Nokia Siemens Networks Takes the Plunge - Enters the CDMA Fray with Nortel Purchase

| Jun 22, 2009 | Wireless Infrastructure | Competitive Intelligence Report

| Analyst: Peter Jarich

Current Perspective: Positive
Vendor Importance: High
Market Impact: Very High

Event Summary

June 19, 2009 – Nokia Siemens Networks announced a planned USD 650 million purchase of Nortel’s LTE and CDMA network assets. Included in the transaction are more than 2,500 employees, including 400 focused on LTE R&D. Entered into as a “stalking horse” transaction, the sale requires a court-approved bidding process, with no business or portfolio integration taking place until the deal is complete. Additionally, the agreement is subject to approval of the U.S. and Canadian governments.

Analytical Summary

• Current Perspective: Positive on NSN’s planned acquisition of Nortel’s CDMA2000 and LTE businesses, because the deal helps to shore up NSN’s position in North America while supporting the longevity of an otherwise successful CDMA business (not to mention the people it employs). It even lends the vendor LTE IPR and R&D that could be useful as competition in this market picks up. Unfortunately, the risks surrounding the deal are numerous: the deal could still be derailed by a better offer; competition (price, deal and margin) in the CDMA space is running high; despite keeping 2,500 Nortel employees, NSN must still make the integration of these businesses work, including directing the operations of a market its never competed in.

• Vendor Importance: High to NSN, because even though CDMA and LTE are unlikely to drive major near-term revenues – any major acquisition and move into a new technology is a big deal. Here, however, it must also be remembered that NSN has been trying to build momentum in North America (something that is difficult without a major in-region presence) and attempting to highlight its LTE credibility. Picking up Nortel’s CDMA and LTE assets supports both efforts.

• Market Impact: Very high on the wireless infrastructure market, because the deal essentially saves Nortel’s CDMA business. While it is unclear how important Nortel’s LTE assets are, it is clear that further indecision or questions surrounding the future of Nortel’s CDMA business would have driven long-standing customers away, leaving it to wither and customers to seek support from Alcatel-Lucent, Huawei, Motorola or ZTE. By stepping in, NSN virtually ensures that customers will get the product, service and R&D support needed – keeping five major vendors in the space.

Recommended Competitor Actions

• Spread FUD: All competitors need to position Nortel’s CDMA2000 business as doomed. To be sure, an acquisition by NSN will boost employee morale and ensure that the business survives. However, the deal won’t close for more than a month and, then, NSN (a company who knows little about CDMA) will have a product portfolio that has enjoyed little in the way of publicly messaged innovation or even improvement. Kicking Nortel when it was down may have been unkind. Now that its CDMA business looks to be potentially improving, competitors need to go on the offensive in selling their strengths – or, at least, Nortel’s weaknesses.

• CDMA-to-LTE: In the long-term, it’s become clear that most CDMA operators plan to migrate their networks to LTE for mobile broadband support. To this end, CDMA vendors need to begin playing up their CDMA-to-LTE migration capabilities if they want to capture a share of these deals. Beyond simply delivering multi-standard base stations or adhering to LTE-focused 3GPP2 standards, specific innovations or expertise supporting a simpler (more cost effective) migration need to be highlighted.

• Ericsson & CDMA: Ericsson needs to consider putting its own CDMA2000 expertise on display. With NSN’s acquisition of Nortel’s CDMA business, Ericsson will be left as the only major wireless infrastructure vendor without a CDMA business. It’s not a major gap in the vendor’s product portfolio, given the global demand for CDMA vs. GSM and WCDMA products. It could, however, suggest a lack of expertise critical for taking CDMA operators to LTE unless Ericsson works hard to remind the market of its former CDMA2000 business and the success of its ongoing work at Verizon.

• Alcatel-Lucent & GSM: The current economy may not put acquisitions top of mind for most telecom vendors. That said, Alcatel-Lucent should consider picking up Nortel’s GSM business. While not the most successful GSM vendor in the market, Nortel’s customer base could help to add scale to Alcatel-Lucent’s GSM business – while delivering potential HSPA and LTE upgrade opportunities which may not be available to vendors like Huawei and ZTE, given their lack of success with buying Nortel’s assets. What’s more, these GSM customers should come cheap, likely under $400 million, given the $650 million price tag for a 40% larger CDMA business (based on 2008 revenues) with the inclusion of LTE assets.

• Chinese Vendors and “Political Marketing”: Huawei and ZTE need to continue portraying themselves as stable, secure and reliable network vendors. It’s understood that each was looking into Nortel’s wireless assets. It’s also understood that security concerns played a part in derailing this process. Going forward, North American acquisitions are still a good idea for the Chinese vendors, if only to show a commitment to the market. To make them happen, they will need to overcome their image problems by aggressively highlighting satisfied mature market customers and organizational structures which keep them free of Chinese government influence.

Recommended End User / Customer Actions

• Voice Support: Like Telus, Bell Canada and Verizon, all of Nortel’s CDMA customers should consider voicing support for the potential acquisition. To ensure ongoing product and service support, a transfer of CDMA assets from Nortel to NSN seems like the best outcome available to customers. While customer support may not be enough to speed the deal or overcome any better offers, it could give NSN the confidence to grow its bid if necessary.

• Engage with NSN: In the run-up to getting the deal closed, NSN cannot begin work on potential business or portfolio integration. That does not, however, prevent customers from messaging their demands on potential solution roadmaps and support services. Likewise, it means that as soon as the deal is officially closed, operators will want to work very closely with NSN to understand the company’s priorities, ensure that their demands are being addressed, and evaluate the long-term logic of working with NSN on CDMA.

• CDMA-to-LTE Migrations: Every vendor with a CDMA portfolio will claim support for an evolution to LTE services. To be sure, the LTE standards have been created to enable this type of support and flexible product architectures make layering LTE on top of existing networks a relatively simple matter. That said, where LTE comes out of the 3GPP, a solid understanding of CDMA networking is critical to developing a compelling CDMA-to-LTE migration strategy, and CDMA operators need to make this level of understanding a core part of their LTE network buying criteria and look for specific product strategies or innovations that result.

• Non-RAN Assets: Operators need to know how CDMA2000 assets outside of the radio access network will be supported by NSN going forward. In the packet core, Nortel had an on-again, off-again relationship with Starent that ended as the company began work on its own PDSN. Is this new PDSN included in the CDMA deal? Likewise, despite its well-known switching prowess, Nortel’s voice business remains separate from its CDMA business. How then will CDMA voice customers be supported? In a worst case scenario, operators may need to support Nortel-based CDMA networks with products from a variety of other vendors, sourcing complexity that could be used as a bargaining chip.

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Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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