NSN & Nortel: AlcaLu Loses Out

There are some obvious winners and an obvious loser from the deal that Nokia Networks (NSN) struck to acquire the CDMA and Long Term Evolution (LTE) assets of Nortel Networks Ltd. – and none of them is NSN itself. (See NSN Picks at Nortel's Mobile Bones .)

The loser side of the equation is pretty clearly Alcatel-Lucent (NYSE: ALU). Alcatel-Lucent and Ericsson AB (Nasdaq: ERIC) have emerged as by far the biggest 3G and 4G wireless infrastructure vendors in the U.S. market. They are the exclusive W-CDMA radio access network (RAN) suppliers to AT&T Inc. (NYSE: T) and the exclusive LTE suppliers to Verizon Wireless . Ericsson is the predominant W-CDMA supplier to T-Mobile US Inc. , and Alcatel-Lucent is the largest CDMA supplier to both Verizon Wireless and Sprint Corp. (NYSE: S). In the major 3G and 4G technologies, the U.S. is Ericsson and Alcatel-Lucent country.

Until this deal was announced, Alcatel-Lucent didn't really face much of a threat to its market position. How likely was it that Verizon Wireless would ever turn over 100 percent of its LTE RAN network to Ericsson? Not very. How likely was it that Alcatel-Lucent would lose LTE share to a weakened Motorola Inc. (NYSE: MOT), a collapsed Nortel, a politically complicated Huawei Technologies Co. Ltd. , or an NSN with only a very small 3G footprint in the U.S. and no CDMA product at all? Just as unlikely.

So while this deal might not exactly put Alcatel-Lucent on its heels just yet, it will certainly get the company up on its toes. Carrots and sticks from U.S. wireless carriers will have quite a lot more impact now that NSN comes to the LTE table with a CDMA portfolio in its back pocket, as well as 400 mostly North America-based LTE engineers. Alcatel-Lucent therefore emerges from this deal with less margin for error in delivering on its CDMA and LTE roadmaps with the right features and at the right price points.

One winner's name has slipped out already. This is Verizon Wireless, not to mention all the other North American wireless operators. The CDMA carriers emerge with their infrastructure supply base strengthened, as well as a newly credible evolution path from CDMA to LTE. AT&T and T-Mobile also get a spruced-up NSN with more people on the ground to choose from among its GSM, W-CDMA, and LTE suppliers.

Another winner is arguably Mike Zafirovski, Nortel's CEO. Having made some fundamental strategic errors with the company's wireless business – including gamely rubber-stamping the fatally flawed WiMax strategy – negotiating $650 million for these assets in the current market environment looks at face value to be respectable, at the very least.

And NSN itself? There's only one answer: Watch this space. Given that NSN is known to be short of intellectual property in OFDMA/MIMO, some of which is key to success in LTE, Nortel's strength in this area will enhance NSN's LTE value proposition, assuming it is included in the sale. A few hundred more engineers can't hurt, either. But the impact of these assets on NSN's global positioning isn't likely to be game-changing.

Let's not forget that NSN is an organization that has only recently emerged from the energy-sapping merger of the former Nokia Corp. (NYSE: NOK) and Siemens AG (NYSE: SI; Frankfurt: SIE) networks businesses. Just when some people thought it was safe to go back into the office, there's now another sizeable, potentially debilitating ingestion to take up months of their time. And just when the portfolio had been rationalized down to more manageable levels, it has to be expanded outward again – with all the implications for diluting the focus of some product lines, such as OA&M; as well as some business units, such as NSN's services business. This is a company whose emerging culture generally opposes marginal, low-volume technologies that are off the beaten track of global standards. One way or another, NSN's acquisition of these assets isn't going to make a significant difference to the company's long-term prospects of winning LTE bids in India, Russia, France, Australia, Brazil, or China.

The acid test of this acquisition's success or failure will be the volume of new 3G or LTE contracts that NSN is able to secure in North America over the next three to four years. Having missed out on the first round with the major U.S. carriers, NSN will unquestionably be in a much better position to secure 3G and LTE business once it has Nortel's assets under its belt.

Whether the incumbent vendors slip up sufficiently in the months and years to come to give NSN an opening is anybody's guess right now. But with Huawei closing in year after year, NSN has placed the only bet that it could if it wants to strengthen its position in the U.S. and still be one of the world's top two wireless equipment vendors five years from now. Whether the bet comes off or not, it is much too early to tell.

— Patrick Donegan, Senior Analyst, Wireless, Heavy Reading

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