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Nortel Networks to Convert Verizon to 'Voice over Internet Protocol' Service

Posted on: Wednesday, 7 January 2004, 06:00 CST

Jan. 8--Launching a multibillion-dollar overhaul of the nation's largest telephone network, Verizon Communications Inc. yesterday named Nortel Networks Ltd. lead vendor to convert Verizon to "voice over Internet protocol" service.

The project, which will likely take a decade or more to complete, commits Verizon to a future of providing cheaper conventional phone calling and advanced telecom services, such as letting consumers combine phone voice mail with e-mail and plug videophones into their existing home phone lines.

Verizon serves more than 50 million US phone lines, including 4 million in Massachusetts, through 9,000 switching facilities that it expects ultimately to convert.

Verizon Network Services Group president Paul Lacouture said in an interview that one future service Verizon now envisions is offering three tiers of local phone service: a cut-rate service similar to today's offerings from small VOIP start-ups like Vonage and Galaxy Voice that would offer somewhat less reliability for a deep discount; standard service; and premium phone plans enhanced by Net-based video, conference calling, and messaging services.

"This move is as significant as when the industry began converting from analog to digital technology in the 1980s," said Verizon president Lawrence T. Babbio Jr., referring to the replacement of mechanical telephone switches with computerized switching gear. AT&T Corp., SBC Communications Inc., and Sprint also are launching major VOIP services this year.

Internet protocol telecommunications systems, which carry voice calls in the same digital packet format as e-mail and Web pages, sharply reduce the cost of providing phone service compared to standard circuit switching. They also make offering service enhancements cheaper and easier. Verizon's upgrades target the core of the network and would not require existing consumers to buy new phones.

Verizon said it had signed a "letter of intent" for a five-year contract with Nortel, which has headquarters in Brampton, Ontario, and a large local office in Billerica. The value of the contract was not specified, but Lacouture said the deal could be worth "hundreds of millions of dollars initially, and much more in the future."

The deal would make Nortel Verizon's exclusive provider of several types of phone-switching gear for the next 18 months, a rebuff to competitors including Lucent Technologies Inc. and Sonus Networks Inc. of Westford. Nortel will be selling gear for Verizon to begin replacing hundreds of local switches, double its long-distance calling capacity this year, and offer IP-based corporate switchboard services to larger businesses.

Sonus has landed business from Verizon selling hardware used chiefly in long-distance calls. "Obviously, this is a disappointment, because we want to win all the deals, but we continue to supply equipment into Verizon and we're continuing to get orders from Verizon," said J.

Michael O'Hara, Sonus marketing vice president. "We're going to continue to work with them. This doesn't change our business plan for the next year."

Nortel shares soared nearly 20 percent after the deal was announced, closing up 92 cents at $5.68, while Sonus dropped 10.5 percent to $7.60.

Despite being shut out of the deal, Lucent, of Murray Hill, N.J., was up 7 percent on Wall Street speculation that Verizon's moves signal resumed big spending by phone giants for network upgrades that could also benefit Lucent, Nortel's leading US competitor.

"Nortel has a headstart, and they're going to be our focus for the next year or so, but there's going to be a lot of room for third-party vendors to provide software and hardware that works with this platform," Lacouture said, adding that Sonus "is still a player, and they're still going to be in our network."

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