Nortel Plays Hardball With the Softswitch

The company targets Lucent customers with a switch that connects Web and wire connections.
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Can

Nortel

(NT)

crack the Bells?

That's the key question for networking companies nowadays. Take the so-called softswitch, the next-generation telecom gear that connects Internet networks with old wire-phone networks. As phone company budgets shrivel, the softswitch is increasingly looking like the one business the telecom gear makers can count on surviving their customers' budget cuts.

Now a couple of recent contract wins make it clear that Nortel sees itself as the hub for this new era of phone switching. If it can steal a few key customers from

Lucent

(LU)

, Nortel could make the softswitch the profit center it hasn't had for more than a year. But Lucent, the incumbent supplier to many of the industry's biggest spenders, may have something to say about that. Both companies' stocks rose modestly Monday, Nortel adding 41, cents to $6.29, and Lucent rising 28 cents, to $7.23.

The Deal

Nortel said Monday that

Sprint

(FON)

agreed to buy $1.1 billion worth of local phone-switch replacements over four years. Lucent had dropped out of the bidding for the contract this summer when it determined that the project wouldn't meet its profit mandate.

The softswitches will be installed at 32 of Sprint's local network equipment offices, enabling Sprint to consolidate the local phone traffic for as many as 135 network offices. This is the second Nortel softswitch win in two months -- the first came from

Qwest

-- and it underscores the effort by phone companies to push ahead on money-saving network upgrades.

The upshot: Nortel gear could catch some sales momentum at a time when there are few other good product cycles to ride. But in order to cash in, Nortel must first win away the biggest customers, which happen to belong to Lucent. And in that sense, the Sprint contract was far from a coup, as Sprint built its network on Nortel gear in the first place.

"Sprint is not one of the major incumbent Bells, and so this is not a sweeping architectural statement," says Lisa Pierce, an analyst with Giga Information Group, an independent research shop.

The Gear

Softswitches use a configuration of software applications to control calls. As such, they are considered the holy grail of voice switching, because they represent the only bridge between Internet-based advances and the old phone system. As the acknowledged stepping stone in network evolution, softswitches promise to keep selling, even as telcos large and small pinch pennies.

As

TheStreet.com

reported in August, Lucent dropped out of competition for the Sprint deal when it declined to cave in on price and terms. Notably, the decision left it without a high-profile softswitch customer to serve as a test bed as other phone companies began to shop for softswitches. This may mean that Nortel has a leg up on Lucent technically when it comes to bidding for competitive accounts.

"Sprint was the key account," Dave Geary, head of Lucent's softswitching efforts, told managers earlier this year when he broke the news of the Sprint loss. Sprint "had the network and cost of operations to justify implementation of it."

Tipping

That said, loyalty appears to be the most important variable in any network equipment decision, and that devotion to status quo appears to play clearly in Lucent's favor. That could change, should Nortel ink a softswitch deal with one of Lucent's core Bell customers. But because competitors tend to make gear that's not readily compatible, most observers don't see the staid big telcos rushing to change their allegiance, even if a price war does break out.

For example,

SBC

and

Verizon

, the two largest local phone companies, have remained faithful Lucent buyers, right throughout the New Jersey company's well-documented financial woes. Lucent and Nortel are bidding on a softswitch contract with Lucent customer

AT&T

, which has bought some Nortel gear in its day, but again, there's no indication Ma Bell will shed her allegiance with onetime subsidiary Lucent. Nortel probably retains an edge with its customers

WorldCom

and

Bell Canada

.

Of course, not everyone sees the die as cast. Nortel's president of softswitching, Sue Spradley, says Nortel's victory in the Sprint competition, such as it was, will get the Bells' attention.

"We are showing we can get through the tough labs," says Spradley. She says Nortel's softswitch is being tested by all the major phone companies, and she adds that she hasn't seen competing tech from Lucent.

Lucent replies that it has three softswitch customers, BT Ignite, NTT DoCoMo and Tiscali. Plus, 12 telcos are testing the gear, including the Baby Bells.

But no matter the reality, expect Nortel to play the we-are-the-champions card, says Pierce of Giga Information. "Lucent is going to have to step up and be more public about their softswitch strategy," she says.