ANALYSIS: Paving the way towards vendor consolidation

21 January 2013 |


A major vendor could be set to exit the wireless market next year if the fall in revenue and sales continues into 2013, according to leading analysts.

Market watchers have claimed that low carrier investment in hardware and a difficult economic environment will be a reoccurring issue for vendors in 2013.

Analysts believe large carriers will no longer be able to support high competition with five telecoms vendors: Ericsson, Huawei, Alcatel-Lucent, ZTE and Nokia Siemens Networks (NSN), presently battling for wireless market share.

The majority of global carriers have also faced a difficult year with sharp dips in profits and low network infrastructure investment, leaving vendors without their traditional revenue source. Notably, the first nine months of 2012 were particularly hard for vendors.

Ovum estimates that radio equipment sales were down 10% and although the fourth quarter tends to be the most profitable, Daryl Schoolar, principal analyst for infrastructure at Ovum, believes they will not break even with last year’s results.

With predictions that the wireless equipment market could decline further in 2013 and that there is unlikely to be much upward growth in the long term, Schoolar suggests it will be a scale game. This is bad news for ZTE and Alcatel, as they lag behind Ericsson, NSN and Huawei in terms of market share.

“We’re all beginning to look at the mobile side again, which is a pretty crowded market, and just wondering how long can it continue to sustain five players,” said Schoolar.

Schoolar suggests that the difficulties in 2012 could be the beginning of a longer term issue. Although vendors are no longer believed to be cutting their prices like they used to, the economic climate means that there is little opportunity to raise prices and the increasing popularity of network sharing agreements is also driving down sales.

The incremental nature of many LTE roll-outs is also not working in the favour of vendors. With the exception of the US and some Asian countries, most operators aren’t opting for massive capex intensive roll-outs but instead drawing the life out of their 3G networks. In addition, multi-standard base stations mean that the bulk of an operator’s LTE investment is made when they are upgrading their 3G networks and not when they roll out 4G.

Vendors have been adopting different strategies to cope with these difficult conditions. NSN announced in November 2011 that it would be cutting 17,000 jobs by the end of 2013 to focus on its core mobile broadband business, and the company has been true to its word.

This year NSN sold its broadband access unit to Adtran, its WiMAX unit to NewNet Communication, its IPTV unit to Accenture, its optical network unit to Marlin Equity partners and most recently its BSS unit to Redknee.

This approach seems to be working with the company’s third quarter underlying operating profits jumping to €323 million from €6 million the year before. “People have said that there is no way you can grow a business while you’re going through the kind of restructuring that we’re doing, but that Q3 2012 was slightly larger than Q3 2011,” said Ben Roome, head of media relations at NSN. “People had questioned our ability to generate cash and we think that is in stark contrast to our competitors.”

Both Ericsson and Alcatel-Lucent have also been pursuing job cuts although not at the same scale as NSN. Despite beginning 2012 on a positive note, announcing its first annual profit in six years in February, Alcatel saw a loss of €156 million in the third quarter and has announced 5,000 job cuts. The move is part of a wider restructuring programme aimed at raising €1.25 billion by the end of 2013.

With pressure mounting, Alcatel also announced a €1.6 billion financing deal in December, and now asset sales are deemed likely by some analysts. "I think it’s really the point they need to think about getting out of some areas and focus on those where they are most successful,” said Schoolar.

Ericsson reported a 42% drop in third quarter profits to €552 million and announced that it too would be cutting 1,500 jobs from its Swedish business. The company has also trimmed its sales outlook and now expects growth of between 2% to 8% through 2014.

Huawei in contrast has, if anything, been increasing its head count this year, announcing investments in the UK, Finland and Egypt, but it too has not proved immune to market conditions. The vendor’s first half operating profit was down 22% in 2012, compared to the previous year a decline it blamed on the “significant challenge” of the global economy and telecoms equipment market.

Some estimates suggest that Huawei has overtaken Ericsson as the world’s largest vendor, although this is with a much broader spread of products, including smartphones and tablets. Despite this positive development for the vendor, it also had several major headaches in 2012.

First it was banned from participating in Australia’s National Broadband Network (NBN) due to security concerns and then, along with ZTE, is being accused of espionage by a US House of Representatives panel.

“Anti-competition and protectionism campaigns only help particular enterprises monopolise the market and secure high returns, but they weaken the momentum for technological innovation across the entire industry and impede scientific, technological and social progress,” said Tim Watkins, vice president of Huawei Western Europe.

ZTE meanwhile issued its steepest drop in net profits since going public six years ago. The company’s profits for the first half of 2012 were down 68% compared to a year earlier at $38.7 million. In the third quarter, the company reported its first quarterly loss of $310 million, which was partly blamed on US investigations into its deals in Iran.

As NSN has shown, scaling back operations can be an effective way of returning to profitability and with such a bleak market outlook, 2013 could well see the big five wireless vendors become the big four.