Nortel and IBM have agreed to jointly develop networking products for the telecommunications industry.

The partnership will initially concentrate on producing carrier-grade servers for telco, based on IBM's BladeCenter server design. The two companies have established a 30-person joint development centre and characterised it as a "strategic alliance."

In addition to the BladeCenter servers, IBM plans to provide the engineering and technical services to help Nortel develop a wide range of products for multi-media services, VoIP and wired and wireless broadband services. Nortel expects the deal to reduce its research and development costs, the company said.

At present, Nortel spends approximately 15 percent to 20 percent of its annual revenue on research and development, according to Ken Pecot, its VP of corporate strategy - equating to between $1.5 billion and $2 billion.

As such, the deal could eventually generate as much as $1 billion per year for IBM, according to Lance Travis, vice president of outsourcing strategies at AMR Research. The deal may even extend to consulting, he said. "This represents, for IBM, a potentially large new market of outsourcing services. This isn't just IBM supplying their technical expertise to Nortel. It's also IBM supplying their expertise around product development."