Telica Buy Gives Lucent VoIP Edge

Lucent (LU Quote) may have bought a winning ticket to the VoIP lottery.

Sidelined until now in the great voice-over-Net race, Lucent suddenly has a strong shot at becoming the leader in advanced phone switching gear with its acquisition last month of Telica.

Analysts say Lucent is in a good position to capitalize on Telica's success at Verizon (VZ Quote) and, barring slip-ups, possibly win a fair share of switching upgrades from the nation's largest phone company. Obviously, making inroads at the biggest Bell could open doors for Lucent at all the big telcos as the phone industry looks to move toward more VoIP services.

The turnaround comes at a good time for Lucent. Though the company's wireless division has won some big contracts recently, investors have been disappointed by Lucent's struggles to revitalize its wired networking gear.

That's why some observers took notice when Lucent wireline chief Janet Davidson spoke in positive terms about VoIP, an area where the company has been a fantastic failure. During a briefing last Thursday at Lucent's analyst day, Davidson said the company expects to have a softswitch in trials at a major telco this year.

Analysts such as J.P. Morgan Chase's Ehud Gelblum say Lucent's $288 million purchase of Telica not only bought some promising VoIP technology, it also gave the company an instant entry in Verizon's softswitch bake-off.

Telica's media gateway device is part of a series of products, including softswitches, that act as bridges between phone networks and the Internet. Telica's technology had impressed Verizon engineers, say people familiar with the product, but the problem for Telica was that big telcos typically don't like to rely on small-scale suppliers.

That's where Lucent comes in, says Sam Greenholtz, a former Verizon engineer who is now an analyst with Telecom Pragmatics. He says the Murray Hill, N.J., tech shop has the engineering support and enough familiarity with the acceptance process to basically mold Telica's softswitches to Verizon's specifications.

But good technology and teamlike determination don't exactly guarantee success, especially for Lucent. It would be understating things just a bit to say that Lucent has had a painful legacy of lapses on the VoIP front.

Lucent, along with predecessor AT&T (T Quote) and Western Electric, almost single-handedly designed and equipped the nation's phone switch system. But all that history hasn't helped Lucent adapt its old-line switching technology to the digitized, packetized world of Internet calling.

The weakness in Lucent's switching evolution was evident early this year, when Verizon named rival Nortel (NT Quote) to head up a massive conversion to VoIP switching. The defeat brought back memories of another huge softswitch setback for Lucent in 2001. After Lucent spent three years working with Sprint (FON Quote) on a so-called packet switching technology, rival Nortel won the exclusive supply contract.

But by picking up Telica, Lucent may have found a new shot at solving an old problem.

Analysts expect Lucent to spend the better part of 2005 testing its Telica equipment and improving its VoIP gear at Verizon. In the meantime, if the trials go well, Lucent could pick up interest from other telcos seeking a similar softswitch solution.

Telecom Pragmatics' Greenholtz says that while the company probably won't start seeing big VoIP gear sales to Verizon until 2006, the toehold at the big telco could give Lucent a potentially strong position in softswitches.

"There's no question Lucent has been trying desperately to get it out and be the market leader, not just one of the players," says Greenholtz.