Ping!

A closer look at the Nortel/Pingtel acquisition: Big fish swallows little fish, or a meeting of minds?

By Gerry Blackwell | Posted Sep 11, 2008
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by Gerry Blackwell

When Nortel Networks acquired tiny open-source communications software developer Pingtel Corp. last month, it looked like another case of a whale devouring a darting minnow.

But we wondered about the back story on this one. The acquisition seemed to resonate on a couple of levels, and to signal some significant trends in the industry.

So we asked the principals to open the kimono a little.

Martin Steinmann, who was senior vice president of marketing at Pingtel and comes to Nortel as leader of next generation SMB telephony, was an architect of Pingtel's earlier acquisition, last July, by BlueSocket Inc.—on the BlueSocket side.

His new boss is David Downing, general manager of enterprise communications at Nortel, who was directly involved in grabbing Pingtel from BlueSocket.

Why so many suitors? Pingtel is the developer of SIPxchange, a software-based, hardware-agnostic unified communications (UC) solution for small and medium-size businesses.

Steinmann claims it's unique, being the only native SIP-based communications solution, and the only one with plug 'n' play management features that allow it to easily interoperate with third-party IP phones and gateways.

In 2004, Pingtel donated the code base to the non-profit SIPFoundry. Since then it has thrived as an open-source project, although Pingtel continued to hold copyrights and to sell commercial licenses.

Twelve months ago, Pingtel entered into an OEM agreement with Nortel. This was either the beginning of the end or the beginning of a new chapter, depending on your perspective.

Nortel used the Pingtel code, with minor additions, first in its Business Communications Manager (BCM) hybrid IP telephony solution, and more recently in version 2.0 of Software Communication System (SCS) 500, its own SMB UC offering. Both are resold by Dell and IBM, as well as the company's traditional channel partners.

Pingtel and Nortel weren't exactly competitors, although Downing concedes there was at least the potential for competition. The two may occasionally have bid on the same contracts. But eliminating a competitor was not one of Nortel's motives.

As far as Pingtel was concerned, competing would in any case have been counterproductive.

"As always with small companies that enter into OEM agreements with large companies, there's a very keen interest on the side of the small company to make this successful," Steinmann notes dryly.

Pingtel in fact often pushed sales leads it received to Dell or one of Nortel's other channel partners, he says.

So why if it already had access to the code and Pingtel presented no competitive threat, did Nortel need to acquire it?

The short answer: success. The Pingtel-enabled Nortel products suddenly started to take off, especially in the IBM and Dell channels, and Nortel wanted to maintain momentum.

"It helped secure us a little more control over the development process," Downing says of the acquisition. "It allows us to be a little more deterministic in our destiny on this product [the SCS 500]."

True, Nortel could have developed its own software based on the Pingtel code. Over the 12 months of the OEM agreement, its development team had entered fully into Pingtel's process and made over 300 contributions to the code.

Indeed, it considered hiring more engineers and building up its own team to do just that, Downing says.

"But when we considered trying to double or triple the size of our team, and how long it would take to catch up—and in some cases rewrite much of the code—we felt it could really jeopardize the momentum we had established in the second and third quarters of this year."

So instead, it bought the assets of Pingtel, and imported its research and development team of ten engineers en masse, plus Steinmann. (Personnel Pingtel shared with BlueSocket stayed behind.)

Nortel may also have been looking for something else from this acquisition: credibility in the open source community.

The company's legacy, of course, is proprietary, hardware-based products, but the leopard is endeavoring to change its spots.

"We're really trying to differentiate ourselves in a couple of respects," Downing says, "but probably the most prominent is to move to real open systems—open up our APIs and interfaces and really drive the idea that the open-source approach has benefits to the general user community but can also be a strong commercial venture."

In other words, Nortel is adopting Pingtel's model. Not that it's unique to Pingtel. At least 50 other venture-backed software startups are melding open source development and commercial licensing in similar ways, Steinmann points out. But it is certainly foreign to incumbents like Nortel.

Since the open source process is vital to the success of this model, it's crucial the community Pingtel fostered continues to participate. And Nortel right now may lack the kind of street cred to keep those unpaid developers contributing.

"Time will tell if we really do get credibility," Downing says. "That's certainly an objective [of the acquisition]. But I respect the critics' opinion, that we'll just have to wait and see how Nortel does with this."

It sounds as if the company is serious about the open source model. "We're taking real, specific steps to ensure that we can foster and grow the development environment Pingtel created at Nortel," Downing says.

Nortel may be trying to gain credibility in the open-source community, but at the same time, the acquisition of Pingtel by a big, established player signals that the open-source process itself has gained considerable credibility in the commercial software industry.

It also signals the acceleration of a trend Pingtel helped initiate in the SMB market, and other bigger players—think Cisco—have long been driving in the enterprise market: voice communications becoming just another data application.

"We founded the company in an attempt to capitalize on exactly that trend toward telephony and unified communication as an IT application that is procured by IT professionals and managed by IT professionals," Steinmann notes.

Adds Downing, "I think [the acquisition] represents a bet that we're making that voice is an application, and that trying to keep it on proprietary hardware has a limited lifetime—even though I would say a lot of our competitors believe they [can still] stretch that model further."

Now that Nortel has the Pingtel expertise in house, it's looking in the short term to use it to push forward development of the SCS 500 and "expand its ecosystem."

It will do this by building in hooks that make it easy to integrate other software. Nortel is already working with developers to ensure its communications capabilities can be embedded in their products—to enable simple click-to-talk applications in CRM solutions, for example.

In the longer term, it will look to add Pingtel functionality to other Nortel products.

But Steinmann is quick to point out that Nortel's plans will not impinge on the open-source process. "We're fully committed not only to continuing but to accelerating the open source version," he says.

A new version with significant enhancements, including SIP trunking, is due out in the first quarter of 2009.

But will priorities end up conflicting? Despite best intentions, can Pingtel's commitment to the open source process really survive in a company with Nortel's legacy?

Downing acknowledges there is potential for culture clash between the Pingtel team and its new masters. "I think the most important thing is you don't brush this under the rug," he says, "that you recognize it's a challenge."

Steinmann sounds optimistic. The integration process, he points out, started 12 months ago with the OEM agreement. And it was by no means one sided. "The Nortel team has to a very large extent adapted to our culture," he says.

Developing in the open—interacting with outside developers all over the world, managing a public code base and bug reporting process—did not come naturally to the Nortel folks.

"I can tell you that initially it caused quite a bit of friction almost, and consternation," Steinmann says. "And then adaptation."

The collaboration has worked well ever since. "And the acquisition does not change any of that," he adds. "We're going to move into a Nortel building but other than that, for us, nothing really changes at all."

Famous last words? Or famous first words?

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