Unified communications (UC) has long been a technology category on the cusp of mainstream adoption. Companies in the telecommunications sector have sunk significant investment into developing the technology, which uses the Internet protocol (IP) to provide a single front end for all communications; be they phone calls, answer phone messages, email, instant messages etc. But to date, major paybacks have eluded them.
And just as it looked like the adoption watershed was finally about to break, the credit-crunch put the kibosh on the kind of high capital expenditure that projects such as UC deployment require.
For many companies with UC interests the timing has been disastrous, and none more so than Nortel. Having weathered inumberable crises in its 124-year history, the Canadian telecommunications giant was compelled to apply for creditor protection in January 2009 after the NYSE threatened to delist its stock if the company’s shares failed to rise above $1 in six months.
That drastic decision saw Nortel’s stock plunge 79% on the Toronto stock exchange, and led the Canadian government to offer it a token C$30 million short-term bailout. In late May 2009, its stock was fetching 20 Canadian cents, way down from a high of C$1112 during the height of the dotcom bubble in 2000.
Speaking in advance of the company’s most recent financial results, for the first quarter of 2009, Nortel CEO Mike Zafirovski noted: “A decline in revenue and margins is expected due to the severe economic downturn and our filings for creditor protection.”
He was right: the company recorded $1.73 billion in revenues for the quarter compared to $2.76 billion for the first quarter of 2008, a plummet of 37%. Any optimism at the company was restricted to: “customer service levels are at multi-year highs.”
Now though, Nortel hopes to emerge from its troubles a leaner and efficient company, following an organisation-wide restructuring process.
John Mann, Nortel’s head of UC for EMEA, insists that rumours of the company’s demise had been greatly exaggerated: “Just to be clear, what we filed for was creditor protection,” he says, bristling at the term ‘bankruptcy’ that has appeared in many reports on the company.
“Nortel is not bankrupt,” he says. “We are not illiquid; we have cash resources of $2.4 billion that allow us to carry on operations and meet our commitments to existing R&D streams and essentially carry on our business as usual. We are not in bankruptcy protection.”
“Clearly it’s a difficult time for Nortel, [but] we are confident that what we are doing is the right thing for Nortel once we put our financial difficulties behind us,” he added.
Indeed, Nortel was one of the larger and more enthusiastic presences at this year’s Unified Communications Expo 09 in Olympia, a presence which Mann suggested “shows a lot. We’re here to demonstrate we’ve got a compelling vision for UC and every intention to continue delivering first class products.”
After the filing, the company moved quickly to reassure its channel partners, particularly major systems integrators such as IBM and software vendors such as Microsoft.
“Historically we come at UC from a communications infrastructure perspective, but when talking to clients you increasingly have to talk from a desktop perspective, and that’s the domain of the system integrators,” Mann explains. “That’s a large part of the reason why we’re working with IBM – they give us access to the relationships they have around the desktop.”
That kind of relationship – critical to securing enterprise business in a sector as complex and fragmented as UC – creates bitterness among smaller providers who feel they are squeezed out of a market that values size over innovation.
“IBM created this myth that you never get fired for buying IBM, but it developed into ‘you don’t get promoted for only buying IBM’,” insists Mark Swendsen, EMEA managing director of California-based Shoretel, a provider of pure IP UC systems.
“Companies like Cisco have done a good job of selling on the ‘one throat to choke’ approach to technology, by being responsible for their own integration. But that doesn’t make any of the individual components great,” he argues. “If a company wants a strong (UC) solution it needs to look outside traditional vendor lock-in.”
Businesses are recognising this, Swendsen says, and pure play companies such as his are “being invited to the table” more often, as worries over integration lessen.
He is contemptuous of the market share data that he says giants like Nortel and Alcatel-Lucent use to exclude new entrants, to “create false comfort for the customer,” and to demonstrate “evidence of life where none exists.”
“You can have the number one market share in video playback, but if your technology is 100% VHS rather than DVD, you’ve got a very sick business,” Swendsen says. “Market share reports are inaccurate reflectors of health.”
IBM’s head of UC in EMEA, Bruce Morse, would not comment on Nortel’s condition but agreed that “it’s been known for a fair amount of time that there’s been a need for consolidation in the industry. Fundamentally whenever you go through a major technological shift there is a shakeout of the market and vendors disappear.”
It is unlikely that Nortel’s presence in the UK will collapse under Ernst & Young’s administration, something the organisers of the London 2012 Olympics will be praying to avoid (Nortel is the Games’ major technology sponsor and partner).
But morale appears low: UK staff made redundant without pay have recently been protesting in London and outside the company’s Belfast offices, claiming Ernst &Young gave them only two days notice before informing them they were laid off.
Keeping hold of the redundancy packages was “necessary for the survival of the business and in accordance with insolvency law,” Ernst & Young said in a statement.
That was a bitter pill to swallow. Speaking to the BBC, one worker who was owed redundancy pay was bristling at the $45 million in cash incentive bonuses paid to 1000 Nortel executives to encourage them to remain with the company. Such chagrin is understandable: documents filed in a US bankruptcy court in Delaware reveal that the remaining 95% of the company’s US workforce will be eligible for only $3 million in retention bonuses.
“It’s a difficult time and we don’t deny that some of [what we are doing] is going to painful for individuals,” says Mann. “But we’re doing the right thing for the right reasons, we have the support of our channel and our customers, and we look forward to the conclusion of the work we’re doing to get us where we need to be.”
Nortel’s ability to survive its present predicament and emerge from administration a leaner company is threatened by the sheer number of suitors keen to acquire the most profitable chunks of the telecoms giant at fire-sale prices. A likely scenario is that the pieces of the business most capable of leading Nortel out of its dilemma will be picked off by savvy investors.
The first to go was the Alteon product line, a series of so-called ‘layer 4-7’ application delivery switches, used to balance application data loads between servers, that generated $50 million in sales in 2008. It was sold in February for just $17.7 million.
Alteon’s buyer, a data centre-focused Israeli company called Radware, expects to grow 40% this year as a result of the acquisition.
“We approached Nortel to try and buy Alteon for several years, but we’d always received a negative response,” Radware’s CEO Roy Zisapel told Information Age.
“When they said ‘yes’ last November, we acted quickly to close all the details. But three days before the signing date they went bankrupt. We had to renegotiate the deal, which was not easy and very frustrating.”
Zisapel believes Nortel’s decision to sell Alteon was unrelated to Nortel’s filing: “They understood that the layer 4-7 business requires very specific attention in R&D and technical customer service; no one even paid attention to it, and it’s an excellent asset. As far as I understand, they wanted to focus on unified communications. We were very happy to hear that.”
However Zisapel acknowledges that the renegotiation resulted in a cheaper deal for Radware.”The deal value went down because the process went on longer,” he says.
Meanwhile, the Wall Street Journal claimed in May 2009 that Nortel was in talks with private-equity backed competitors Avaya and Siemens about selling its key wireless equipment business as well as a office telecoms systems unit which generated $6.7 billion in sales last year.
Compared with other IT sectors, market share between UC leaders is split fairly evenly. Such a purchase would radically disrupt that balance, instantly doubling the buyer’s presence in the market, creating the sector’s first gorilla and leaving Nortel with little hope of emerging from its current predicament.
However while it refuses to comment on specifics, Avaya’s mood has palpably shifted.
“Nortel’s filing has had an enormous impact on the industry,” says Jiriana Yates, Avaya’s EMEA head of marketing. “I don’t want to kick somebody when they’re on the ground, but Nortel been extremely successful at working with service providers and one impact has been the opening of those channels to other competitors.”
Days after speaking to Information Age in May 2009, Avaya launched an aggressive assault on Nortel’s lucrative partner base in an attempt to lure them over with discounts and training incentives, placing particular emphasis on the its new software-based UC platform, Aura.
Most recently, Nortel revealed it was putting its 2005 joint venture with electronics giant LG, intended to give it inroads into the South Korean market, on the auction block where it is expected to fetch up to $1 billion.
That move incensed another team of suitors: a cadre of former Nortel executives led by 74 year old ex-president Robert Ferchat, who are convinced they can buy the company outright and keep it whole, thereby ensuring Nortel’s intellectual property assets remain in Canadian hands.
“Are we really ready to hand over some 5,000-plus shining crown jewels for a few shillings with no apparent outrage or attempt to change that outcome?” asked John Tyson, a retired Nortel vice-president, writing in the Ottawa Citizen newspaper.
“Canadians helped pay for the development of many of those technologies through R&D tax credits and other government programs. Canada also supported the education of much of the engineering talent that produced them. How can we stand by and watch that investment be de-valued so massively?”
Ferchat’s scheme might be a little leftfield, but keeping Nortel in Canadian hands would be a major political win for a government planning a high-speed network upgrade.
Despite the current turmoil, the unified communications market looks destined to be highly lucrative. Amid the dire forecasts for the economy, market watcher IDC predicts the market will grow from $2.6 billion in 2008 to $13.5 billion by 2013.
But the technological watersheds in UC are coming at such a pace that by the time the sector’s giants lumber into action, it may be too late. Already the end-user UC market has shown a clear preference for a software-based future; Microsoft in particular is investing heavily in its Office Communications Server 2009 product in the hope of becoming the UC standard. And it has a good chance given its desktop hegemony, familiarity to users, and interoperability with other applications.
But it’s in for a fight from its ever-present sparring partner Google. The search giant is gradually unveiling pieces of a compelling software-based UC vision which will both challenge and validate many existing players.
Google Voice, which emerged from its acquisition of GrandCentral in 2007, will soon offer users a free universal phone number capable of routing calls through to mobile devices, landlines and desk phones. It will include voicemail and a feature that transcribes and even translates messages, converting them to text and rendering them searchable. The service will also integrate low-cost domestic and international calls, thereby presenting a direct challenge to VoIP providers such as Skype.
Furthermore, Voice promises to click together nicely with Google Wave, the company’s recently-announced online communication and collaboration tool that represents a renewed bid to disrupt Microsoft Outlook’s dominance of desktop communications. Successful integration would make Google a heavily disruptive player in the UC sector, particularly as users’ consumer and professional lives converge.
UC has always seen rapid innovation such as this, but Shoretel’s Swendsen believes it is about to come to a head, eventually giving way to a growing focus on integration. “I think we’re at precipice of what has been an arms race over the last couple of years.”
The upheaval caused by Nortel’s financial difficulties mean that substantial UC opportunities are still there for the taking.