T-Mobile Awards 3G Deals

Ray Le Maistre
LR Mobile News Analysis
Ray Le Maistre, Editor-in-Chief
11/27/2006



As anticipated, Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK) have been chosen by T-Mobile US Inc. to provide the infrastructure for its 3G network rollout. (See Ericsson Wins T-Mobile USA Deal and Nokia Wins Deal.)

The two Scandinavian firms had been earmarked as the most likely winning vendors after T-Mobile snapped up 120 new wireless spectrum licenses in September's AWS (Advanced Wireless Services) spectrum auction. Both vendors say their deals are "contingent upon the award of AWS spectrum to T-Mobile USA," an award that is expected soon from the U.S. Federal Communications Commission (FCC) . (See T-Mobile Confirms 3G Plans and Big Guns Dominate Spectrum Auction.)

T-Mobile USA's parent, German giant Deutsche Telekom AG (NYSE: DT), which spent $4.2 billion winning the AWS licenses, has said it will spend €2.1 billion ($2.75 billion) on building out its UMTS/3G network over the next three years. The carrier will deploy the latest UMTS access infrastructure based on HSPA (high-speed packet access) technology from both vendors.

Lehman Brothers analyst Jeff Kvaal notes that T-Mobile USA has already started its network upgrade from GSM to 3G, with its New York deployment, part of Ericsson's contract, already well advanced. In 3G rollout, the carrier is behind some of its bigger rivals -- such as Cingular Wireless , Sprint Corp. (NYSE: S), and Verizon Wireless , but T-Mobile's management says timing of the launch may provide benefits such as cheaper handsets as well as cheaper infrastructure, says Kvaal. (See T-Mobile 3G Is Imminent.)

Even so, T-Mobile's capex of $2.75 billion is at the low end of what analysts had been expecting. One possible reason is that T-Mobile USA will have likely struck itself some very favorable terms with Ericsson and Nokia by including Chinese vendor Huawei Technologies Co. Ltd. in the final stages of the RFP (request for proposal) and contract bidding process.

In a research note issued this morning, Kvaal said that "while strategically beneficial [to Ericsson and Nokia], given the size of the network build, we caution that the margin structure is likely to be very difficult in the early phases, as is common with greenfield builds. In addition, pricing has likely been competitive, as we understand the two incumbents beat Huawei in the bidding process."

It was unlikely that T-Mobile would have actually put any business Huawei's way, believes Heavy Reading senior analyst Patrick Donegan, a wireless infrastructure specialist. "In mature markets, generally speaking, UMTS operators are not interested in awarding large-scale deployments to Huawei. They continue to prefer to use Huawei as a stick with which to beat better terms and conditions out of the established Tier 1 mobile infrastructure vendors.”

There is the odd exception, though, as Huawei has managed to win a deal, albeit of an unspecified financial size, with Vodafone Espaņa S.A. for its HSPA rollout.

Huawei claims that success is just the first of many deals with Tier 1 mobile operators that are responding positively to its distributed Node B architecture. Huawei has basically separated the call handling and RF functions, with calls handled from a centralized point and the RF functions distributed in 1 RU-sized boxes. Huawei claims it is a year ahead of its competitors with this approach, which reduces site acquisition and power costs.

But even with that cost-conscious approach and its competitive pricing, Huawei is up against very strong incumbents in Ericsson, the global GSM and UMTS market leader, and Nokia, which will soon create an even more formidable rival when it forms a network equipment joint venture with Siemens Communications Group . (See Nokia, Siemens Get OK From EC.)

Gabriel Brown, chief analyst at Unstrung Insider, Light Reading's wireless research arm, notes that both Nokia and Ericsson have developed distributed, or modular, Node B equipment of their own, with Nokia's Flexi Base Station (BTS) scoring highly in a recent Insider report, "3G Base Station Design & Wireless Network Economics.” (See Cutting Costs in Wireless Networks and Base Stations Drive Wireless Economics.)

“With equipment now counting for less than half the typical cost of a cell site, there is increasing pressure on vendors to deliver product designs that minimize overall site costs,” says Brown. “Flexi BTS uses a modular design that plays on the 'zero-footprint' cell-site concept that helps reduce site costs such as leases, civil works, and power consumption.”

He also notes that Ericsson is tough to beat out under almost any circumstances. "Ericsson is just Ericsson –- no one can beat them on a 3G RAN [radio access network] contract if Ericsson wants to win it."

— Ray Le Maistre, International News Editor, Light Reading

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