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Report Looks to Base Cuts

Network equipment vendors will have to continue cutting the cost of developing, managing, and operating 3G kit in order to maintain sustainable long-term profits, according to the latest edition of Unstrung Insider.

The report -- “Open Base Stations: Cutting the Cost of 3G Networks” -- claims that plummeting 3G base-station prices and increasing R&D investment are forcing equipment vendors to step up previous cost cutting efforts.

“Cutting jobs isn’t enough for the sector to return to sustainable profitability,” warns report author Gabriel Brown. “What’s required is a dramatic reduction in the cost of developing and operating 3G equipment.”

The report notes that GSM (Global System for Mobile communications) base-station prices have fallen to below $15K and between $25K and $50K for 3G, while R&D costs have increased to an average of 16 percent of sales since 2000 (see R&D Is Killing 3G Wireless and What Price a 3G Base Station?).

As a result, Brown argues that recent outsourcing efforts from the likes of Lucent Technologies Inc. (NYSE: LU), Nortel Networks Ltd. (NYSE/Toronto: NT), and Alcatel SA (NYSE: ALA; Paris: CGEP:PA) must be cranked up a gear in order to sustain future profitability.

“Over time, more base-station components have been manufactured by third parties, and it is now common for antenna, cables, power amps, filters, transceivers, and baseband silicon to be sourced from outside the company and integrated by the OEM. But it is generally accepted that this process of horizontalization is far from complete.

“For the Tier 1 and Tier 2 OEMs, supply chain, inventory management, purchasing, and business forecasting will become at least as important as making incremental improvements to what are in essence, standard products.”

Should vendors successfully adopt such sharper business processes, Brown estimates that a future operating margin of “around 7 or 8 percent” is sustainable.

— Justin Springham, Senior Editor, Europe, Unstrung

The new report – Open Base Stations: Cutting the Cost of 3G Networks – is available as part of an annual subscription to the monthly Unstrung Insider, priced at $1,350. Annual subscription includes 12 monthly issues. Individual reports are available for $900. Open Base Stations: Cutting the Cost of 3G Networks may be previewed here.

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