Choosing LTE vendors in a hot M&A environment

Carriers have to consider the financial health of LTE vendors to ensure investment protection. A confluence of factors -- a worldwide recession, reduced carrier spending, and a young and volatile LTE market -- makes it difficult for carriers to predict which choice is the right one.

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Wireless operators have always based their infrastructure buying decisions on the speed, performance and reliability of vendors' equipment, but operators that are choosing Long-Term Evolution (LTE) vendors must also consider investment protection. LTE vendors are in a relatively immature market that is facing pressure from a worldwide recession and reduced carrier spending.

The cost of doing [mobile traffic backhaul] through fiber optics is coming to a standstill, and the cost of doing it through microwave is coming down, so there may be some microwave acquisitions.
Bill Rubino
Principal AnalystACG Research

"Unfortunately, there's no indicator as to whether or not a [carrier] is making a good move by investing in whatever [LTE] vendor they've chosen," said Debbie Kish, principal analyst at Gartner Inc. "You can't ring-ding anybody that badly about financials because we did have a recession …. [so carriers should be] choosing a vendor that has a long history of mobile technology and viability, and the one that has a product roadmap that fits their needs."

The list of LTE vendors that offer end-to-end portfolios is relatively short and dominated by the market's biggest players, according to Kish, who contributed to Gartner's new Magic Quadrant for LTE Infrastructure. The roster of vendors will continue to shrink, she said, as large telecom vendors gobble up independent LTE vendors to fill gaps in their product portfolios.

Owing partly to this market volatility, LTE spending will be sluggish until late 2011 and 2012, Kish said. Gartner estimated the worldwide LTE infrastructure market to be just $132 million in 2009 and projects it to reach $553 million by the end of this year. By 2014, Gartner expects LTE spending to skyrocket to $7.1 billion, she said, as the market matures and carriers become more confident in investing.

Juniper Networks' recent acquisition of Akeena, an online content delivery company specializing in rich media, is a prime example of how core-heavy vendors may try to beef up their LTE offerings, according to Bill Rubino, principal analyst at ACG Research.

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"I absolutely see it as a volatile market right now," he said. "The big piece to this right now is with the packet core -- or in the LTE space, the evolved packet core -- and a lot of that equipment is really from people who have expertise in the router world … but there are little pieces that surround this core network that potentially could be acquisition targets."

Carriers can also expect microwave radio vendors to become acquisition targets of big core players such as Cisco Systems and Juniper, which may try to differentiate themselves by building up their access and edge network offerings, Rubino said.

"I actually see the major vendors in the packet core as pretty much at the same level -- Cisco's there, Alcatel-Lucent's there, Tellabs' there, Ericsson's there," he said. "The cost of doing [mobile traffic backhaul] through fiber optics is coming to a standstill, and the cost of doing it through microwave is coming down, so there may be some microwave acquisitions."

Consolidation among LTE vendors may not cause problems

The dismembering of Nortel Networks' various lines to multiple vendors over the past year -- after the former telecom giant filed for bankruptcy protection in early 2009 -- was a carrier's investment protection nightmare made manifest, Kish said.

But consolidation among LTE vendors in such an immature market may not be a bad thing, according to both analysts.

"I don't think that it's cause for concern. It's kind of like the chicken and egg scenario -- if a major operator is deploying a small company's equipment, [that vendor] potentially may be a target for acquisition, regardless of what their financial health is," Rubino said. "They may have a technical solution that's desirable for that space, and the acquiring company [has the resources to] expand on it in the future."

The telecom industry has a reputation for being "a very incestuous business," Kish said, meaning that carriers aren't likely to be blindsided by anything completely disruptive.

"Usually, in a case where there's an acquisition, that acquiring vendor will continue support," she said. "Don't forget, they get the employees, too, and most of them just rebrand [the product]. Most of them have worked for the competition at some point. There is a danger, but it's not [as if] support just ends as soon as the acquisition happens."

Carriers stand by top LTE vendors despite downturn

Some LTE vendors have weathered the recession better than others. Huawei reported to investors last year that it grew its overall revenue from 2008 to 2009 by an eye-popping 19% -- from $18.3 billion to $21.8 billion.

Ericsson was largely unscathed compared with its more direct competitors, reporting a 1% decline in revenues from $26.3 billion in 2008 to $25.9 billion last year. But Alcatel-Lucent reported an 11% revenue loss from $20.8 billion in 2008 to $18.5 billion in 2009.

Carriers are creatures of comfort, however. They loathe taking a chance on LTE vendors whose staying power in the market is uncertain, Kish said. No one gasped when both Verizon Wireless and AT&T announced their top LTE vendors, Alcatel-Lucent and Ericsson, which have been key suppliers for North America's two dominant carriers despite their recent financial troubles.

As a result, they're likely to be tougher on the balance sheets of newer or smaller equipment suppliers, such as Huawei, to ensure that a product purchased today won't be acquired and discontinued in a few years, Kish said.

"Most of them have had relationships with these [LTE vendors] forever," she said. "Huawei made some serious milestones with their financials, but there was some question as to whether or not it was by undercutting on price and [whether that would be sustainable]."

A Verizon spokesperson declined to comment on how the operator chose its LTE vendors, which also include Cisco-acquired Starent Networks for the packet core and Nokia Siemens Networks for the IP Multi-Media Subsystem (IMS) network. AT&T did not respond to a request seeking comment.

"Financial viability is totally important because they want to make sure that vendor will be around to support the technology they deploy," Kish said. "Secondly, they want to know that vendor has a migration path or portfolio for all those things that come into play."

Let us know what you think about the story; email: Jessica Scarpati, News Writer

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