel corner and a flurry of jabs by competitors to dislodge existing customers. So far, clients have stayed firm. The company continues to ship products and under the current economic conditions, no one has the budget for a “rip and replace” that won’t be required if Nortel succeeds with its restructuring.

At an analyst breakfast hosted by Carrier Networks President Richard Lowe, the mood was frank and Lowe pulled no punches about the challenges the company faces and the strengths it retains. The company’s Optical products continue to sell well despite the uncertainty of Chapter 11 and some sources put Nortel as the leading Carrier VOIP provider. Legacy GSM and CDMA products, softswitches and UMTS core products continue to generate welcome cash.

But these days, the pride of a top-tier vendor is its Radio Access Network portfolio, and despite recent success with LTE in the lab (with device partner LG), Nortel’s overall record has disappointed. The UMTS RAN business was sold off and the company recently reversed its previous commitment to WiMAX leaving partner Alvarion in the lurch. Nortel seriously needs a significant reference win with LTE to transfer success in the lab to success in the market place.

There were brave hopes by management that Verizon would name Nortel as its third LTE vendor along with Ericsson and Alcatel-Lucent (all smiles this morning in those two camps despite what must have been heavy celebrations on Wednesday night). But this was never a possibility: who could go to their board and recommend a vendor whose very future is in doubt.

The good news for Nortel’s employees was that Verizon did not name a third vendor. Although there is nothing official, and certainly nothing in writing, the widespread interpretation was that Verizon is waiting for Nortel to finish its restructuring. Nortel’s plans and test results were credible, but the long-term viability of the company needed to be resolved. If the restructuring plan promises stability, a solid financial base and a clear path to future, then Verizon will put Nortel back in the hunt for the third spot. If the company hasn’t resolved its financial issues by the time Verizon feels compelled to engage a third vendor, then someone else will take the spot. This pressures Nortel to come out of Chapter 11 sooner rather than later: the longer it delays, the greater the chance that Verizon will have to make a decision and the more time its rivals have to close the lab gap.

The speculation at the Mobile World Congress was that if Verizon had failed to leave the door open, Nortel was doomed as a “full service” vendor. Its Optical, VOIP, Enterprise and legacy RAN businesses would have been sold off and while one or more of these product lines might still carry the Nortel brand, the company as previously known would have disappeared. Nortel’s leadership no doubt would have vigorously denied this binary conclusion but there is also no doubt they understood what was riding on that press announcement.

I suggested to one of them that the open third slot must feel almost like a victory.

He agreed and his face showed the relief of a boxer who gets a mandatory 10 count: a brief reprieve before taking up the fight again.