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Nortel customers don't need to panic, analysts say

But big customers should start looking at other vendors

January 14, 2009 12:00 PM ET

Computerworld - Nortel Networks Corp. customers: Don't panic and rip out your Nortel gear.

That's the advice of analysts who follow the Toronto-based network equipment provider, which filed today for protection from creditors under Chapter 11 of U.S. bankruptcy laws.

While the Chapter 11 filing may sound dire, it is not as serious as it might have been with a Chapter 7 filing. The Chapter 11 law is designed to give companies in financial trouble some time to organize a plan for paying off debts, analysts noted.

But having Nortel in Chapter 11 can be a thorny problem for the CIO of a large company that has entrusted its vital networks to Nortel, especially because Nortel has been under financial strain for around four years and faces debts of $4 billion, analysts said. The company's stock price has slipped well below a $1, and it closed yesterday at 32 cents.

"If I was a board member of a company using Nortel for mission-critical needs, I'd be asking the CIO what the hell they were doing," said Zeus Kerravala, an analyst at Yankee Group Research Inc. in Boston.

Kerravala said that a potential bankruptcy filing was expected last fall, so today's news is not a surprise.

At the same time, Kerravala and analyst Jack Gold of J.Gold Associates in Northboro, Mass., said nothing urgent has happened today. In fact, a Chapter 11 filing will help Nortel protect what cash it has, they noted.

What CIOs face is a more strategic decision, and if they are undergoing a upgrade of a part of a network, it might be time to look to other vendors, analysts noted.

"Nortel does face a customer perception issue with customers saying, 'Do I want to invest any further money with a company whose future is unclear?'" Kerravala said. "When they come out of Chapter 11, they may look a lot different, but during this period, Nortel won't invest in small companies with innovative technologies."

Gold said that big Nortel customers need to carefully weigh what is happening. "If I were a big company using all kinds of Nortel gear and I was facing an equipment refresh, I'd be very hesitant to use Nortel," he said

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In a video address on the the company's Web site, Nortel CEO Mike Zafirovski addressed Nortel customers head-on, assuring them that Nortel is "100% committed to customers" and that Nortel employees "all remain very committed to the future of Nortel."

Zafirovski said that Nortel, a traditional supplier of telephone network infrastructure gear to network carriers globally, has made "significant progress in the last three years" since his arrival as CEO, and had done well in sales of wireless technology, 40 Gigabit Ethernet switching and unified communications products.

But the analysts said Nortel hasn't done enough to move beyond its legacy as a telecommunications carrier switch provider and to show advantage in innovative technology areas. If the economy had not soured globally, Nortel might not have needed to file Chapter 11, they said.

While the engineering of its products is still good, Kerravala rated Nortel a 4 on a scale of 1 to 10 for its innovations. "Nortel is not seeing market transitions happen, and while they do make good products, they haven't led in things like voice over IP," he said. "Where can Nortel lead?"

One green initiative that the company announced at Interop last spring was designed to show that Nortel switches use less energy than those from Cisco Systems Inc. and others. But Kerravala ridiculed that effort, saying "it was mostly marketing, and if I were a customer buying green, I hope the green part wasn't what persuaded you to buy it."

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