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Nortel's Plan for Survival? Patent Profits!

Something that has escaped notice of most people writing or discussing the current Nortel sell-off of business units is that the sale of its wireless and enterprise business assets include only some, but not all, product and technology patents; the most valuable patents have not been included as part of the auction process. Nortel will be leasing wireless patent rights to the product assets the Swedish system supplier has tentatively won in the bankruptcy court auction, and one assumes it will be a similar deal with the winner of the enterprise unit. Nortel could emerge from bankruptcy as a company owning valuable Intellectual Property Rights (IPR) generating a profitable revenues stream with very little cost overhead. The company may decide to hold onto some of its existing business operations, and use royalty payments as the primary funds to continue in business and maybe expand, again, in the future. I exchanged emails on this topic with my fellow analyst friend Ron Gruia, Frost & Sullivan, and we both expressed our belief that this is a potential, but not definite, scenario that Nortel CEO Mike Zafirovski may be playing out.If royalty payments must be paid to Nortel by the eventual winner of the Enterprise Solutions (ES) business unit, it will be a major factor in deciding which acquired products are to continue being sold (and how long) or be cut early from the merged product portfolio. This assumes that the winner is an existing enterprise communications system supplier, such as Avaya or Siemens Enterprise Communications, with product of their own; a private equity firm, such as MatlinPatterson, would not have much of a choice. For example, Siemens would likely have little trouble choosing its own Unified Communications (UC) OpenScape product over Nortel's MCS 5100; both products are comparable in design and capabilities and can work as standalone solutions behind other IP telephony systems. Avaya has no comparable single product offerings like the MCS 5100 and may need to retain it for a while in its portfolio. Avaya may also need to retain the Nortel Agile Communications Environment (ACE) product to work behind the CS 1000 for Services Oriented Architecture (SOA) applications for at least the short term; Siemens' OpenScape would make it unnecessary working behind the CS 1000.

There have also been discussions if the Nortel CS 2100 would be discontinued or retained as a migration vehicle for SL-100 customers. Siemens would have no need of the product for new installations, because it has its own carrier-based solution, OpenScape UC Server, but Avaya lacks such a design platform and the port capacity limits of its own S8730 is a fraction of the CS 2100 capability. What must be considered by any supplier when proposing a new CS 2100 is the IPR royalty payment to Nortel, eating into an already thin profit margin caused by competitive pricing pressure; it would be a lesser consideration for migrating SL-100 customers, because it is highly profitable to retain existing customers for another product life cycle.

The current break-up of Nortel is far more complex than it looks when digging below the surface. There is no 100% guarantee that Ericsson's "winning" wireless bid will be finalized and there is even less certainty that Avaya will be the eventual winner of the enterprise business. Intense discussions regarding the number of Nortel employees that will be retained or downsized are going on behind the scenes; pension and severance issues must be agreed to; planned facility closings, the number and locations, can lead to noisy local municipality protests; executive golden parachutes are being negotiated; and a boatload of other issues are hidden from public view. Right now the biggest winners in the Nortel bankruptcy may be websites, like No Jitter, who are getting record hits due to the intensive interest in the proceedings. I'm sure Nortel customers are among the most interested, because they have the most to lose based on the outcome.