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Ericsson's CDMA Dreams

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LM Ericsson (Nasdaq: ERICD) CEO and president Kurt Hellstrom used the company's strategy and technology summit in New York City Monday to do a brisk U-turn on his firm's CDMA2000 infrastructure strategy and to defend the much-maligned Sony Ericsson Mobile Communications handset venture.

Hellstrom, who took the stage along with CFO Sten Fornell and Angel Ruiz, president of the firm's North American business, is now saying that Ericsson wants to become one of the top three CDMA infrastructure equipment vendors over the next few years.

Back in September, Hellstrom said that if the company didn't sell more CDMA equipment, it would consider abandoning the market (see Ericsson: Look Before You Leap!). At the time, Nomura Holdings Inc. telecom analyst Richard Windsor said he thought Ericsson had around a five percent share of the market, behind vendors such as Motorola Computer Group, Nortel Networks Corp. (NYSE/Toronto: NT), and Lucent Technologies Inc. (NYSE: LU). He also said Ericsson would be crazy to get out of the CDMA2000 market. "CDMA2000 has done better than anyone expected," he said.

It seems that attitude has taken hold at Ericsson. Hellstrom now says that Ericsson is focusing on providing a GSM/GPRS upgrade path to 3G and a similar route to CDMA high-speed happiness. The company is expecting the business to be 80/20 split in favor of GSM-derived networks.

This is all well and good. But how does the company plan to get from being a CDMA minnow to a CDMA whale?

Hellstrom says the company has good CDMA technology -- Ericsson bought Qualcomm Inc.'s (Nasdaq: QCOM) network infrastructure business -- and intends to compete hard in Asia markets. He doesn't discount the prospect of some price cutting but says Ericsson has no plans to slash its CDMA prices.

Of course, one easy way to gain market share is to buy a struggling vendor that has a bigger market share than you. "If you look around in the industry, everybody may not be in top form," Hellstrom says. "We have the opportunity to enter the market that way… to grow non-organically… but I'm not going to say any more on that." Earlier in the presentation, CFO Fornell told the audience that the company has $7 billion cash in the bank that it could spend.

Certainly, most of the people that Unstrung talked to at the event seemed to think that an acquisition would be the only way for Ericsson to achieve its dream of becoming a major force in CDMA.

Phil Marshall, program manager of mobile and wireless technologies at Yankee Group reckons he knows what company Ericsson should buy if it does go that route.

"Lucent Technologies Inc. would be the most appropriate choice," he says. "They would give most bang for the buck in America." Earlier, Ericsson's Ruiz told the conference that North America is Ericsson's largest single market, representing 15 percent of its sales.

Aside from CDMA, the other about-face was the company's renewed enthusiasm for its mobile phone venture with Sony Corp. Both partners had agreed previously to invest up to €500 million ($492.5 million) in Sony Ericsson before the company's second anniversary in October 2003, but Ericsson had said it wanted to see increased sales and market share before it put in more money. Both sales and market share are on the decline.

But now Ericsson says its handset business is part of the big picture. "We are really planning to put some more money into Sony Ericsson early next year," Hellstrom says. The company is also looking at ways to allow Sony Ericsson to borrow money. What is not being revealed is the size of that investment or when exactly it will happen -- and we asked 'em nicely, as well.

Sony Ericsson's flagship P800 smartphone is now expected to be launched in Europe in the next few weeks, and sometime in January or February in the U.S.

— Dan Jones, Senior Editor, Unstrung www.unstrung.com

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12/4/2012 | 9:17:41 PM
re: Ericsson's CDMA Dreams
Ericsson appears to be recovering from its not invented here syndrome and that is good for the entire industry. now if we can only get Qualcomm to loosen those licensing fees a bit.

I think ericsson and club UMTS have missed the big picture here. The infrastrastructure market has historically ran between $15 and $30 billion peaking above that.
That's a lot of money. license fees are nice, pure profit, but infrastructure alone is not bad. In other words, who cares who invents the tech. It unrealistic to expect that the incumbents will continue to monopolize the develop of next genertion technologies. Let the start ups do that. They are better at it anyway.

I wonder if this is also tacit acknowledgement that W-CDMA shipments won't grow as expected.
12/4/2012 | 9:17:25 PM
re: Ericsson's CDMA Dreams
If Ericsson is serious about becoming a leader in the CDMA market, there couldnGÇÖt be a better partner than Lucent, which is almost pure play CDMA these days. However, I doubt that Lucent would be keen to sell, or that Ericsson could afford it.

Wireless has been LucentGÇÖs best performing division in recent times. According to its FY 2002 results, Wireless sales dropped 17% from FY2001, versus a drop of 55% for Optical, a drop of for 44% for Switching and a drop of 35% for Services. CFO Frank DGÇÖAmelio confirmed on the Q4 FY2002 results call that Wireless also has superior margins.

Consequently, some financial analysts have speculated that LucentGÇÖs very survival depends on the health of the wireless business, and although this is probably an exaggeration, it does make it hard to see why Lucent would want out.

That is unless theyGÇÖve seen the future of CDMA equipment and think itGÇÖs bleak: LucentGÇÖs Mobility revenues fell of a cliff last quarter, down from $1,451M or 49% of sales in Q3 FY2002 to $882M or 39% of sales in Q4. On the plus side, management guidance is for an increase in Mobility revenues in the first and second quarters of FY2003 (or could this just be a case of talking up the prospects for the business in preparation for an exit?).

LucentGÇÖs Q4 $232M impairment charge related to UMTS R&D could be interpreted as clearing the way for a tie up with a GSM/UMTS player. It also says it doesnGÇÖt expect to recognize any revenue from UMTS in FY2003. Somewhat conversely, however, the firm seems pretty committed to maintaining expertise in GÇ£spread spectrumGÇ¥ technology, which includes WCDMA and CDMA.

Ericsson, meanwhile, had to complete a rights issue not so long ago to keep itself afloat and would seem to have enough on its plate trying to follow through on its own restructuring, which, btw, should soon start having a positive impact on its financials.

For Ericsson to become No. 3 in CDMA, as Hellstrom says he would like, this would mean merging or acquiring the wireless equipment business of either Lucent, Motorola or Nortel. Overtaking any of these three CDMA leaders by organic growth looks unlikely.

So far, Motorola has been the most vocal advocate of consolidation, as reported on Unstrung and as suggested by Adrian Nemcek, the VP of their wireless equipment business. This is also the second time (at least) in recent months that Hellstrom has called for consolidation. Similarly Siemens has publicly acknowledged its interest in participating, which all implies thereGÇÖs quite a bit of talking going on behind the scenes.

However, although consolidation could play a role in taking capacity out of the sector, it would be so complex and costly that it is unlikely. There seems to be tacit agreement that until balance sheets are sorted out, not much can happen.

What everybody would like is for their competitors to bear the costs of taking out capacity via a merger or acquisition so they can come in and compete for the customers. The carriers are obviously keen to ensure vigorous competition amongst suppliers and wouldnGÇÖt be guaranteed to continue buying from an acquired vendor. Furthermore, even the slightest whiff of organizational turmoil related to a merger, or uncertainty about which products would be canned, could be a major turnoff.
12/4/2012 | 9:16:52 PM
re: Ericsson's CDMA Dreams

I was thinking Unstrung would propose Motorola as well but if Ericsson "gets" Lucent mobile then it really would be the start of the end of Lucent. Which unit would be the nice to go - who is going "get" LU's switch products (Nortel?) - I assume that Ericsson would want to stick to its AXE platform and this merger (or purchase?) rumour would only cover the cdma2000 radio products. What about LU's wireless packet switch
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