Avaya is bidding to acquire Nortel Enterprise - the new company would be the biggest & largest enterprise Voice Company, doubling Avaya’s worldwide installed base of enterprise phone systems.

The PBX industry continues to consolidate, but this announcement is one for the books. Avaya who has historically been an intense competitor with Nortel, will now bury the hatchet and join forces in merry matrimony, competing head to head against the likes of Alcatel-Lucent, 50% of Avaya’s ex-parent company. And even more interesting, two of Avaya’s most influential executives today, Charlie Giancarlo and Kevin Kennedy, in the recent past were two Cisco powerhouses who successfully drove Cisco’s market entry and leadership in the Ethernet Switching and VoIP markets.

The obvious challenge in the near term would be Avaya’s mountainous task of integrating the two entities.   From product architectures, service, channels, employees, etc. The distraction and complexity of merging “equals” does not have a good track record in the Networking/IT industry- recent history is filled with failed attempts.

Kevin Kennedy, President and CEO of Avaya, has spelled out the three top benefits of this proposed joining of equals- increase global scale, Expand Channel Partner Network, and Strengthen Products & Services.

Increase global scale, they will. Avaya will become the largest Enterprise Voice Company worldwide with a high concentration of market dominance in specific regions and countries.

The new Avaya + Nortel would represent 28.1 percent of the WW installed base of legacy and IP PBXs - in comparison the next largest vendor would be Siemens at 12.7% and Alcatel-Lucent at 12.5 %. When looking at specific regions, the dominance would be the strongest in North America- with a combined installed base of 50.3%. And in APAC and Europe, they would hold the second largest installed base position in each of these two major regions.
 
With the new venture's 50% North American installed base- it will increase the difficulty of Siemens and Alcatel-Lucent to grow their channel and presence on US soil. Also, Avaya’s share in one of Western Europe’s largest markets, the UK, will also have a significant installed base footprint.

Clearly there will be advantages of scale- however the Nortel market share has been declining - in its prime, Nortel commanded over 15% market share, but in 2008 fell to under 10%.

What is important about the installed base figures is that it doubles the opportunity Avaya has to migrate an aging, multi-billion dollar TDM infrastructure to IP and then on to the grand prize, Unified Communications (UC).

It goes hand in hand that Avaya will also get an immediate boost in market share leadership. Cisco and Avaya have had a consistent fight for #1 in the Enterprise Telephony market for nearly a decade. With the Nortel move, Avaya quickly moves ahead on their market share surpassing Cisco.  For example, in 2008, Cisco held 15.52% market share and Avaya held 14.43%- adding Nortel’s share into the mix (albeit a declining one) you have a new Avaya combined market share of 24.09%- nearly 10 market share points ahead of Cisco. Synergy believes the big question will be, will the Avaya move stop the bleeding of the Nortel installed base. Nortel who had been a strong #3 for decades, has seen its share slide down to single digits, placing them as a #5 player.

Market share shifts would also impact the emerging market of Collaborative Applications/UC as well.

Although it is not spelled out in the announcement, it appears Avaya will be picking up Nortel’s SMB and Enterprise Data Networking product families of Enterprise Routers, Ethernet Switching, Wireless LANs, and Network Security products. More specifically, the Nortel Secure Router Series, Nortel VPN Router Series, Business Ethernet Switch family, Ethernet Routing Switch family, Nortel Switched Firewall Systems, Nortel SSL VPN Gateways, and SSL VPN Accelerators. These products have been targeted primarily to the verticals of Education, Finance, Healthcare, and Hospitality.

Although the market share positions of these product portfolios are in the low single digits, the products are indeed solid technology and they may have the opportunity to bolster Avaya’s ability to sell a more rounded end-to-end UC solution.

The above discussion represents an introduction to Synergy’s latest report A Game Changer: the New AVAYA. This report looks deeply into this announcement’s impact and industry ramifications- the report will be published Wednesday July 22, 2009. Along with analysis and predictions, the report will also include recommendations to Avaya and Nortel’s customers, channel partners, and competitors.

For more information please contact Heather Gallo, 775-852-3330 extension 101 or hgallo@srgresearch.com