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Alcatel Slams Wireless Price War

Ray Le Maistre
7/27/2006

Alcatel (NYSE: ALA; Paris: CGEP:PA) CEO Serge 'The Merge' Tchuruk lashed out at his company's GSM infrastructure rivals today, saying they were driving pricing levels down to unsustainable levels in a bid to win market share.

Talking during his company's second-quarter conference call, Tchuruk said that a lot of the players involved in merger consolidation "are trying to reposition themselves aggressively and are trying to buy market share." (See Alcatel Reports Q2.)

He added: "Some prices in new contracts, for instance in Latin America, are becoming extravagant, and we decide not to go into it. Our customers are not naïve enough to let us recover bountiful margins later on. Competition is quite strong, particularly from established players."

Those comments came as Alcatel reported an operating margin of 7.9 percent for its mobile communications division, with operating profits of €80 million (US$102 million) from revenues of just over €1 billion ($1.27 billion) in the three months to June 30. Alcatel also suffered a margin squeeze in its mobile business in the first quarter of the financial year. (See Alcatel Battles Margin Pressures.)

Without directly naming the competitors, Tchuruk made it clear he was referring to Ericsson AB (Nasdaq: ERIC), Nokia Corp. (NYSE: NOK), and Siemens Communications Group , Alcatel's main GSM competitors, all of which are involved in the current vendor consolidation craze, along with Alcatel of course. (See Nokia, Siemens Create Networks Giant, Lucatel Clears Euro Hurdle, and Ericsson Buys Bulk of Marconi.)

Late last week, Ericsson CEO Carl-Henric Svanberg said he believed his company had won the vast majority of work to build a new GSM network for Brazilian CDMA mobile operator Vivo Participacoes SA -- a move referred to in Wednesday's Lucent Technologies Inc. (NYSE: LU) conference. (See Lucent's Russo: Don't Panic!)

"We absolutely decided not to follow the pricing seen at Vivo," stated Tchuruk, adding that there is no point in investing in losses.

The CEO also took the opportunity to crow about the combined might of Alcatel and Lucent, noting it will be bigger and more technically and geographically diverse than Ericsson/Marconi or Nokia/Siemens. The CEO stressed particularly Alcatel's growing presence in the routing market. (See Alcatel Router Revenues Surge and Alcatel Shrinks Access Router.)

"IP is absolutely key to the future, and we have strong IP technology. I'm not sure our two main competitors are in the same shape," he boasted.

That IP portfolio, which has been putting pressure on Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (NYSE: JNPR), is still growing rapidly, according to Alcatel COO and president, Mike Quigley.

Quigley said service routing revenues were up fourfold year-on-year, while sequential revenue growth was in the double digits, and that 15 new customers had been signed up in the second quarter. (See Alcatel Wins in Egypt .)

While Alcatel didn't provide actual numbers, according to statistics from Synergy Research Group Inc. , Alcatel's IP products generated $35 million in revenues in the second quarter of 2005, which would put the latest quarter's revenues from IP routing products at around $140 million.

Alcatel also recorded a record period for DSL line shipments, hitting 5.9 million in the second quarter, said Quigley. He also talked of growing WDM equipment demand, a better performance in IMS elements, and greater investments in WiMax, an area where Alcatel recently announced a trial with BellSouth Corp. (NYSE: BLS). (See BellSouth Selects Alcatel .)

And the COO also had to field questions about his future, with one analyst on today's conference call wondering whether Quigley is committed to staying with the company once it merges with Lucent, especially as he recently opted for a less up-front role. (See Quigley Steps Down as Lucatel COO and Inside Lucatel: Quigley's Not Mad at Pat.)

"If I was going, I'd be gone by now," said Quigley. "I have no plans to go anywhere else."

And there seems to be little in the way of the Lucatel merger closing before the end of the year, according to Tchuruk. He said he hadn't thought about a "Plan B" that would come into action if the merger fell apart, so convinced is he of its success. He said Alcatel couldn't provide guidance for the full financial year as he expects to be reporting the fourth quarter as a merged company.

In total, Alcatel reported second-quarter revenues of €3.38 billion ($4.3 billion), and net income of €180 million ($229 million). Having fallen in morning trading, the vendor's share price picked up and closed the day in Paris up €0.08, nearly 1 percent, at €8.71 ($11.09).

— Ray Le Maistre, International News Editor, Light Reading

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digits
digits
12/5/2012 | 3:47:10 AM
re: Alcatel Slams Wireless Price War
Is Alcatel over-reacting, or is there really a desperate bid to win GSM networks business with loss-leading pricing?
materialgirl
materialgirl
12/5/2012 | 3:47:09 AM
re: Alcatel Slams Wireless Price War
I believe that WiMax and WiFi are the future, and that long-term cellular economics are as dead as SONET/ATM. This is just how the demise starts to happen. An invisible force drives prices down to the lowest common denominator.
jcrawshaw
jcrawshaw
12/5/2012 | 3:47:08 AM
re: Alcatel Slams Wireless Price War
I think Alcatel finds the pricing of Ericsson, Nokia and Siemens "aggressive" because:
a) they have greater scale to spread fixed costs (such as WCDMA R&D) across enabling them to offer lower prices;
b) they have launched new low cost platforms for emerging markets which are cheaper to deploy than Alcatel's.
Unfortunately, merging with Lucent will not solve the lack of scale in WCDMA/GSM and will burden Alcatel with a CDMA business that appears to be in terminal decline outside North America.
jepovic
jepovic
12/5/2012 | 3:47:08 AM
re: Alcatel Slams Wireless Price War
Interestingly, Ericsson's CEO said last week that the intense price pressure experienced the last year or so had now been reduced. Ericsson and Nokia have very healthy and healthy margins in their GSM business, respectively. Margins in wireless are still much better than in most wireline business.

I think jcrawshaw hits the spot on the real reasons. Prediction: Lucatel is wiped out of wireless altogether within 5 years. DSL, IMS and the Timetra stuff are the only healthy pieces of Lucatel.
OldPOTS
OldPOTS
12/5/2012 | 3:47:06 AM
re: Alcatel Slams Wireless Price War
Does this mean that Pat needs a better Strategic plan than Q?

OP
exLuman
exLuman
12/5/2012 | 3:47:06 AM
re: Alcatel Slams Wireless Price War
ERICY got over 40% market share in GSM, Nokia over 20% market share and ALA is merging with another fat company...What do you do?

1. Take share from smaller player to gain scale...even at break even...because you already got the margins and generating cash.
2. Take aim on competitor market (LU-CDMA) and give equipment away at low price to get customer to move to another technology.
3. ALA and LU got to understand the world do not work at 35 hour work week at $5M a year salary (Russo).
4. Let see how happy Verizon is when Motorola release the next big phone and got to wait 6-12 months to come out on CDMA and Cingular gain share.
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