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Ericsson's CDMA Cheer

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LR Mobile News Analysis
Light Reading
10/27/2003

Swedish vendor LM Ericsson (Nasdaq: ERICY) has been flagged as a potential major force in the Code Division Multiple Access (CDMA) infrastructure market by the latest Unstrung Insider report, bringing further cheer to the company just days before it expects to post a long-awaited quarterly profit.

According to Unstrung's monthly subscription-based Insider report -- CDMA Networks: Full Speed Ahead -- Ericsson’s performance in the CDMA market has been “significantly better than most analysts and market participants had anticipated,” with the vendor set to possibly challenge Motorola Inc. (NYSE: MOT) for third-place status (see chart below).

Ericsson is traditionally associated with the European-backed GSM (Global System for Mobile communications) and UMTS (Universal Mobile Telecommunications Service) sectors, where it enjoys a market-leading position. UMTS is the 3G upgrade to the GSM standard, using a wideband-CDMA air interface on top of the GSM core network to increase voice capacity and boost data-transfer speeds to a potential 2 Mbit/s.

The vendor turned heads last year, however, by declaring its intention to win a top three place and 15 percent market share in the rival CDMA business. A "spread spectrum," digital, cellular, air interface technology mainly used in the U.S. and South Korea, CDMA operates in the 800MHz band and 1.9GHz PCS band and supports data transfer speeds between 14.4 kbit/sand about 2 Mbit/s (in its latest third-generation variants).

“A year on, it seems that Ericsson is now the vendor most likely to overtake Motorola,” says report author Gabriel Brown. “The real surprise is the speed at which Ericsson has emerged as a serious player in the CDMA infrastructure market. The market leaders cannot afford a moment’s complacency.”

Brown believes that such success can be attributed to Ericsson’s ability to transfer much of the technology and hardware platforms developed for its much larger UMTS business to the CDMA market. The vendor has also helped reduce its costs by striking a partnership with fellow CDMA player Airvana Inc.

“As a result, Ericsson is now offering the latest-generation CDMA technology and starting to pick up contracts around the world, especially in emerging markets,” adds Brown (see Ericsson Wins in Ecuador, Ericsson Does Kazakh CDMA, and Ericsson Secures Nigerian Win).

Ericsson’s CDMA fortunes mirror a turnaround in overall company performance. The business is expected to report an adjusted pre-tax profit of around $66 million in its third-quarter results due Thursday, following a miserable three years of massive restructuring and gloomy financials (see Ericsson Rebuilds Exec Team and Ericsson Spirals Downward).

[Ed note: Nortel Networks Corp. (NYSE/Toronto: NT), Ericsson, and Samsung Corp. do not publicly reveal data about sales of CDMA equipment.]

— Justin Springham, Senior Editor, Europe, Unstrung

The report -- CDMA Networks: Full Speed Ahead -- costs $400. An annual subscription to the Insider is ordinarily $1,250, but is currently available at the special introductory price of $899. For more information, including subscription information and research examples, go to: Unstrung Insider.

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satike1
satike1
12/4/2012 | 11:18:34 PM
re: Ericsson's CDMA Cheer
Can someone explain to me how 3 contract wins amounts to a 8% market share in a multi billion dollar market segment?
IPobserver
IPobserver
12/4/2012 | 11:18:29 PM
re: Ericsson's CDMA Cheer
Ericsson has 14 announced contract wins with CDMA carriers in last 12 months, but I concede that 8% revenue market share in 2003 may be a little optimistic. Think of those numbers as estimates.

If anything, IGve probably underestimated the GǣOthersGǥ market share, which would include vendors such as ZTE Corp., LG and Hitachi.

The problem in trying to assess market share is that only Lucent and Motorola give any indication as to what proportion of their wireless infrastructure revenues derive from CDMA. In addition, there are lots of difficulties to assessing market share that relate to when revenue can be recognized and what the deal pipeline is like.

Unstrung Insider reports consider the CDMA market to be sales of all network equipment to CDMA carriers, including for example, MMSCs, MSCs and other core infrastructure. I did not look only at radio access equipment.

Other cellular equipment market size estimates IGve done in the Unstrung Insider have been broadly in line with numbers from banks and other market research organizations.

If you have a better idea of CDMA market size and market shares, IGm interested. Please post them on this thread.
data_sub
data_sub
12/4/2012 | 11:18:26 PM
re: Ericsson's CDMA Cheer
Ericsson has more than 3 recent CDMA wins.

Starcomm
Rel Tel
Telecsa
Indonesia
Al Tel
Tata
RCC

and that is in the last 6-9 months.

Granted players like Nortel and Lucent are announcing billion dollar deals but how much of that has been payed out? Most of these contracts are spread out over 5 years and contain so much financing that it makes my home mortgage look like a buying a movie ticket. I don't think this article could possibly understand what is really going on with the confidential contracts so this 8% number seems to be a guess.
IPobserver
IPobserver
12/4/2012 | 11:18:25 PM
re: Ericsson's CDMA Cheer
Of course this is a secretive business and, yes, itGs impossible to know whatGs going on behind the scenes. ThatGs why we said it is an estimate.

The estimate is based on all sorts of information including financial reports, exec presentations, analyst comments and so on.

FYI, a list of EricssonGs recent, announced CDMA contracts is posted on the Unstrung Insider site: http://www.unstrung.com/inside...

How would you rank the leading CDMA vendors?
lrmobile_jorge
lrmobile_jorge
12/4/2012 | 11:18:00 PM
re: Ericsson's CDMA Cheer
Counting MSCs, SMSs and other non BSS equipment is ambitious. It's a still a razor and blade business and unless a firm is a niche player with limited R&D and staff, making only MMSs or PDSNs, it's all about selling BTSs, especially if the purported goal is being a top 3-4 player. The other commonly used metric for marketshare (primarily based on BTS's sold) is the number of subscribers supported on the infrastructure. Any idea what the marketshare is using this metric?

Aside from 8% potentially appearing high, other relevant issues aside from marketshare that need to be considered are the quality of the contract wins. Ericsson is used to winning major carriers with $500M+ contracts with potential for significant follow on orders for expansion, like the T-Mobile GPRS contract. Note, Samsung and Hitachi 1X EV-DO wins at KDDI. Aside fromn Unicom, Ericsson has not landed a major carrier. Another consideration is that if the Chinese GSM handset manufacturers have large enough marketshare that negatively affect Nokia and Motorola, won't they do the same in infrastructure? Look at ZTE's purported share on their Website (and they aren't exactly the most sophisticated at self-promotion). Another consideration is whether the 14 recent contract wins have resulted in current or future profitability. An indicator of a vendor's strength is the breadth of their product portfolio. There is a distinct difference between the top 3 and everyone else, which also makes the 8% figure questionable.
IPobserver
IPobserver
12/4/2012 | 11:17:57 PM
re: Ericsson's CDMA Cheer
Jorge,

Thanks for your many good points.

I didnGt count the individual product segments (MSCs, PDSNs, etc), but instead lumped everything together as Gǣsales to CDMA carriersGǥ. I agree thouG that the number of BTSs shipped/sold would be a good guide to market share.

Market share based on subscribers supported by a vendorGs infrastructure would be tricky for quite a few reasons. For example, how would you account for multi vendor networks, or where an operator decides to sacrifice network quality of service to support more subscribers? I could see this getting very complexGǪ how to account for green field operators, and so on?

Without going into fine detail on Ericsson:
G The new CEO is very focused on costs and profitability. I think itGs safe to assume that this includes the CDMA business.
G The company has announced new-generation CDMA base station products recently
G There is cross-over with the UMTS products
G They need some tier 1 accounts (the MMS deal with Verizon is a step in that direction)

The others:
G Lucent, Nortel and Motorola dominate
G Samsung and Hitachi won KDDIGs EV-DO business (previously a Motorola customer)
G ZTE appears to be very competitive in some markets, and is getting very good at Gǣself-promotionGǥ judging by a few ads IGve seen recently

I have no motivation to promote any particular vendor, and I am certainly not trying to pretend I know everything about this market. IGd love to know more.
lrmobile_jorge
lrmobile_jorge
12/4/2012 | 11:17:05 PM
re: Ericsson's CDMA Cheer
A couple of other points:

The recent buzz that there may be a CDMA license in Sweden at 450 MHz may prove to be ironic for Ericsson since they have not been active bidding in these markets and don't appear to have a product in this band. In fairness to Ericsson, with limited resources, prioritizing a 2.1 GHz product probably makes more sense. Nevertheless it's a problem their some of their competitors don't have and Nortel and Lucent will jump at an opportunity to show up the Swedes in their own backyard. The fact that CDMA barely penetrated Europe also raises the question of Ericsson's corporate commitment to CDMA. They certainly have the leverage and customers that their North American and Asian competitors only dream about, but did not seem to capitalize on a major competitive advantage. This is also indicative in the US and Latin American TDMA markets where Ericsson appears to have pushed GSM over CDMA, since the TDMA->CDMA conversions they've announced appear to be with the smaller carriers. Perhaps pushing GSM was a no-brainer, although one can speculate that Ericsson got into CDMA to have a product offering at 800 MHz. Ericsson and likely, Nokia, had to provide AT&T and Cingular major assurances that 800 MHz GSM phones would work, be widely available and the lower costs than CDMA phones would make up for ditching the IS-41 network equipment common to CDMA. At any rate Ericsson's CDMA division appears to have to compete with its own GSM division, in addition to its CDMA competitors. Its North American competitors have internal competition as well, but at a corporate level, GSM/GPRS/EDGE appears to be a second choice.

Regarding cost management, it's not clear why Ericsson is targetting 47K employees while Nortel and Lucent are targetting under 36K (~30%). The businesses may not be exactly the same, but the three appear to largely be wireless and wireline infrastructure vendors with some differences in optical, broadband and maybe defense. Ericsson's cost cutting attempt to transfer its CDMA engineering from pricey San Diego to Montreal seems to be a questionable winning strategy. To say that transferring the knowledge from a few hundred engineers to another division is a challenge, is an understatement, especially when the engineers with the knowledge know their jobs are being eliminated. Even if this transferral is successful, the division Ericsson purchased in 1999 was conservatively 6-12 months behind 5 or 6 of its competitors. To achieve their stated goal of 15% marketshare, they needed to make up for being a late entrant and leapfrog their competition. The other Scandanavian company in San Diego has also made statements about increasing its CDMA marketshare and has taken a different, more conventinal approach by significantly staffing up, including hiring a number of former Ericsson engineers.

I do not know whether 8% marketshare is too high, but it is the highest I've seen anywhere, including announcements from Ericsson.
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