In the wake of an accounting scandal earlier this year that led to the dismissal of its CEO and two other top executives,
Nortel Networks Ltd. is now betting on its prominent voice technology as its best means of growing its enterprise data presence.
This spring, Brampton, Ontario-based Nortel was not only forced to restate its earnings, but is also facing investigation from the U.S. Securities and Exchange Commission and the Ontario Securities Commission. As it moves past the scandal, Nortel hopes that its market-leading position in voice systems will help the company continue to win contracts for its Voice over Internet Protocol (VoIP) products, as well as increased sales of data networking gear.
Nortel allows customers to convert private branch exchanges (PBXs) slowly without having to rip and replace them, said Maribel Lopez, vice president with Cambridge, Mass.-based Forrester Research Inc. That type of less expensive and less dramatic VoIP migration helps give Nortel an edge over Cisco Systems Inc. in the voice market, she said.
But the competition in the enterprise networking market is fierce, said Dave Passmore, research director with Midvale, Utah-based research firm Burton Group. Nortel was once a credible runner-up to market leader Cisco but that has changed.
"Nortel just doesn't have the breadth of someone like Cisco," Passmore said. In addition to Cisco, the company is also competing with a half dozen other networking companies with a larger share of the data market. Hewlett-Packard Co., 3Com Corp., Extreme Networks Inc., Foundry Networks Inc., Juniper Networks Inc. and others are all competing for a share of the networking market.
Nortel is also recovering from a few strategic missteps, analysts said. Like most other networking vendors, Nortel focused on the carrier market during the late '90s, Passmore said. That market collapsed along with the dot-coms. The company also briefly branched off into customer relationship management software.
"There was a fracture in the business," Lopez said. "Some wanted to take the business in the application service provider direction in addition to networking."
Pat Cooper, a Nortel spokesman, denied both of these missteps. "I don't agree that Nortel has ignored the enterprise market to focus on another," he said
Nonetheless, Nortel is winning new customers, based in part on its focus on network convergence. The city of Daytona Beach, Fla., had 17 legacy voice and data systems, and was paying "a fortune" just to maintain them, said Grady Meeks, the city's director of information system and services.
The city wanted to replace its infrastructure with a converged network that would carry data, voice and video. The city of Daytona Beach considered Cisco along with Nortel, but ultimately picked Nortel.
"The big thing for us was quality of service and a proven track record," Meeks said. "When you are talking about public safety and mission critical applications, you have got to have top notch quality of service."
Meeks said his decision was also influenced by another local organization that installed a Cisco system, and that it took a very long time to get both voice and data running over the network.
The city of Daytona Beach was able to deploy its data system first, and add voice to the mix a month later over the course of a weekend. Meeks said voice quality is adequate and the system has proven reliable.
Meeks was also concerned about having to replace gear in the future. Nortel, he said, presented a clear roadmap of upgrades that did not require it to rip and replace products over time.
In addition, Nortel is one of the early vendors to embrace session initiation protocol, an emerging standard for VoIP.
Just months after installing the system, the city of Daytona Beach not only achieved its goal of reducing communication costs by $300,000, but has also begun to resell voice and data services in the buildings it leases.
With the city of Daytona Beach, Nortel was able to turn its voice expertise into a network sale. And that is a key part of its strategy going forward, said Angela Singhal, Nortel's director of enterprise customer solutions.
But that advantage is shrinking, Passmore said. Most enterprise networking gear can be tweaked to provide the kind of performance that voice requires, he said. Plus switches and routers are becoming increasingly commoditized.
In addition, he said, enterprises are risk-averse. And Nortel has a black mark on it following its accounting problems. Though Nortel appears to be financially healthy, enterprises take accounting problems into account, Passmore said.
Nonetheless, Lopez said that Nortel -- because of a large installed base of voice customers and a focus on voice -- still has a leg up on many of its networking competitors.
"If it can convert 10% or even 30% of its voice customers into data customers, that is not bad market," she said. "But companies only get so many shots at the brass ring."