Merger Would Benefit Lucent in IPTV
Alcatel and its partner Microsoft Corp. (Nasdaq: MSFT) dominate the market for large-scale telco TV rollouts. (See Alcatel & Microsoft Going Steady.) Lucent, meanwhile, has been far less visible and would like the chance to play in the profitable and growing space. (See Lucent Sees IPTV Opening.) “We think Lucent is more desperate to get a deal done than Alcatel, given its lack of growth prospects, and a merger with Alcatel would give Lucent an opportunity to participate in the FTTx/IPTV build-out projects currently underway at service providers across the globe,” says Citigroup analyst Alex Henderson in a note. Alcatel has been promoting telco TV for many years, and is now reaping revenues from access equipment sales to new deployments like AT&T Inc. (NYSE: T)’s Project Lightspeed.
Alcatel currently controls more than one-third market share in broadband access, writes Prudential Equity Group LLC analyst Inder Singh in a brief released Friday.
Alcatel reported $15.8 billion in revenues during 2005 while Lucent reported $9.2 billion.
UBS AG estimates that access equipment sales contribute a third of Alcatel’s fixed-line revenues, which in turn represent about 40 percent of the company’s total revenue. (See Alcatel Struts TV-Over-DSL.)
By contrast, access equipment revenues contribute only 11 percent of Lucent’s fixed-line revenues, which account for 26 percent of total revenues, UBS analysts say. And so far, Lucent has made some deals in the IPTV space, but they've been limited in scale. (See Lucent Sees IPTV Opening.)
Alcatel’s technology portfolio contains a wealth of network access equipment now being used by carriers to build out new fiber-powered IPTV networks. Lucent’s portfolio, analysts say, contains very little access technology that might enhance Alcatel’s portfolio in this area.
If a merger takes place, Alcatel would continue to control the access business of the combined company. “The IP division within Alcatel is really the one that has put together the company’s triple play services delivery architecture, and they are going to continue to lead that,” says Heavy Reading analyst Rick Thompson.
The wildcard in the deal for Alcatel may be Lucent’s progress in IMS. Lucent has won broad IMS contracts with the likes of AT&T and Cingular Wireless , but the revenue implications of those wins remains unclear to many. Still, as time goes on, IMS make become more and more entwined with carriers’ IPTV offerings. (See Cingular Picks Lucent for IMS, SBC Picks Lucent's IMS , and BellSouth Picks Lucent for IMS.)
“The fact that Lucent has won some IMS deals, Alcatel will certainly leverage that going forward,” Thompson says. “There will be some kind of integration between IPTV and IMS, and that could be something that could strengthen Alcatel’s IPTV story beyond what it already is.”
Analysts believe the two companies’ strengths are complimentary and would bring about some changes in a combined company. “We would expect Lucent’s access and IPTV business to be dramatically scaled back given the strong position Alcatel has in this business globally,” UBS analysts wrote in a research note released Friday. “Alcatel’s IMS business is likely scaled back in favor of the stronger Lucent offering.”
A Lucent/Alcatel merger could also be seen as a logical reflection of the regrouping of AT&T, Cingular, and BellSouth Corp. (NYSE: BLS). Before that event, Lucent had won IMS contracts at all three companies. Alcatel had been a key vendor in the networks of AT&T and BellSouth. It’s not farfetched to think that some synergies could grow from a merger of the lead access provider and the lead IMS vendor at the new AT&T.
Some analysts believe Alcatel's dominance in the access network might open some big doors for Lucent’s profitable managed services business. Lucent Worldwide Services, which offers such things as hosting, managed services, and network installation and integration, contributed roughly a quarter of the vendor’s revenues last year.
In general, analysts note that Lucent is strong in IMS, CDMA mobile infrastructure, and services; while Alcatel is strong in access, edge routing, and optical.
Geographically, Lucent has strong relationships with large North American telcos -- notably Verizon Communications Inc. (NYSE: VZ) -- that might eventually benefit Alcatel. Alcatel has a strong presence in Europe and in emerging markets.
Alcatel is expected to discuss the Lucent merger talks at a board meeting this Thursday.
— Mark Sullivan, Reporter, Light Reading