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Optical/IP

UTStarcom's Odd Router Move

UTStarcom Inc.'s (Nasdaq: UTSI) announcement that it will buy CommWorks -- 3Com Corp.'s (Nasdaq: COMS) carrier networking division, has raised some eyebrows.

CommWorks' most notable product is the Total Control Packet Data Service Node (PDSN), a core wireless product for CDMA2000 data networks.

PDSNs, a.k.a. wireless routers, act as the gateway between carriers' CDMA radio networks and their IP networks. Recently these boxes have emerged as focal points for adding service creation, billing, and IP traffic management capabilities to 2.5G and 3G networks.

However, it is unclear why UTStarcom would want a product that was once the market leader but is now struggling.

“UTStarcom is likely to find itself challenged to maintain current CommWorks’s revenue levels [because] the Total Control 1000 has been surpassed by all other vendors in terms of capacity, footprint, and functionality,” says Ken Rehbhen, wireless infrastructure analyst at Cuhrhent Analysis.

Speaking earlier this month on a conference call, UTStarcom’s president and CEO, Hong Lu [ed. note: do they dangle fro and to?], shed some light on his company's motivation, when he implied that the real reason for the aquisition was not to sell the PDSN, but to gain access to CommWorks’ wireless customers in order to sell them existing UTStarcom products. “So far we’ve never been able to get into KDDI, and this is going to add a lot of opportunity for us in voice-over-IP gateways,” Hong said.

The Total Control product is installed in the networks of nearly all the world’s major CDMA carriers, including Verizon Wireless, KDDI Corp., SK Telecom (Nasdaq: SKM), and the fast-growing China Unicom Ltd. (see CommWorks Wins With Unicom). According to data from UTStarcom and CommWorks, the product generated around $40 million of revenue over the past four quarters.

But the question now is: How will UTStarcom deal with mounting competition from Cisco Systems Inc. (Nasdaq: CSCO), Nortel Networks Corp. (NYSE/Toronto: NT), Starent Networks Corp., and Tahoe Networks?

Current Analysis’s Rehbhen believes that UTStarcom needs to look at partnerships with established CDMA vendors that require PDSN solutions. “UTStarcom should approach companies such as ZTE Corp. or LG Electronics Inc. to obtain access to infrastructure distribution channels,” he recommends.

Another possibility is that UTStarcom upgrade the Total Control product into a truly competitive next-gen PDSN and make a full-on assault into the CDMA access market. It took its first steps in this direction when it struck a deal to OEM CDMA radio modules from InterWave Communications Internationl Ltd. (Nasdaq: IWAV), a vendor of compact radio access systems, in November 2002.

Whatever happens, it’s unthinkable that UTStarcom will sit on its hands and do nothing. In the meantime, while they wait for the deal to close, the CommWorks wireless team is carrying on with "business as usual" and has just announced a compact, enterprise version of the PDSN (see: Vendors Offer Campus CDMA).

— Gabriel Brown, Research Analyst, Unstrung

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