Editor’s note: This is the third of a three-part series about where troubled telecom gear-maker Nortel stands in the recovery efforts led by CEO Mike Zafirovski. The reports were written by Mark Evans, a veteran Toronto technology and telecommunications journalist who covers Northern Telecom in a blog. Nortel employs some 2,200 people at its Research Triangle Park, N.C., campus. Evans also is a frequent contributor to WRAL Local Tech Wire with coverage of NT.

TORONTO — Nortel (NYSE: NT) scored a public relations and perhaps a financial coup on Wednesday with the announcement that the telecommunications firm will provide much of the gear needed to support the 2012 Olympics in London.

The announcement, which also includes Nortel signing on as one of the event’s major sponsors, is one Nortel can use to tout the performance, reliability and cutting-edge technology its products can deliver.

But when assessing Nortel’s technology portfolio, here’s the fascinating and challenging reality: the company’s most profitable business – selling CDMA (code division multiple access) equipment – is dying a slow death as other technologies such as GSM (global system for mobile) become more popular and are implemented.

It makes for an interesting strategic situation because, as much as Nortel must focus on new areas to drive growth, it also needs to carefully manage the CDMA business to ensure it can continue to help finance the rest of the operations.

While CDMA is Nortel’s “golden goose,” the company is hoping to drive its wireless business by moving into new markets. In particular, it is focused on 4G (fourth-generation wireless, which includes high-speed multimedia capabilities) and Long Term Evolution (LTE), which is an effort to improve mobile phone standards and integration of service.

LTE moved into the spotlight recently when Nortel announced it was getting out of the Wi-Max business by entering into a joint venture with Israel-based Alvarion Ltd. The moves will allow Nortel to focus its research and development dollars on LTE.

In many ways, the move was a surprise because Nortel had been so bullish on Wi-Max. With wireless networks being used to access the Web and watch video, Wi-Max was seen as a hot market to provide carriers and consumers with the necessary bandwidth. Nortel was as enthusiastic as any telecom equipment supplier, along with rivals such as Samsung .

The reality, however, is that despite Nortel’s strategic focus on Wi-Max, it had not established itself as one of the leading suppliers even though it had invested aggressively in the business. At the same time, the WiMax market is still finding its way. Sprint, for example, pulled back on its multibillion-dollar plans to roll out a national Wi-Max network.

Switch and grow?

George Riedel, Nortel’s chief strategy officer, said the switch from Wi-Max to LTE was a logical move.

“The Wi-MAX market, relative to where we thought it would be 18 months ago, has probably moved out not once but twice in terms of the size of the opportunity,” Riedel told Network World, while adding that LTE is gaining traction in terms of technology and standards development, trial implementations and subsequent purchases.

Analysts said the joint venture with Alvarion made sense because Nortel was not winning any major deals on its own, while Alvarion is a well-respected player with revenue of nearly $250 million.

Along with LTE, Nortel is focused on seven other markets:

  • Unified communications, where it has a strategic joint venture with Microsoft
  • Metro WDM to serve the needs of carriers looking to increase the capacity of networks in urban centers
  • 40GB/100GB Metro and long-haul optics, where Nortel has a strong market position and recently did trials with Comcast and Virgin Media
  • Carrier Ethernet – a $4 billion market with strong growth potential. Nortel recently signed a significant deal to supply Verizon with Ethernet switches.
  • Carrier applications
  • Services

One of Nortel’s strongest technology areas is VoIP, where it has about 31 percent of the carrier VoIP market in North America and about 15 percent globally. Nortel has a strong presence in wireline and wireless VoIP and has been able to thrive as carriers focus more on VoIP and SIP applications rather than IMS.

Chris Umiastowski, an analyst with TD Securities, said Nortel also has healthy prospects in the 40GB optical market.

“Nortel has already won 14 customers with its differentiated 40GB optical transport product in only six weeks of general availability,” he said. “We believe this product line could build up hundreds of millions [in] revenue over the next two to three years, and perhaps more important, it should pull in an equivalent amount of other Nortel optical products.

“Most impressive to us (is) Nortel’s win of a $30 million contract to deploy 40GB transport on a competitor’s undersea amplifier chain. This opens a huge door for Nortel in terms of attacking market share that is currently owned by competitors.”

Bandwidth opportunity

As the demand increases for more bandwidth, Nortel could be well-positioned to capitalize on it as carriers and cable companies look to boost and expand capacity.

Barry Richards, an analyst with Paradigm Capital, said most networks are not ready for the “onslaught” – a situation made evident by the move among broadband service suppliers to implement traffic management technology and introduce bandwidth caps.

“Overall, the Internet is quickly surpassing television as the prime information conduit,” he said. “This upgrade will require significant investment in wireline and optical networking, and there can be little doubt that the Internet feeds will ultimately scale to 100Mbps over the next 10 years. Even at that level, today’s blue ray movies would take a remarkable 67 minutes to download.

“The situation is shockingly worse in many ‘suburbs,’ where carriers offer plans ranging from 150 Kbps to 1Mbps (which they have the nerve to call high-speed). A recent OECD report on international broadband connectivity echoes this view that the availability of broadband service (typically meaning 1Mbps or faster) is scarce, with even the top five countries in the world sporting penetration rates of just 30 percent.”