Part 2.........
Will Vendor Financing Woes Hobble Lucent's, Nortel's Wireless Units? (Cont'd)
By Tero Kuittinen
Special to TheStreet.com
2/16/01 3:13 PM ET
This is the second part of Tero's article discussing the widening vendor financing problem in the wireless networking world. Be sure to read Part 1.
What next? If Lucent (LU:NYSE - news - boards) has spent a bundle to lubricate operators and even that was not enough to give it meaningful 3G market share, what happens when the lavish spending stops? On its own merits, Lucent's W-CDMA division will be hard-pressed to land new customers. Obviously, Nortel (NT:NYSE - news - boards) will face challenges as well, though its program has resulted in more than a 10% market share and can be argued to have given the company a necessary foothold to keep it alive. A lot depends on just what delivery dates were inked into Nortel's deals, the extent of the financing component and how draconian the slippage penalties are.
The Comeback of Competition
One important point here is that the early spending binges and current profit crunches have rendered Lucent, Nortel and Motorola (MOT:NYSE - news - boards) unable to continue their strategies. They simply can't continue their initial payoff policies -- investor focus on vendor financing issues will now effectively bar them from offering lavish incentives.
The biggest fear about the 3G infrastructure market has been the gnawing suspicion that vendor financing may poison the well for all participants. Paradoxically, Lucent's and Nortel's shock news from Thursday may ultimately benefit the industry. Now that the torrent of vendor financing money will turn into a trickle, orders will be placed based on the real merits of rival bids.
Lucent's and Motorola's 3G market shares may seem low -- but they are probably artificially inflated even now. Nortel stands the best chance of continuing as a presence even without the vendor financing crutch; but it would not be surprising to see Lucent and Motorola withdraw from the market within two years. With their current order books, solid margins will be impossible to attain.
And here's the key to why companies have scrambled so frantically to land the first 3G clients; the second-generation mobile network orders are no longer enough to drive revenue growth from about 2003 onwards. The only way to maintain a successful mobile network division is to succeed in the third generation. Lucent and Motorola are now facing more than questions about their 3G strategy; it is the future of their entire mobile network units that will be tested during the next year or two. Nobody knows what the real competitiveness of these two companies is, but now that they have to stop buying market share, we are about to find out.
The Operators Will Be Next
Of course, the spillover effect on operators is the big unknown here. Many marginal entries to the 3G market have been launched just because equipment vendors have been only too happy to shoulder the risk. Now the calculation is going to change - and the outcome may be that we won't see the expected 4-6 rival operators in many 3G markets; and perhaps only three.
In the long term this is good for the industry, because it means that operators could actually make money, which would allow them to build 3G networks with a sufficiently dense pattern of base stations that can deliver decent performance. If that's true, then the overall infrastructure spending of three healthy 3G rivals can match the spending of five unprofitable operators. A smaller number of operators can ultimately result in greater infrastructure spending; it's the expansion orders that matter.
Just as importantly, healthier competition in 3G markets would enable companies that deserve success to achieve it. Siemens (SMAWY:OTC BB ADR - news - boards) has been surprisingly robust in the 3G infra market -- could it actually hit 20% market share if it won't be forced into insane financing bidding wars in the future?
These long-term considerations will be furthest from the minds of investors obsessing about the next short-term sentiment swing. But in the long run, these are the critical issues affecting success.
Be sure to read Part 1.
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Tero Kuittinen is the vice president of wireless telecommunications at Halsey Advisory and Management, an investment firm based in New York. He is also the Wireless Technology Advisor to Wharton Equity Partners, LLC, a U.S.-based private equity firm , and the senior strategist of SpringToys, a mobile entertainment start-up company based in Helsinki. At time of publication, Halsey was long Ericsson and Nokia, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback and invites you to send it to Tero Kuittinen . |
