R&D Is Killing 3G Wireless

BATH, U.K. –- Commodity Base Station Event -- High research and development costs are squeezing too much of the profit out of the mobile equipment market, according to attendees at a 3G equipment conference in the U.K.

Vesa Tykkylainen [ed. note: roughly translated, that's Finnish for "Tickle me Elmo"], director of Nokia Corp.'s (NYSE: NOK) network technology modules division, presented statistics showing R&D spending by major OEMs has increased dramatically from 13 percent of sales in 1999 to 17 percent of sales in 2003. “We’ve reached a level of R&D that’s unsustainable in the long-term,” he said.

The solution, says Tykkylainen, is for the industry to do less in-house development -- which means OEMs will take on more of a system integrator role by buying standardized modules, such as base-band processors and integrated RF modules, from specialist, third-party suppliers.

By doing this, the OEMs can shift some development costs back to their suppliers and play them off against one another to reduce cost. Another advantage, says Tykkylainen, is that the rate of module R&D won't be tied to the rate of development of the base station itself.

But, in order for this to happen, there have to be standards to which these third-party vendors can develop. There have to be common interfaces to link the separate components together

This is why -- in an attempt to standardize the interfaces between various modules -- industry groups such as the Open Base Station Architecture Initiative (OBSAI), the Common Public Radio Interface (CPRI), and the Antenna Interface Standards Group (AISG) have been set up. The effect for module vendors of moving from proprietary to standard interfaces is expected to be a larger addressable market, but also more companies going after the same business.

“It’s not really good news for the module suppliers, because we’re going to be squeezed hard,” said Peter Kenington, director of RF subsystems at Andrew Corp. (Nasdaq: ANDW).

“To cope with competition we need to look at how we can add more value and innovation, and that means more investment in R&D,” said Simon Swales from RF power amplifier supplier Powerwave Technologies Inc. (Nasdaq: PWAV), citing the emergence of tower-mounted radio head products with integrated amplifiers, transceivers, and filters, as an example.

“But are the OEMs ready for CPRI and OBSAI,” asks Swales? “We’re knocking on their doors and asking them when they want this.”

— Gabriel "Ready for OBSAI" Brown, Chief Analyst, Unstrung Insider

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