Nortel Networks (NYSE:NT) is in the midst of transforming itself from a networking infrastructure provider to an enterprise support business. The new business direction is spearheaded by a strategic alliance with Microsoft (NASDAQ:MSFT), wherein Nortel will provide the hardware and Microsoft the software for a range of mobile, enterprise, and wired communications solutions.

The idea seems to be to provide a broader base of communications solutions for Nortel's customers, as opposed to simply building out and supporting the network. The move is helped by today's announcement of the settlement of patent infringement lawsuits between Nortel and Ciena (NASDAQ:CIEN), a company that prides itself on building value-added networks, rather than just simple communication lines. The settlement includes cross-licensing agreements between the two companies, letting Nortel use the technologies to which Ciena originally wanted to block access.

In return for the new focus, Nortel may sell or spin off its Universal Mobile Telecommunications Systems (UMTS) division, because of the intense competition in that market. It remains to be seen whether market leaders such as Alcatel (NYSE:ALA), Ericsson (NASDAQ:ERICY), or Lucent (NYSE:LU) might pick it up.

Nortel also landed large contracts during the quarter with international cable operator Liberty Global (NASDAQ:LBTYA), the U.S. Army, and Verizon Wireless (NYSE:VZ), thus supplying its partners with everything from voice-over-IP solutions to wireless broadband technologies for the next several years.

The company last saw a profitable fiscal year in 2003, and even that success was based on one-time items. Management has set a gross margin goal of 40% and a full-year sales growth target in the high single digits on flattish operation expenses. That would produce operational margins around 2%-3% and a small net loss for the year. The turnaround plan, then, has a longer-term focus than the next few quarters. That's what I like to hear.

If I'm reading management's comments right, it sounds like it wants to do what Cisco (NASDAQ:CSCO) is doing: become a large part of the in-home voice, data, and video experience. The market will be huge in a few years, and Nortel might as well stake out a plot before it gets too crowded.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here, but he's awaiting the home entertainment revolution with bated breath. You can check out Anders' holdings if you like. Foolish disclosure has its strategy all figured out.