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Lucent spin-off and telephony products manufacturer Avaya faces a challenging conundrum, one that many vendors in changing markets often confront and frequently mismanage: how to sell a convincing story to potential buyers of a range of new products, without alienating the users of products based on older technology.

At the same time, it must fight off a variety of aggressive competitors, some of which do not have that problem. In Avaya's case, the new technology is IP-based telephony (phone systems that use internet protocol packets) and the principal competitor is, of course, Cisco Systems.

At the company's customer fair in Cannes in the south of France in May, the mood matched the bright weather. Most of the attention focused on Avaya's IP products and services business.

Executives re-asserted their belief that convergence (between generic computer applications and telephony systems) is finally happening and customers duly swooned over the new applications. Analysts praised the new technology, particularly Avaya's IP phones, exchanges and software products, all aimed for the important contact centre market.

But almost nothing was mentioned of the company's core market, the source of most of its $5 billion annual revenue: old fashioned circuit-switched PBXs [private branch exchanges] and digital phone equipment for enterprise customers, all increasingly sold through a channel of resellers and service providers.

There is the conundrum that Avaya and most other suppliers in the IP communications market face - with the notable exception of Cisco Systems. They must balance the need to protect investments in older technologies with the equally pressing need to encourage customers to migrate to new IP-based equipment and applications.

No-one in the telecommunications industry doubts that eventually, all new systems will be IP based - and now is not the time to be over-protective of an ageing revenue stream. "We have an interest in protecting our customers' investments," says Michael Thurk, Avaya's group vice president for converged systems and applications, "but protecting a past technology is a good way to go out of business."

The danger for Avaya is that customers will turn to other, nimbler suppliers after being persuaded of the benefits of IP telephony. Not that Avaya actually has many customers to protect in Europe. The company commands just 4% of the European enterprise telephony market, despite its presence in Europe, in one form or another, for 20 years.

That, at least, means it can be more aggressive in pushing the IP telephony in the UK.

So far, contact centre operators and organisations moving to new, greenfield premises have enthusiastically bought into the migration path to IP-enabled PBXs and pure IP communications. But persuading other companies to switch to IP is proving far harder. Prices are falling and clearer business cases emerging, but progress is still slow.

For customers, differentiating between the products of rival suppliers is also a problem. But there is clear water between Avaya's business model and those of its main rivals in one important respect: its maintenance business.

"Services is where the value really lies," says Lou D'Ambrosio, Avaya's group vice president for worldwide services. The company has about 7,000 service staff in 23 countries, including the UK. One of the most important services they provide to customers, says D'Ambrosio, is the ability to remotely diagnose and fix network problems within minutes of them occurring.

Jerry Caron, an analyst with Current Analysis, rates the company's technology, but he points out that Avaya's new 'Eclips' IP telephony platforms share many common elements with its legacy 'Definity' systems. "This may comfort existing Avaya customers looking for an IP migration path, but it will not necessarily win Avaya new enterprise telephony customers," he says.

Avaya's shipments of IP-based systems are "noticeably few", while the company continues to struggle to break Cisco's stranglehold on the local area network (LAN) telephony market, he adds.

Avaya, after several years of very heavy losses, has recently enjoyed an improvement in business performance - a position that is sustainable. But unless it successfully manages that transition from circuit-switched to IP-based systems, it may yet find itself mired once again in financial and strategic difficulties.