A few weeks ago, The Business Standard (of India) ran an article indicating that state-owned telecom service provider Bharat Sanchar Nigam Ltd. (BSNL) had narrowed its list of WiMax equipment suppliers to three: Chinese vendor Huawei; U.S.-based Telsima Corp. ; and Israeli-based Alvarion Technologies Ltd. (Nasdaq: ALVR). Those who appear to have been dropped from the bidding include Alcatel-Lucent (NYSE: ALU) and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). (As an aside, it was very interesting to see the new head of Alcatel-Lucent bashing WiMax shortly after his company missed the cut.) (See Huawei, Telsima Win BSNL?)

This contract is a very big deal because BSNL is planning for a nationwide rollout of WiMax services with a total investment of over $1 billion. As such it should be among the larger WiMax installations on the planet for some time to come. While Alvarion is the industry leader in WiMax installations worldwide, this contract is going to present some very interesting hurdles for the company to overcome.

When you look at the competition, Telsima may be headquartered in Sunnyvale, Calif., but they’re about as close to being the home team as you can get. Of the company’s five locations, three, including an equipment assembly facility, are in India. Telsima is young, only five years old, but one of their financial benefactors was Intel Capital , a driving force behind the WiMax technology. While the company had been privately owned, a few weeks ago it was acquired by Harris Stratex Networks Inc. (Nasdaq: HSTX), a supplier of backhaul solutions for wireless and broadband networks. (See Harris Stratex Snaps Up Telsima for $12M.)

If there is a negative for Telsima, it may be that they have already won a WiMax equipment contract with BSNL rival Tata Communications Ltd. last spring. Aside from the traditional competitive sniping that is always associated with such equipment decisions -- can your network really be better if you use the same equipment as your competitor? -- there had to be very real concerns related to service. Telsima was not a very large company (300 employees), and the demands on it to handle two major rollouts and the customer support thereafter may have been a disadvantage. However, Telsima being part of Harris Stratex Networks, their 1,400 employees and operations in 135 countries, should offset any concerns.

The company that may be the most troubling on the list is Huawei, the privately held Chinese communications equipment supplier. Because they are not a publicly traded company, the financial information available is limited. Like many private companies, Huawei, provides an audited annual report that is helpful in demonstrating their financial condition as they’re competing for business on the world stage. They are by no means small, ($12.5 billion in 2007 revenue) and, based upon anecdotal comments from companies like Cisco Systems Inc. (Nasdaq: CSCO), Huawei is a very aggressive and formidable competitor.

In late 2008, Huawei announced it was expecting 29 percent growth in “contract sales” (i.e. new contract wins) for 2009. While that growth will be heavily driven by the 3G rollout taking place in China, it’s also suggesting a fair amount of increased market share elsewhere in the world.

Last year, I noted a comment in domestic business paper The Economic Times that Reliance Communications Ltd. , the largest CDMA service provider in India, procured a 10-year, $750 million loan from the China Development Bank (CDB) for the purchase of GSM equipment. What made this unusually interesting is that they were buying the equipment from Huawei.

Will that same type of “teamwork” between CDB and Huawei play a roll in securing a win for Huawei in this contract? If so, what is already a very difficult competitive landscape for virtually every telecommunications equipment supplier will have gotten all that much more difficult. If there is one area of the 1990s that the industry does not need to see return on a large-scale basis, it is vendor financing. However, if you have a deep-pocketed, government-sponsored entity doing it for you, that certainly makes life far simpler.

Next Page: Gauging Alvarion

If WiMax is to gain a significant share of the 4G opportunity, it will have to make dramatic strides in the next couple of years while long-term evolution (LTE) is still in the development stages. Alvarion has quietly moved to the front of the WiMax stage with more than 250 installations worldwide, but, realistically, it has not yet translated into a very large revenue opportunity (i.e. about $450 million life-to-date). This revenue reality -- coupled with the current macroeconomic circumstances which weigh heavily on the ability of service providers to find adequate financing -- has been a huge drag on Alvarion’s stock. Nortel Networks Ltd. 's decision to drop mobile WiMax and end its OEM deal with Alvarion also had an effect on the Israeli firm's revenues in the fourth quarter of 2008. (See Alvarion Takes Nortel Hit.)

As of March 16, Alvarion is down about 27 percent on a year-to-date basis, and that is at least 10 percent points more than the broader market averages. What is more important from an investor perspective is that 84 percent of its current market capitalization is in cash and the company has no debt.

In essence, the market is saying that the enterprise value of this company is worth only 0.09-times estimated 2009 revenue estimates. That’s an amazingly low figure when you consider some others in the communications equipment space as shown in the table below.

Table 1: Communications Equipment Suppliers

This BSNL contract is a seminal event for Alvarion, in my opinion. Should they win, it would propel Alvarion to the top tier of vendors that are considered in all future WiMax installations. But should they lose, they'd be kept in the position of constantly having to get noticed and separate themselves from their much larger competitors. It’s not life or death for the company, per se; that will be determined by their profit and loss statement. But it is very important from the perspective that Alvarion has the opportunity to hit the long ball from a very big stage.

We should not have very long to wait because a final decision from BSNL is expected to be made in very short order. For now, all each of the vendors can do is sit and wait.

— Bob Faulkner, Unstrung