AlcaLu Answers Outsourcing Critics
E-Plus Mobilfunk GmbH , the German mobile operator owned by KPN Telecom NV (NYSE: KPN), has awarded an initial three-year network outsourcing contract to Alcatel-Lucent (NYSE: ALU) estimated to be worth €600 million (US$793 million), prompting a riposte from the vendor against its detractors.
Alcatel-Lucent was up against Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK), both of which have strong managed services businesses. Reports last week that AlcaLu might win the E-Plus deal surprised some analysts. (See Major Vendors Scrap Over Outsourcing Deal.)
Now AlcaLu has taken exception to being positioned by those analysts as a second-rate supplier in Germany.
"We enjoy a leading market position for IPTV and optics in Germany," says an Alcatel-Lucent spokesman. "We are also very well positioned in the mobility market, and were recently awarded an important GSM/EDGE contract from T-Mobile, giving us the majority stake in their access network." (See T-Mobile Picks Alcatel-Lucent.)
The vendor adds that it manages more than 50 networks worldwide. Yet Lehman Brothers suggests that the contract was awarded to the Franco-American vendor because it bid the lowest price.
"While the deal is a big win for Alcatel-Lucent, given the competition, the level of pricing aggression is in question," said the Lehman Brothers London analyst team in a research note.
But Heavy Reading analyst Patrick Donegan says there are factors other than price that may have been in Alcatel-Lucent's favor.
"Alcatel has a strong presence on the ground in Germany and Lucent has always been very well connected to KPN at the corporate level in the Netherlands," says Donegan. "These are likely to have been important factors, though price may have featured strongly as well."
On March 1, 750 E-Plus employees will join Alcatel-Lucent in Germany. There, AlcaLu is taking over the operation, maintenance, and deployment of E-Plus's network. The contract is estimated to be worth €200 million ($264 million) per year for an initial three years, although the winning vendor could not confirm this amount.
"E-Plus has asked us not to provide specific details on the terms of the agreement, but we can say that it has an estimated value worth several hundred million euros," says an Alcatel-Lucent spokesman.
E-Plus is Germany's third largest mobile operator, boasting 12.7 million customers at the end of 2006. CEO Thorsten Dirks said at the 3GSM show in Barcelona that he expected a 20 percent cost saving from outsourcing network operations. Dresdner Kleinwort estimates that saving to be about €15 million ($19.8 million) per year.
Such efficiencies could prompt others to follow in E-Plus's footsteps, and lead to a domino effect of outsourcing announcements from the other mobile operators in the country, according to analysts.
Dresdner Kleinwort anticipates more managed services contracts to follow in Germany, citing a precendent in The Netherlands. Dutch operator Telfort B.V. , which is now owned by KPN, first outsourced its network to Ericsson back in 2002. Then in early 2006, Vodafone Netherlands , T-Mobile Netherlands , and Orange Netherlands all announced network outsourcing contracts. (See V'fone Netherlands Picks Ericsson , Nokia Wins Dutch Deal, and Ericsson Wins Orange Deal. See also KPN Acquires Telfort.)
Dresdner Kleinwort analyst Per Lindberg believes Telefónica O2 Germany GmbH & Co. OHG , part of Telefónica SA (NYSE: TEF)'s international mobile operations, could be next to outsource its network operations, with Ericsson or Nokia likely candidates for the job. Lindberg also believes Vodafone D2 would likely choose Ericsson, while T-Mobile Germany would probably outsource to the pending Nokia Networks joint venture.
— Michelle Donegan, European Editor, Light Reading