Ericsson's CEO talks about GPON action, slower than expected growth in mobile infrastructure, and China's 3G licenses

February 2, 2007

4 Min Read
Ericsson: Hungry for PON

Ericsson AB (Nasdaq: ERIC), best known as the world's leading supplier of mobile network infrastructure, is hoping to make a bigger name for itself in fixed broadband access, including the North American gigabit passive optical network (GPON) market.

During this morning's earnings conference call, CEO Carl-Henric Svanberg said the big money in fixed networks is "in access… GPON business in the U.S. is something we hope to get a fair share of," while opportunities in fiber-based access network growth in Europe and Asia/Pacific also exist.

If industry projections are any way accurate, the PON equipment market will be worth playing in during the next few years. (See PON Sales Surge.)

Ericsson's prime interest, though, is to become a serious player in the IPTV market. It has been building its IPTV story during the past year, and wants to play a part in the associated high-speed access market. It already has a range of IP DSLAMs, branded EDA (Ethernet Data Access). (See Ericsson Brings the IPTV, DSL Port Shipments Up 16%, Ericsson Fills Its VDSL 'Black Hole', Ericsson Wins Versatel Deal, Ericsson Powers T-Com Rollout, and SingTel Trials Ericsson's EDA.)

The vendor says its recent acquisition of router vendor Redback was driven by the anticipated demand for infrastructure that can manage video traffic. (See IPTV Drives Ericsson to Redback.)

Currently, Ericsson is reliant on winning any GPON business from the North American RBOCs through its relationship with Entrisphere Inc. The partners are currently bidding for GPON business at AT&T Inc. (NYSE: T) and are believed to be on the shortlist at Verizon Communications Inc. (NYSE: VZ), but they are up against stiff competition from the likes of Alcatel-Lucent (NYSE: ALU), Hitachi Telecom (USA) Inc. , Motorola Inc. (NYSE: MOT), and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). (See RBOCs Aim for 10M GPON Subs.)

Entrisphere is also believed to be in the hunt for PON business at Qwest Communications International Inc. (NYSE: Q). (See Qwest Floats Fiber Access RFP.)

Entrisphere had not returned calls for comment as this article was published.

Recent industry speculation has suggested that Ericsson might need to own the PON technology to land a piece of the action. The Swedish giant has also been linked with a bid for Tellabs in the past, but that seems less likely, from a financial perspective, following Ericsson's recent acquisition of Redback. (See Ericsson to Buy Entrisphere?, Ericsson's Svanberg Could 'Bolt On' , and Who's Going to Buy Tellabs?)

But Ericsson is also developing its own GPON technology in its labs, confirms a spokeswoman, who says the development is a continuation of work started by Marconi. (See Ericsson/Marconi Portfolio Unveiled.)

Svanberg expressed his GPON aspirations as he presented fourth-quarter and full-year earnings that largely met with analyst expectations. Revenues for 2006 totaled 177.8 billion Swedish Kroner (US$24 billion), up 17 percent from 2005, while net income was SEK26.3 billion ($3.8 billion). (See Ericsson Ups Profits in 06.)

Mobile margin squeeze
Back in the mobile business, investors were a bit spooked by Ericsson's less optimistic view of the mobile infrastructure market for 2007. Previously the company had predicted year-on-year growth of up to 8 or 9 percent, but Svanberg reined that number back to 5 percent today.

Svanberg also confirmed that margins are being squeezed in major emerging markets. "There are markets such as India that are very competitive, where you can buy footprint to grow from in the future. But that's business as usual."

News of that slower-than-expected growth sent Ericsson's share price down 6 percent to SEK25.75 on the Stockholm exchange Friday, while its ADRs (American Depository Receipts, which represent a number of Ericsson shares) took a 7 percent hit on the Nasdaq exchange, dropping $2.74 to $36.59.

Svanberg was pessimistic about the award of 3G licenses in China during 2007. He said China's home-grown version of 3G, called TD-SCDMA, is still not ready for commercial deployment and is being "given some headroom" for major trials, so "we don't expect to see 3G licenses in China this year."

The Chinese authorities are expected to award licenses for TD-SCDMA, WCDMA, and CDMA 1x rollouts, and Ericsson is looking to pick up billions of dollars worth of business from WCDMA contracts with China's GSM operators when they migrate to 3G.

In the meantime, Svanberg expects to see significant GSM network expansion deals from the likes of China Mobile Communications Corp. and China Unicom Ltd. (NYSE: CHU) this year as subscriber numbers continue to climb. Ericsson announced such a deal in Augyst 2006. (See Ericsson Wins Contracts.)

Ericsson also announced today it has won a deal to manage Orange SA (London/Paris: OGE)'s network in the Netherlands. (See Ericsson Wins Orange Deal.)

— Ray Le Maistre, International News Editor, Light Reading

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