Wednesday, January 14, 2009

Nortel Networks files for Bankruptcy

In a long-anticipated move, Nortel Networks announced that it is filing for bankruptcy protection in the Ontario Superior Court of Justice. The Canadian firm had posted a $3.4 Billion loss in the third quarter, and had been under investigation by the Securities and Exchange Commission for number of accounting irregularities. The company's American and European subsidiaries are also expected to file for bankruptcy protection.

It's been evident for the last 3 or 4 years that Nortel's core product line - the switch-based private phone system (PBX) - has been facing its eventual demise. Voice over IP (VoIP) has proven itself to be far more cost-effective over the long term, and high quality vendors like Cisco and Avaya have taken over leadership of the telecommunications industry. Whether Nortel can emerge from bankruptcy or not is obviously an open question. But I have my doubts. Phone systems are long-term investments, and a buyer wants to be reasonably sure that the manufacturer will be around to stand behind their products. Filing for bankruptcy will, of course, cast substantial doubt on that part of the equation. As a result, sales to new customers will dry up almost instantaneously, and sales to existing customers will be hit with enormous competitive pressure.

It's really too bad, because Nortel made excellent switch-based PBX systems. They were highly reliable and relatively easy to maintain. Plus, they had cultivated great relationships with their reseller community, making top sales engineers readily available for proposals and site surveys. I wouldn't too surprised to see Cisco snatch up a significant part of the business, using that strategy to convert more customers to their VoIP product line.

Cisco Systems, Inc.: CSCO (NASDAQ)
Avaya Inc.: Privately Held
Nortel Networks Corporation: NT (TSE)

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