[qi:gigaom_icon_4G] Earlier this month, when I wrote about Telecom’s Titanic Shifts and the decline of the once mighty service providers, in passing I noted the slow-mo descent of Western equipment makers. With the mega-growth registered by non-Western carriers as dominant equipment buyers, we have seen the rise of two hardware giants: Huawei and ZTE.
Their rising fortunes have been mirrored by sharp declines for hardware makers based in Europe and North America. That point was brought home over the weekend when Nortel (s NTL) announced that it was selling CDMA and LTE pieces of its wireless equipment business to Nokia Siemens Networks (NSN) for about $650 million. It was a tactical admission by the once-mighty Nortel that it had little or no room in tomorrow’s telecom world.
I have followed Nortel for a long time. The company rose and fell with the telecom bubble. It got Cisco envy — it bought companies for outrageous prices only to see the deals go nowhere. The hubris of its managers turned this once proud house of innovation into a footnote. The company started to chase new markets too late and relied too much on North American market for too long. A lot of that can be blamed on lack of management.
How long before we see other big names in telecom take a dirt nap? Will Alcatel-Lucent (s ALU) be next? In a note to its clients, UBS Research points out that Alcatel-Lucent is going to face considerable pressure in North America, as NSN will indeed be super aggressive. Given how aggressive Huawei has been in its bid to gain market share, the jury is still out even on NSN’s long-term sustainability.
With the current economic crisis, we will see many more changes to the telecommunications industry for the upcoming year. This will affect the entire world as more jobs being outsourced of terminated. It will be very interesting to see what the next move in the industry will be.
Much like auto industry, we are seeing some sort of creative destruction in an inefficient industry with too little growth and too many players.
I do agree the big changes are coming and next couple of years are going to be even tougher for telecom than most people realize. I think part of it is lack of imagination/innovation. I am hoping to hear something ground shifting to emerge from these “giants” R&D operations.
One big difference between the auto industry and this case is the desire of the government to get involved. It’s a shame that there are government bailouts for inefficient car companies (that in Canada are nothing more than assembly plants without any of the research and development work) but the only government assistance is tax dollars going to provide loans for the companies picking at Nortel’s bones.
Perhaps the managerial rot went too deep, but it would have warmed my heart to see someone really try to rebuild it as a smaller more focussed entity.
Alcatel-Lucent is, indeed, next in line among the western infra vendors looking at a bleak horizon. Although, it being part Alcatel, it will get some lifelines from the French government at some point, I’m sure.
While Huawei and ZTE have been super aggressive in pricing and listening to their customers, quality issues remain. As I understand it, their gear is not what Ericsson’s, NSN’s or even ALU’s are.
Ericsson is the only one of the big vendors to have vision of what infra providers will be in the future. You’ll notice I used the word provider here, because the business model is changing. NSN’s future hinges on shifting its business east and capturing a meaningful share in the US. ALU’s future hinges on I don’t know what…becoming much better at executing. Huawei and ZTE need to build on their success in pricing (often severly undercutting their western counterparts) and improve quality and service.
That being said, they all do not have a future. And the changes taking place will hasten the decline of some.
The growth for the vendors will not be where it has been. The vendors all need to position solutions for extending the network into low margin markets with poor supporting infrastructure (power supplies, roads, security).
Just some random thoughts with little cohesiveness…
@Jukka
You think Ericsson is on a better track than NSN? It seems to me that NSN is right-on with their move towards high margin services rather than commoditized hardware — basically they are emulating IBM. My experience with Ericsson (limited to the US market) is that they have always succeeded on the strength of their sales force and its ability to insinuate itself within the higher echelons of a carrier.
Huawei and ZTE are getting savvy day by day. They pay low but where else can in the telecom industry can you go work for, since none of the other guys are growing. The pricing issue is only going to go on for so long. Once they have enough market share and a few of the other players die and merge, they can play easily.
BTW, I thought Huawei is considering buying Motorola’s Infra Business ..that would give them some leeway
I’d say all the major vendors except Ericsson, Huawei and ZTE are looking sickly by now. Motorola will be the next to go (or get eaten), then Alcatel-Lucent, then NSN. All the gold plating due to legacy regulations will become irrelevant, then a lean core of infrastructure will remain. The survivors will have to retool, though there may still be edges to be had in, say, radio technology.
Cell phone manufacturers will have to look out or Apple and Google will eat their lunch. Lots of consolidation seems likely here as well; how many hopefuls are trapped in their decaying last-gen software and product lines? They will be unable to level up, if you will. At a guess, this means most everybody except maybe Nokia. Things will look reasonable as long as the old cell phone market still grows. Then not.
It will be interesting to see how the consumer-facing oligopolistic operators evolve in this setting (they too seem ultimately superfluous). Apart from operators accepting their fates as bit pipes, when will we see the ‘real’ internet (not the telco-accomodating one) make inroads into the last holdout: wireless infrastructure?
In short: the internet part of the pie will grow, the telecoms one will shrink. Telecoms is a legacy market, an end game, so milk the cash cows and invest in something with a future.