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Nortel looks to salvage sinking market share

Nortel Networks decides to drop prices and license its network software for a simple reason: It's got nothing to lose.

Nortel Networks today decided to drop prices and license its network software for a simple reason: It's got nothing to lose.

As its market share suffers in the single digits compared to rival Cisco Systems' dominant stake in Internet routing devices, Nortel's strategy shift is a logical one, analysts say.

Network routers are used by businesses of all sizes to connect to the Internet. In recent years, Cisco has been at the head of the Internet boom, essentially serving as the main supplier of network equipment to firms as their Internet needs have grown.

Various market research firms peg Cisco's share of the overall market--from low-end routers to high-end devices--between 60 to 80 percent. At the same time, Nortel seems to be losing its already limited share of the market, according to market data compiled by the Synergy Research Group.

Cisco gained ground in every segment of the routing market in the first half of this year, the firm said, while Nortel slid further behind in the market.

Analysts said Nortel has been competitive in overall network contract bids, but faces serious challenges in displacing the huge base of customers that depends on Cisco routing devices and their accompanying software to ferry Internet traffic to its final destination.

"This is more of a company-specific movement on Nortel's part," Jeremy Duke, president of Synergy, said.

Yet others see Nortel's moves as a general attempt at gaining more market share. "They may just be going for a market share grab," said Hilary Mine, analyst with industry consultants Probe Research.

Nortel hopes that by opening its software to third parties, its new set of devices can route traffic around the so-called "edge" of a network. It aims to bring the core of a network closer to the user, essentially bypassing Cisco's equipment, previously seen as the "brains" of most networks. 3Com, another networking player, has articulated a similar strategy, taking advantage of its dominance in network connection cards for PCs.

Cisco has made few friends with its claims of being a "New World" company, when compared to older phone equipment firms such as Nortel and Lucent Technologies. Yet today Nortel stole that theme from its competitor, branding current routers as incapable of meeting today's Net needs.

Nortel executives today extolled an era of "new economics" in routing devices and stressed the explosion of alternative computers as evidence that the industry no longer needs purpose-built routing hardware.

"I don't think it's about the old world," Bill Conner, president of enterprise solutions at Nortel, said during a conference call today. "This is an inflection point in the industry. Over time, the Internet revolution is all about, 'How do you open up this space?'"

As evidence of the change, Nortel announced that Microsoft and Intel are two among 75 firms that have agreed to license Nortel's software. Intel plans to incorporate the technology into a networking chip, while Microsoft plans to integrate the technology in its upcoming Windows 2000 operating system.

"This is the direction the industry is going," said Kalai Chelvan, general manager of Nortel's revamped "open IP environment" software.