In a conference call with clients today, Nikos Theodosopoulos and colleagues said Alcatel has the potential to win a sizeable portion of the contract proposal issued last month by BellSouth Corp. (NYSE: BLS), SBC Communications Inc. (NYSE: SBC), and Verizon Communications Inc. (NYSE: VZ) (see RBOCs Hungry for Fiber).
Alcatel is alone among big companies responding to the RFP, say the UBS analysts, in being both an integrator and supplier of a shipping broadband passive optical network (BPON). Alcatel also has the largest access installed base in the U.S. among the likely candidates, which should help its chances considerably.
(UBS makes a market in Alcatel securities, along with those of other companies mentioned in the report today.)
Alcatel can't win alone, Theodosopoulos said. To meet the needs of the RFP, vendors need a cheap home PON unit, a working BPON, video expertise, and network management/integration services. Alcatel has most of that, but it needs help in the video area and in some of the PON components. Its partnership with Scientific-Atlanta Inc. (NYSE: SFA), already established, will be key.
Other partnerships handicapped favorably by UBS are:
- Lucent Technologies Inc. (NYSE: LU), in partnership with Motorola Inc. (NYSE: MOT) and Quantum Bridge Communications Inc.;
- Siemens AG (NYSE: SI; Frankfurt: SIE), with Terawave Communications or another PON startup;
- Nortel Networks Corp. (NYSE/Toronto: NT), with Optical Solutions Inc.; and
- Permutations of other vendors (see below).
Table 1: UBS Picks Likely BPON Equipment Winners
|Group 2||Lucent/Motorola/Quantum Bridge|
|Siemens/Terawave (or other startup)|
|Group 3||Nortel/Optical Solutions|
|Combos of Advanced Fibre, Cisco, Fujitsu,
Marconi, NEC, multiple startups
|Source: UBS Investment Research "Q-Series" presentation 7/9/03|
At least one of these partnerships could win up to half the RFP, UBS says. Since the U.S. is the only country with a large-scale PON RFP out, and since most of the leading PON suppliers are startups (Optical Solutions Inc., Quantum Bridge Communications Inc., and Terawave Communications), the carriers aren't taking any risks. For every item of work awarded, there's likely to be a second vendor involved.
Still, the opportunity for Alcatel could be enormous, running into nearly $2 billion annually if the deal pans out as UBS predicts. Specifically, if the RBOCs install PONs for an average of 3 million homes per year once the project gets going, Alcatel could take up to $575 per home, by UBS calculations.
Nice work if you can get it. But UBS offers a few caveats. First, the contract isn't likely to mean real deployments for at least another year: "We believe the recent FTTP RFP sent out by the RBOCs will result in network deployments no sooner than 2005, with only trials in 2004. We do not expect a new capex cycle by the carriers until 2005 at the earliest," say materials accompanying today's presentation.
Also, while Alcatel looks to be a possible winner of big bucks in this RFP, UBS says it may come at the cost of some of its DSL deployments, so the increase in revenues may not be as sizeable as some may wish.
Not everyone has been as aggressive in their outlook on this RFP as the UBS analysts. In a note issued in May, analyst Steven Levy of Lehman Brothers estimated RBOCs would deploy between 500,000 and 1 million lines annually, not 2 to 5 million as UBS predicts.
Others have questioned how serious the RBOCs really are about PON rollouts (see A Closer Look at PON Econ). UBS says there are definitely differences in their PON plans. Verizon, they say, will likely spend the most, BellSouth the least. But UBS argues that all the RBOCs are likely to glom onto PON for competitive reasons. Fiber deployments will help them beef up bundled rollouts while escaping the regulatory strictures of their copper networks.
UBS, like Lehman, warns the PON RFP isn't a sign of rebirth in the telecom sector: "Given our view that FTTP will not be a major capital spending cycle until 2005 at the earliest, we maintain our neutral position on the telecom equipment industry. We do believe, however, that the... outcome of the FTTP RFP in the next six months will be a major factor for investment sentiment toward the sector."
— Mary Jander, Senior Editor, Light Reading