In tech, M&A is still fueled mostly by a combination of competitive pressure to offer a broad-based product strategy and a desire to “mine” revenue from customer relationships. The key point here is that revenue mining works only when there’s revenue to mine. Where markets are commoditizing, you can improve efficiency and costs, but it’s a race to the bottom that U.S. companies will lose to offshore competitors, particularly in China.

In IT, where most of the M&A has been happening, software is a key differentiator, and technology is directly linked through software to the productivity value proposition. In networking, the underlying problem is price commoditization at the network layer and below, and that problem cannot ever be solved again. Thus the major players in the space will ultimately fail, specialize or seek differentiation elsewhere. Alcatel-Lucent, Ericsson, and NSN are all vulnerable here because they have broad product portfolios that can be attacked piecemeal by Huawei and ZTE.

Will they go the Nortel route? It’s possible in our view, but it’s more likely that there will be a musical-chairs shifting of business elements among these players as each one strives to find a niche it can defend. In effect, these companies have to get smaller in product footprint and revenue to survive.

The challenges of the major network players may create problems for smaller vendors, many of whom are relying on OEM relationships with giants in networking or IT, or are looking to these firms as buyers down the road. There are surely going to be network deals done (Juniper is said to be preparing to announce it is buying Trapeze from Belden, an example of musical-chairs product elements), but we think these will be fewer, smaller and harder to monetize effectively than those of the IT space. Network vendors are losing strategic engagement, as our spring study showed, and without that it’s hard to leverage even good assets.

The question again is whether the winner really wins anything much. We are of the view that the value of traditional carrier voice-layer technology, including the so-called NGN voice stuff, is becoming problematic given trends in voice pricing and some interesting VoIP action that includes the finalization of the Telefonica/Jajah deal.

To us, it seems very likely that 4G voice questions are already being raised, with operators wondering if they want to be in 4G voice at all, or if they do, whether some simple non-IMS approach would be better. Skype, Vonage, Jajah, and others offer low-overhead voice that’s easily applied to smartphones and other wireless devices. If mobile moves toward a non-traditional voice model, then there’s no such thing as FMC and no value to IMS assets.

Why then buy VoIP assets from Nortel? The argument that it buys a position with U.S. operators is thin in our view. Are those operators more certain of a legacy voice evolution? We doubt it.

Ciena’s challenge is the duopoly of articulation and competition from Asia. Its acquisition of the Nortel Carrier Ethernet assets probably do the company less good than it would have done for Nokia Siemens Networks, who had little U.S. market position. Its core incumbency is the one most threatened by Huawei, a threat that’s growing even in the U.S.

By focusing on lower-level assets, Ciena is taking its eye off the ball in the service management and higher-layer services space. Ciena has reasonable assets in service management and even the potential for a service-layer story, but like most vendors, Ciena seems trapped in early-2000s buzzwords and jargon. Operators have moved into the purchase planning process for its service-layer initiatives and is looking for stuff that contributes, even if that stuff is down at the bottom of the network stack.

The question now is whether Huawei, who was unique in seeing its strategic credibility rise sharply with operators in 2009, will actually end up being more strategically credible, as well as cheaper. If that happens, Ciena is in for a very sad 2010.

We think this is a good thing for NSN because we doubt the symbiosis would have been as strong. NSN is not a marketing company, and NSN needs to leverage any Nortel asset win far beyond Ethernet in order to gain value. That’s unlikely, given that NSN doesn’t have much in the way of higher-layer technology of its own. We also think that’s true of Ciena, perhaps even more true. Ciena can’t be buying market share at this point, particularly when it’s a North American company itself and thus has an opportunity to make its own way in accounts where Nortel was strong.

In technology terms, Nortel has been the originating champion of PBT, but was unable to keep the momentum going on its own concept, even though carrier interest in the technology was the highest of any in the history of our operator surveys. We don’t think Ciena is going to be strong enough in a marketing and strategy sense to keep it going either, and thus this bid may well kill PBT.

Nortel, whose latest quarter showed more bloodletting, is in the process of self-dismemberment down to a minimalist piece nobody can quite identify yet. NSN is also widely expected to bid for the unit to rekindle its chances in North America, where rival Ericsson’s win of the Nortel wireless unit has given it a leg up. The Ericsson CEO did a bit of crowing over its position in North America, in fact.

With Alcatel-Lucent winning many of the AT&T procurement zones and Ericsson strong in wireless, NSN needs to get effective in a hurry. We don’t think that the Nortel deal will do enough; NSN should look to broader M&A and strategy changes quickly.

Most financial industry speculation is aimed at NSN, whose numbers seemed to show more product sales erosion than others in the market. At NSN’s analyst event, there was a sense that professional services were the name of the game, though of course they could never sustain a business of that size. Furthermore, nobody knows how much of the professional services business NSN could get without a strong equipment base. In short, NSN needs to sell gear.

The Nortel stuff would bring them a much better North American presence, one of the problems NSN is contending with. It may collide with the Juniper/NSN joint venture, however, enough to reduce its overall value. We don’t think NSN could up the Ciena bid more than about $250 million without paying so much the Street would trash its stock. We also wonder whether more low-OSI-layer assets will really help.

Our feeling: leave Nortel alone.

NSN had been an unsuccessful bidder for the Nortel wireless assets, but the move to set up its own development center might actually do the company more good by forcing it to devise a true LTE strategy of its own, integrated with its own assets and strategies.

Assimilating Nortel would not have been an easy task, in our view, and would have distracted management from the critical positioning exercises that are absolutely essential to getting a story ready for the fall planning cycle.

We’ve noted that most of the operators we’ve talked to have been skeptical of the prospects for the sale of Nortel’s Ethernet business, given the fact that its prior successes were linked in part to PBT, which has lost momentum in part because of poor strategy on the part of Nortel.

The hope that Ericsson might buy the unit seems at least partially justified, but the question is whether a buyer as conservative as Ericsson could really gain much traction in the space at this point.

The Nortel deal gives Ericsson another North American asset after its win of a management contract for Sprint. It also means a major disappointment for NSN, which really needed to boost its own position in the U.S. in particular.

Obviously everybody knows at this point that wireless capex will beat wireline for the foreseeable future, but we also think that the move is linked to an overall change in provider procurement policies worldwide, a shift to a partnership with a few key vendors that control significant opportunity ecosystems.

Other deals like this are likely to emerge, inside and outside the wireless space, as vendors mass up and position for the fall cycle. We cover this shift in depth in the July issue of Netwatcher.

Any company, to be successful, has to make its customers successful. There are a lot of paths toward doing that; some rely on innovation and others on integration or being a cost leader. Any company can pick one, but that’s the rub. You can’t pick none, or pick them all. Nortel never had a strategy, it only had a set of tactics to address this or that silo. At a time when “convergence” is the byword of the market Nortel didn’t see its market as being converged, as having a single set of needs and as driven by a single set of conditions. It was, and so they missed the boat.

Cisco or Alcatel-Lucent, both cited by some as examples of what should have happened at Nortel, aren’t out of the woods yet either. The world of carrier and enterprise networking changed forever in 2008/2009 and the remaining players have yet to be tested against the new conditions. Good things, and bad things, are still to come.