Wednesday, July 19, 2006

Nortel/Microsoft Deal - Who Needs Who?

The Nortel/Microsoft story certainly made news yesterday, and it opens up a lot of possibilities for both companies.

In terms of what the deal means, I'm going to steer you to Alec Saunders's post from earlier this morning. Alec spent a lot of years in Redmond, and knows the company well, and I largely agree with his assessment, which is a thumbs up.

In short, Nortel doesn't have many partner options left, especially after Siemens made their deal with Nokia. So, they either team up with Cisco and "bulk up" like the other vendors, or try to stay in the game and compete as another big vendor. They have stated a preference to go it alone, but it's hard to see how they can really continue on this path. The remaining choices seem to come down to partnering with a handset vendor like Motorola (not going to happen), an IT company/systems integrator (like IBM), or a software company (like Microsoft). There are other options as well, like Huawei or Juniper, but it's all moot now. Of all these scenarios, I'd say they made the best choice.

I've participated in a few Microsoft things recently, so they've been in my thoughts quite a bit. The only thing I'd like to add to Alec's comments is to raise the question about who really needs who in this story. At face value, obviously Nortel needs Microsoft more. Aside from settling on a clear growth strategy, shareholders need to see Nortel making moves that give them confidence. In many ways, Microsoft fits the bill here, and it's often said that in the PBX world, the sooner the vendors realize they're in the software business and not the hardware business, the better their chances of survival will be.

That said, I'd like to look at the other side of the coin and note that despite Microsoft's size and market power, they have some bigger picture challenges ahead of them. The rise of browser-based platforms/Web 2.0 is presenting a genuine alternative to software-based platforms. The same, of course, goes for open source, which is disruptive on so many fronts. Last week, I was on a briefing for Windows Live, which is basically a browser-based version of Windows. It's pretty neat, and am sure is positioned to give Google, et al a good run for their money.

Then one has to consider the hardware side of the equation. The PC industry isn't doing so well, and even Dell is running into trouble. IBM made a great move to get out of the PC business with Lenovo, but were savvy enough to keep 20% just in case. And of course, IBM has been an early champion of open source, and one could argue they are closer to the leading edge of where operating systems are going than Microsoft. We all know that Microsoft has been late to the party with voice, and in the enterprise market, the move with Nortel makes sense in this regard. Nortel's voice legacy is really unmatched, so they bring a lot to the table with Microsoft.

So, despite the difference in size between these companies, my take is that both need each other in a big way.

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