This article from the Street.com suggests tht Nortel is not only financing deals but guaranteeing subscriber growth.
Anybody know anything about these so-called guarantees?
A Race Down to the
Wireless, Part 2
By Tero Kuittinen
Vendor Financing: Worse Than You Think
Scott Moritz's fine article mentioned Nortel's
vendor-financing deals, which, rumor has it, involve
lending up to 125% of the cost of the network upgrade.
According to what I hear, that may not be the peak: The
highest venture capital figure I've heard is 150% to
200% -- and this is not even the scariest part of the
impending vendor-financing nightmare.
The real nightmare of the most aggressive
vendor-financing deals involves something called
subscriber-growth guarantees. The most aggressive 3G
vendors have landed deals that actually promise the
operator buying the equipment specific
subscriber-growth benchmarks.
This means that unless an operator hits certain
subscriber goals, say 200,000 3G customers by
December 2002, the network provider has to pay
damages for every subscriber missing from that goal.
These contracts also typically provide penalties if
networks aren't operational by their promise dates.
This may become a particular concern for Nortel. Why?
Because Nortel sold its underperforming handset unit
years ago -- the company is relying on Asian phone
manufacturers to deliver the 3G handset portion of its
contracts in time.
But outsourcing handset manufacturing means that
Nortel can't have precise information about pricing,
features or functionality -- the three elements critical to
forecasting consumer demand. Without insights into the
factors that will determine ultimate consumer
acceptance of its networks, Nortel is running blind when
it negotiates a vendor-financing framework. It also has
to depend on guesswork about pricing and
technological specifications of general packet radio
system phones to try to gauge how well 3G phones
might do against their GPRS competitors in 2002.
In contrast, Motorola (MOT:NYSE - news), Ericsson
(ERICY:Nasdaq ADR - news) and Nokia (NOK:NYSE
ADR - news) are developing both GPRS and 3G models
-- they presumably have at least some idea of how the
competing technologies will match up against each
other.
Wouldn't a partner such as Matsushita (MC:NYSE
ADR - news) -- its Panasonic brand is expected to
launch Nortel's British 3G network -- be ideal for Nortel?
After all, the Japanese will launch 3G perhaps a year
before Europe does.
The catch here is that Japanese 3G networks will be
single-mode -- i.e., operating on only one standard.
European operators are demanding triple-mode phones
that operate on current global systems for mobile
communications, or GSM, and the upcoming GPRS
standard, as well as the new 3G systems.
So as the Japanese phone vendors race to develop
single-mode phones for their domestic market, will they
really be able to simultaneously develop
GSM/GPRS/3G phones for export markets? The early
outlook is ominous: Motorola and Ericsson seem to
have a clear head start in bringing GPRS phones to the
market. Nokia is taking a more cautious approach and
is not trying to be the first brand out with GPRS
phones; its goal is to make sure that its GPRS phone
is as functional as possible.
Asian vendors such as Matsushita, Sony (SNE:NYSE
ADR - news) and NEC (NIPNY:Nasdaq ADR - news) will
face a tough hurdle in hostile GSM territory before they
can even approach the 3G market outside of Japan.
They don't build GPRS networks, so negotiating the
interoperability issues of dealing with different GPRS
operators will be a considerable challenge.
Fantasy Meets Reality
Nevertheless -- before investors rush to buy Nokia at
$50, it would be good to consider how the actual,
commercial GPRS launch is going to unfold in Europe
during the next three months. I can guarantee that it's
going to be messy.
Word from the Nordic operators running trials of
Motorola's first GPRS model is already leaking out in
Scandinavia; the current test models are very sluggish
when it comes to net access speeds. If Motorola
persists on getting these phones into retail stores
during December, GPRS may face a vicious early
public relations backlash.
The launch of 2.5G general packet radio services
systems is inevitably going to be an ugly spectacle,
involving nasty spats over the lack of interoperability
among different network/phone vendors. By next
summer, fine-tuned models will start demonstrating the
true potential of 2.5G. Then, we have about a year
before 3G starts arriving in markets outside of Japan. At
that point, the data transmission speed of color-display
GPRS phones will be near 100 kbps. That's when we
see how well the expensive, geographically limited 3G
handsets will stack up against their ugly sisters.
No matter what happens at that point, the wireless
world is facing a rough ride during the year 2001. Not
every day will be boosted by the simultaneous
benevolence of Alan Greenspan and the resolution of
the U.S. presidency. After Tuesday's party, telecom
stocks very likely will face some spectacular hangover
days.
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 senior strategist of SpringToys, a mobile
entertainment start-up company based in Helsinki. He
is currently working on his Ph.D. in neurobiology
research at the University of Helsinki. At time of
publication, Halsey was long 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 .
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