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Verwaayen: Nearly All Right on LTE

Heavy Lifting Analyst Notes
Heavy Lifting Analyst Notes
Heavy Lifting Analyst Notes
11/21/2008

Ben Verwaayen was in top form during the announcement of Alcatel-Lucent (NYSE: ALU)'s third-quarter results. The comments of the company's new CEO were particularly animated on 4G LTE. With his trademark well-honed spontaneity, Verwaayen said there is to be no more "clinking of champagne glasses" around vendor partnerships of the kind that the company signed 18 months ago with NEC Corp. (Tokyo: 6701) to develop LTE. Alcatel-Lucent might still partner with NEC for "certain components" of an LTE solution, said Verwaayen, but it was now clear in the light of changed market circumstances that "Alcatel-Lucent needs to be in that space and to occupy it."

So is he right? In regard to the LTE market as a whole, he's mostly right. Scale is king in 3rd Generation Partnership Project (3GPP) infrastructure, and it's difficult to see how the market will support much more than three LTE base station vendors over the long term. Generating decent margins out of joint ventures is notoriously difficult. It worked for Siemens AG (NYSE: SI; Frankfurt: SIE) and NEC in W-CDMA in terms of market share, but not profitability. And that set of priorities eventually cost Siemens its own independent place at the top table of equipment vendors.

Like everyone else, Alcatel-Lucent now faces a bleak global macroeconomic outlook. It also faces a wireless infrastructure landscape in which Ericsson AB (Nasdaq: ERIC) is arguably stronger than it was five years ago, and in which Huawei Technologies Co. Ltd. is stronger today than it was yesterday. Base station development is a binary decision now – you're either in or you're out. Putting a joint venture placeholder on the table as a substitute for committing hard R&D dollars was just not going to cut it. Verwaayen has identified and corrected that.

He is also right to make the positive decision to commit. There are a lot of uncertainties out there in the carrier capex market. But one of the few near certainties is that over the next five years, Verizon Wireless is going to spend, spend, spend on LTE – much the same way Sprint Corp. (NYSE: S) has been spending to get WiMax off the ground. Within 18 months, Sprint will have pretty decent WiMax coverage in a lot of U.S. cities through Clearwire LLC (Nasdaq: CLWR), together with handover to CDMA 1X EVDO. For its part, AT&T Inc. (NYSE: T) has a software-based HSPA roadmap to 14.4-Mbit/s downlink speeds and an HSPA Evolution roadmap that goes way beyond that. Meanwhile, Verizon Wireless is stuck at 3.1-Mbit/s downlink speeds with EVDO Rev. A, with nowhere else to go except LTE. Verizon Wireless has to throw the kitchen sink at LTE to remain competitive in this arms race – and soon. There is no alternative.

Critically, Alcatel-Lucent is uniquely well placed to win a share of the first LTE deployments with Verizon Wireless. It supplies two thirds of Verizon's CDMA equipment. Its LTE development program doesn't even have to be fully competitive with Ericsson, Nokia Networks , and Huawei. So long as it's there or thereabouts, Alcatel-Lucent's ability to combine a reasonably credible first release commercial LTE product, combined with some kind of story around integrating it into existing CDMA sites and the sheer weight of its presence in the account, will make it nearly impossible for Verizon Wireless to not include Alcatel-Lucent as one of its chosen two or three initial suppliers. In the economic and political environment that looks set to prevail in 2009, being the most American of any of the likely short-listed vendors will also stand the company in very good stead.

Even better, Verizon Wireless will likely be the first carrier to deploy LTE in volume anywhere in the world. So getting ahead of the LTE deployment curve would also create a plausible platform for launching a serious bid to wrest control of the global 4G wireless equipment market from Ericsson, Nokia Siemens, and increasingly Huawei.

There's perhaps one area in which Mr. Verwaayen may have to reconsider: Having a credible LTE core network story will be key to winning, but that's not a particular strength of Alcatel-Lucent's today. This is not true of Starent Networks Corp. (Nasdaq: STAR), which is the incumbent PDSN supplier to Verizon Wireless. Starent possesses a very good reputation in the wireless packet core space and a set of PowerPoint charts pointing to a very elegant migration path for the packet core from CDMA to LTE. Starent is likely way too expensive for Alcatel-Lucent to consider buying, which leaves an obvious alternative: intense activity around an interoperability roadmap between Alcatel-Lucent and Starent. It may not be a joint venture or a memorandum of understanding, but there has to be a decent chance of a press release sometime in 2009. There may have to be some clinking of champagne glasses yet.

— Patrick Donegan, Senior Analyst, Wireless, Heavy Reading

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