Nortel, Sprint deals establish Ericsson as ‘formidable competitor’

Editor’s note: John Byrne and Michael Sullivan Trainor are a director and an executive analyst respectively at Technology Business Research.

HAMPTON, N.H. – Ericsson’s successful bid for Nortel’s CDMA and LTE assets on July 24, along with the network outsourcing deal announced with Sprint earlier in the month, position Ericsson to become a more formidable competitor in the North American market.

Ericsson Trumps Nokia Siemens

Ericsson agreed to pay $1.13 billion in cash for Nortel’s CDMA (code division multiple access) and LTE (long term evolution, fourth generation) assets, outbidding Nokia Siemens Networks, which, in its original stalking-horse bid made on June 19, had agreed to pay $650 million.

Ericsson acquires a strong installed base of customers, including Verizon, Sprint, U.S. Cellular, Bell Canada and Leap, and a profitable business that generated $2 billion in revenue last year. The company will also absorb 2,500 Nortel employees, including 400 devoted to LTE research and development.

Combined with Ericsson’s $2.7 billion in North American sales, the addition of Nortel will make North America Ericsson’s largest region, with approximately 14,000 employees.

Ericsson expects the acquisition to contribute to company profitability within a year of the closing. The company appointed Magnus Mandersson, the current head of Ericsson Northern Europe, to the position of president of CDMA operations, while Richard Lowe, Nortel’s president of Carrier Networks, will be appointed chief operating officer for CDMA operations.

Ericsson Lands Major North American Beachhead with Sprint Deal

Sprint had announced a major expansion of its managed services business on July 9 with a seven-year deal with Ericsson. Titled “Network Advantage,” the deal calls for Ericsson to assume control of the management, provisioning and multivendor maintenance for Sprint’s CDMA, iDEN and wireline networks. Ericsson will also provide OSS, processes and tools to improve Sprint’s network management practices. As part of the deal, which is expected to generate $4.5 billion to $5 billion over the course of the seven years, Ericsson will take on 6,000 Sprint employees. These employees will be converted to Ericsson employees by the end of 3Q09. The deal brings the total number of customers under Ericsson management to more than 350 million.

TBR views the Sprint transaction as part of a critical shift in the wireless infrastructure equipment industry, as Ericsson looks to strengthen its market presence in the key North American CDMA market in anticipation of a wave of new contract awards from CDMA operators looking to upgrade networks to the next-generation LTE technology. The importance of the CDMA-to-LTE market is significant as equipment vendor choices by CDMA operators in North America will establish a pattern for future LTE contract awards by CDMA operators in other regions.

WINNERS & LOSERS

Ericsson Now Positioned for Significant N. American Growth

TBR believes the two aforementioned deals significantly improve Ericsson’s fortunes in the North American market. The company had already achieved a major victory earlier in the year, when it landed a portion of Verizon Wireless’ initial LTE deployment contract. Now, with the additions of the Sprint contract and Nortel’s significant customer base, Ericsson positions itself to land new business as CDMA operators migrate to LTE over the next three years. By combining Nortel’s CDMA experience with Ericsson’s LTE leadership, Ericsson can offer CDMA customers the best of both worlds – providing strong support of legacy CDMA infrastructure and allowing customers to leverage legacy investments while simultaneously providing a path for those customers to migrate to LTE. Additionally, TBR believes the Sprint managed services deal increases the likelihood that other operators (though most likely not the Tier 1 operators) would consider managed services deals to improve network efficiency and reduce opex.

Nokia Siemens’ North American Initiatives See Major Setback

Among all the suppliers, the acquisition of Nortel’s wireless assets would have provided NSN the most immediate impact by allowing it to gain market share in the North American market that it was unable to attain on its own. Juxtaposed with its 21% revenue decline in 2Q09, the Nortel deal would have represented a major boost to NSN. With Ericsson emerging victorious, NSN now faces a long uphill battle to improve its position in North America.

The Ericsson-Sprint managed services deal also represents a blow to NSN, though not unexpected given that Ericsson had been rumored to be close to a Sprint deal for most of this year. NSN had been hopeful that its managed services deal with Sprint spinoff Embarq, announced last year, would give it a leg up in negotiations for a similar deal with Sprint; however, TBR believes Ericsson’s stronger record with managed services, along with its stronger financial position, likely gave it a more compelling position than NSN.

A More Competitive Ericsson in N. America Represents a Clear Threat to Alcatel-Lucent

Over the long term, the vendor most likely to be affected by Ericsson’s newfound leadership role in North America may be Alcatel-Lucent. While Alcatel-Lucent has successfully defended at least a portion of its traditional stronghold by landing a part of Verizon Wireless’ LTE deal earlier this year, the company will now compete directly against Ericsson in many CDMA accounts where it had previously competed against a weaker Nortel.

Combined with Ericsson’s LTE assets, the combined Ericsson/Nortel will compete much more effectively against Alcatel-Lucent to land CDMA-LTE migration deals.

Ericsson/Nortel Could Create a Window of Opportunity for Other Suppliers

Ironically, Ericsson’s purchase of the Nortel assets could create an opportunity for other suppliers. While a Nokia Siemens Networks/Nortel combination would have created a strong three-horse race between Alcatel-Lucent, NSN and Ericsson, the combination of Ericsson and Nortel now leaves just two major competitors.

Network operators, who may be reluctant to put too much bargaining power in the hands of just two suppliers, may have an incentive to bring other suppliers into contract discussions. This could create new opportunities for suppliers such as Motorola, which continues to struggle to maintain market share in network equipment, and Huawei, which is trying to gain a stronger position in North America.