Nortel's bankruptcy: A long time coming

Nortel's demise -- punctuated by this week's bankruptcy protection filings --  started long before the accounting scandal of 2004 and the multimillion dollar quarterly losses that the company has piled up since.

Nortel began unraveling after failing to capitalize on the huge acquisitions it made in the late 1990s and early 2000s. It paid $15 billion for two companies back then -- switch makers Bay Networks and Alteon WebSystems -- in an effort to transform itself from a century-old voice telephony stalwart into an IP voice and data powerhouse. But the acquisitions -- $7 billion for Alteon alone, which at that time had annual revenue just shy of $200 million -- came amidst the dot-com bubble. Navigating that while trying to establish itself in new markets like IP routing, and LAN and Web switching did not allow the company to grow or take substantial share in those markets.

Read about Nortel's relationship with Microsoft. 

This inability, coupled with declining revenue in its legacy voice business and the accounting scandal, steered Nortel irrevocably off-course this decade even as IP leader Cisco deftly managed and made the most of its multibillion dollar acquisitions. A deep-rooted complacency at Nortel didn't help matters either.

"As an incumbent telco equipment maker, Nortel was way too slow to embrace the reality of the change in the market that they served," says Thomas Nolle, president of consultancy CIMI Corp. "They should have been the No. 1 provider of routers to telcos. Hubris . . . prevented them from strategically absorbing Bay even though they financially absorbed them." ( Dell'Oro lumps Nortel into the "other" category in the telco router market, which has a 4% share of the $2.2 billion pie in the third quarter, well behind leaders such as Cisco and Juniper).

Nortel plodded along for years with stagnant or declining growth in IP routing and Layers 2, 3 and 4-7 switching, compiling just a 3.8% share of the $18 billion market in 2007. Meanwhile, the fraud forced the company to restate years of financial results, a situation inherited by CEO Mike Zafirovski when he took the Nortel reins in 2005.

But Zafirovski's efforts to restructure Nortel and get it back on track by focusing on 4G wireless, unified communications for enterprises, Carrier Ethernet and services have been largely fruitless -- culminating in last week's bankruptcy protection filings. Two days before the filing, Nortel unveiled a new line of stackable Gigabit Ethernet switches.

Some watchers believe Nortel assets in its Carrier, Ethernet Solutions and Metro Ethernet operations, which went on the block in September, will be sold off and its share in key markets dispersed among competitors. Others say Nortel may emerge focused solely on the enterprise and services, leveraging its strength in VoIP and alliance with Microsoft for unified communications.

Click to see: Timeline of Nortel's fall

The entire unified communications market for the third quarter of 2008 was $3.1 billion, according to Dell’Oro. Avaya led the pack with 22% of that market followed by Cisco with 18%, then Nortel with 11%.