IPTV Drives Ericsson to Redback
Driven by IPTV
The main driver for Ericsson's move appears to be the anticipated impact that video traffic will have on carrier networks. Redback's main competitors -- Alcatel-Lucent (NYSE: ALU), Cisco Systems Inc. (Nasdaq: CSCO), and Juniper Networks Inc. (NYSE: JNPR) –- are all active in this area, with Alcatel-Lucent offering the most rounded carrier solution courtesy of its partnership with Microsoft Corp. (Nasdaq: MSFT), its own IP and access gear, and its integration experience. (See Alcatel, Microsoft Confirm IPTV Deal.)
Cisco has been busy building out its capabilities and is believed to be looking to add to its arsenal, while Juniper has been trailing the pack. (See Alcatel, Microsoft Confirm IPTV Deal, Sources: Cisco Forming IPTV 'Ecosystem', Cisco Steps Up Telco TV VOD, Will Cisco Make an IPTV Middleware Move?, Juniper Intros OpenIPTV, Juniper Antes Up on Ethernet (Finally), Juniper, Siemens Test IPTV, Juniper Gives Static to IPTV Critics, and Juniper Tunes Its Ethernet, IPTV Stories.)
Ericsson has also got off to a slow start in the telco video world, but has stated on a number of occasions that it wants to be a player in the IPTV sector. Now it has decided it needs its own intelligent IP routers to be taken seriously and be a credible alternative to the other Tier 1 vendors. (See Ericsson Brings the IPTV.)
In a research note issued today, Lehman Brothers analyst Jeffrey Kvaal writes that the move "should enable [Ericsson] to build on Redback's recent momentum in the edge router/IPTV market by leveraging Ericsson's global carrier relationships."
It also gives Redback the muscle it has lacked. "While there had been concern in the market regarding Redback's sustainability as a smaller vendor playing against industry leaders Cisco, Juniper, and Alcatel, we see Ericsson's global footprint and carrier relationships as providing support to this growing revenue stream," noted Kvaal, who believes the integration should be quite straightforward, given Redback's size and lack of overlap with Ericsson's own portfolio.
And Prudential Equity Group LLC analyst Inder Singh noted: "We consider this deal to be a strong positive for Ericsson in the fast-growing worldwide IPTV market." He added in a research note issued today: "We believe this positions Ericsson as a strong contender for AT&T's IPTV initiative as well, where it has had an ongoing trial."
Singh also noted that Redback is "in the process of bringing out gateway products (for wireless networks) and Ethernet switches in the future, which could further enhance available opportunities."
Impact on IP market, partners
Should the acquisition close in February 2007, as Ericsson expects, the main impact in terms of vendor relationships looks, at first glance, to be a negative one for Juniper, which has counted Ericsson as a partner for about four years. (See General Cable Goes With CableNet.)
An Ericsson spokeswoman says that, obviously, the acquisition will affect any metro IP router deals "as we will have Redback, but we will continue to work with Juniper in the IP core and in the GGSN [GPRS gateway service node] for mobile operators, and with Cisco in the IP core." (See Juniper Joins Ericsson on Mobile.)
With Ericsson continuing to resell Juniper and Cisco core IP routers, Juniper won't be affected too much, reckons Lehman analyst Jiong Shao, who estimates that Ericsson "generally accounts for less than 10 percent of Juniper's revenue," and of that revenue, about 90 percent is core router sales. Overall, then, Shao believes the impact will be around 1 percent of Juniper total sales, or around $20 million to $25 million a year.
Ericsson's move for Redback does, though, end speculation about a potential merger between the Swedish giant and Juniper. (See Ericsson, Juniper, Again and Analysts Dismiss Ericsson/Juniper Talk.)
Prudential's Singh notes that "the current deal will likely disappoint some [Juniper] investors who were hoping for the company's buyout."
But it's a deal that may have been shot down by too big a price. Ericsson CEO Carl-Henric Svanberg said during today's press conference in Stockholm that "there are other players we looked at but they weren't worth the money, so we left the table," though he declined to name names.
Juniper's current market capitalization is $10.6 billion. Its share price is down 54 cents, nearly 3 percent, today at $18.72.
The impact on Alcatel-Lucent is also due to be minimal, reckons Lehman's Kvaal. He notes that the newly-formed giant accounts for around 5 percent of Redback's sales these days, a number that will likely soften once the Ericsson deal is completed.
— Ray Le Maistre, International News Editor, Light Reading