According to a report from the Wall Street journal last night, April 7, Nokia Siemens Networks (NSN) has launched a bid for most of Nortel’s Carrier Network unit along with its LTE R&D resources.  There are three stories here:

The future of Voice

The future of Wireless, and

The future of Nortel

Phil Marshall and I put our heads together to analyze the potential for NSN in buying Nortel’s assets.

The Future of Voice

The WSJ says this of the acquisition: “Its bid includes an early voice technology known as TDM” Holy Mackerel, is this what the DMS has been reduced to: “an early voice technology”?!  They’re talking about the beloved switch of the Bell System, the thorn in the side of AT&T (AKA Lucent, Alcatel-Lucent).  If the DMS voice switches command so little recognition today – what’s in it for NSN?  Clearly NSN is interested in two things with this acquisition as posited in the press:  penetration into the North American market, from which NSN derives only 5% of its revenue, and advanced LTE technology.

Yankee Group research points to an acceleration of “wire-cutting” as residential users eliminate their land line voice connections and rely exclusively on their mobile devices.  In addition, the service providers will be gradually migrating to a more flexible and economical voice over IP (VoIP) infrastructure in the core over the course of the next 5-10 years.  Clearly – TDM voice is not where any manufacturer wants to be today.  However – the acquisition of Nortel’s VoIP and TDM voice business would give NSN three advantages:

• Global installed base with a focus on North and South America.  Service Providers are using a “cap and grow” strategy with their TDM voice solutions.  For many, it is not worth the effort or risk to the voice business to move customers off the TDM network and onto an IP network.  Service Providers tell us they expect to have their TDM voice switches around for another 15 years and more.  That’s right – 15 (actually they said 17, but we just couldn’t believe it)
• Instant carrier VoIP penetration. Nortel is the market leader in Carrier VoIP with, as of Q4 2008, over 340 service provider customers (wireless, wireline, cable and broadband) 106 million VoIP ports for carriers and 21 million IP telephony lines.  
• The potential to leverage Nortel’s voice presence (both TDM and IP) to penetrate further into the carrier network.  In former days the data/IP carrier folk and their voice/transport counterparts seemed to pride themselves on NOT working together.  The service providers are coming around, however, and in anticipation of a converged core, they are converging/rationalizing their voice and data, TDM/IP, organizations.  Chances are good that if NSN sales teams is able to develop a strong relationships with their TDM/voice products, they will be able to parley that into a relationship on the IP side and assist their carrier customers in making a graceful transition to an all-IP network.

The Future of Wireless

Again, clearly if NSN were to purchase Nortel’s wireless assets, it would be aimed to capture incumbency in North America, which has been a struggle for NSN, and capitalize on Nortel’s R&D capabilities for LTE. A secondary consideration is the potential for NSN to convert legacy Nortel players to 3G-UMTS. I believe that this strategy (if correct) is flawed for the following reasons:

• The Nortel incumbency in CDMA while large (approximately 35% of Verizon and 45% of Sprint), is in decline in North America. NSN might look at CDMA incumbency in North America as a beachfront position for early LTE deployments. Unfortunately, Verizon has already decided on Alcatel Lucent and Ericsson for its LTE vendors. Sprint is doing WiMAX in partnership with Clearwire. If it were to follow in the footsteps of a player like KDDI to do LTE as well, it wouldn’t happen any time soon.
• GSM incumbency does not imply squatting rights for a 3G upgrade. With little technical integration between GSM and 3G-UMTS, service providers do not necessarily see an economic advantage of a single vendor implementation for GSM and 3G.

What does make sense is for NSN to acquire Nortel’s LTE R&D assets. NSN needs to accelerate its LTE and EPC (enhanced packet core) capabilities. We believe that NSN lags its major competitors in bringing LTE and EPC solutions to market. Even under the cloud of bankruptcy, Nortel has been successful in winning KDDI’s core network (EPC) business and is an active participant in LTE trials with T-Mobile.

The Future of Nortel

If corroborated (and, surprise, neither Nortel nor NSN are talking), this acquisition calls into question the future of Nortel.  When Nortel filed for Chapter 11 in January 2009, CEO Mike Zafirovski stated that he believed the company could “emerge as a respected technology supplier.”  It’s now three months later and Yankee Group does not see this happening.  In January, Nortel announced that it would discontinue its mobile WiMAX business.  Nortel announced in February that it had entered into a purchase agreement with Radware for certain portion of it Application Delivery portfolio.   Reports emerged last month that Avaya and Siemens were bidding on the Enterprise business.  Nortel has been trying to entice buyers to its Metro Ethernet division.  RAD, Genband and Ciena have all been reported looking at Nortel business units.  I expect news of the purchase of the Enterprise and Carrier units to come down from Toronto this month.  The question is, when the dust settles, will there be enough left of Nortel in terms of product, people and will-to-survive, to survive.