Now's the Time for Microsoft to Buy Nortel
Ever since Microsoft got into the enterprise voice market, there's been speculation that it might buy one of the major players--Siemens or, more likely, Nortel, given the partnership that Microsoft and Nortel have established. It never made that much sense before, because Microsoft didn't want to be in the PBX business, and still doesn't want to be. But with Nortel stock trading near historic lows and the Canadian vendor already announcing plans to divest its Metro Ethernet unit, is it time for Microsoft to revisit the idea of acquiring Nortel's enterprise business?
Ever since Microsoft got into the enterprise voice market, there's been speculation that it might buy one of the major players--Siemens or, more likely, Nortel, given the partnership that Microsoft and Nortel have established. It never made that much sense before, because Microsoft didn't want to be in the PBX business, and still doesn't want to be. But with Nortel stock trading near historic lows and the Canadian vendor already announcing plans to divest its Metro Ethernet unit, is it time for Microsoft to revisit the idea of acquiring Nortel's enterprise business?Let's be clear about one thing: The only real reason for Microsoft to buy Nortel's PBX line is account control, and the issue isn't so much about immediate enterprise purchases, but about long-term strategy.
Unfortunately, it's realistic to expect that the market for IP-PBXs will slow down or worse as the economy as a whole slows down or worse. In his most recent Feature here, Allan Sulkin wrote that the enterprise voice market is already down 5% in 1H08 versus a year ago. So you might think that maybe Microsoft's existing strategy of overhanging the PBX market with Office Communications Server will in fact become redundant--there are a lot more ominous things overhanging the market these days.
But at the same time, Allan demonstrates that Cisco continues to gain market share. In the overall market (all size systems, key/hybrid through enterprise), Cisco went from 20% share of port station shipments to 26% just in the first half of this year. That's a pretty stunning gain in six months, and even if the market slows down, there's no reason to believe Cisco won't continue to perform strongly among enterprises that are continuing to invest in IP telephony.
What's interesting is that Cisco's gains in market share haven't really come at the expense of either Avaya or Nortel. Allan's figures on large systems tend to obscure this fact, because Avaya and Cisco combine all their systems into one number, while the comparable Nortel figure doesn't include the small-system Nortel BCM, making Nortel look worse off than it might otherwise seem. So we're using Sulkin's market numbers for all size installations. And there, Avaya actually picked up a percentage point in the first half, while Nortel was flat. Cisco's gain mostly came across the board among the rest of the universe.
The question is, how long will this state of affairs last, especially in the case of Nortel, with its well-publicized challenges continuing? And what are the odds that, if a certain amount of the Nortel installed base moves, the lion's share won't go to Cisco?
Microsoft needs to lock customers, not into the Nortel platform as such, but into a premises strategy that features Nortel today and OCS in the future. The most significant thing about Cisco's recent acquisitions of PostPath and Jabber aren't that Cisco bought an email and IM company, respectively, but that their public statements have emphasized plans to integrate the acquisitions with the network-based Cisco WebEx platform. I still think PostPath in particular gives Cisco a strong premises play against Exchange and OCS, but Cisco has said virtually nothing about this possibility, stressing WebEx instead.
Everyone, including Microsoft, is paying homage to the concept of Software as a Service or Cloud Computing, but as the vendor that generates real revenue when people build bigger networks, Cisco stands to be one of the big winners if SaaS/Cloud really happen. Microsoft would much rather keep real-time communications as an on-premises service for the enterprise. I tend to think, given their historic tendencies, that enterprise managers would much prefer this as well, so that gives Microsoft a big edge.
Buying Nortel could help them leverage that edge.