Threat or opportunity?
Approval of the mobile WiMAX standard creates a positioning problem for Alvarion.
Hadass Geyfman 23 Jan 06 17:37
The challenges that the mobile WiMAX market poses for Israeli company Alvarion (Nasdaq: ALVR; TASE: ALVR) are expanding. Recent developments in the WiMAX market render the question of where Alvarion will position itself in the new market more acute. The 802.16e mobile WiMAX standard was approved in mid-December, and all its definitions were settled. Giant telecommunications equipment manufacturers planning to operate in this market have begun to expedite development of their mobile WiMAX systems. Towards the end of 2007, all manufacturers are expected to finish making their equipment compatible. In other words, mobile WiMAX is already here. Ostensibly this should be excellent news for Alvarion, which supplies broadband wireless telecommunications systems, and dominates the fixed WiMAX market. In mobile WiMAX, however, Alvarion does not yet have original equipment manufacturer (OEM) agreements with major telecommunications equipment makers.
Alvarion’s share is continuing its surge. The share climbed 22% last month, and closed at $10.46 last Friday, reflecting a market cap of $617 million.
Alvarion believes that it will start running a demo version of its mobile WiMAX system in the first quarter of this year, and that its product will be available on a limited basis this year. Availability of the product to the general public is expected in 2007. Alvarion competitor Airspan Networks (Nasdaq: AIRN) has a similar timetable.
The market expects 2006 to be a year of trials and work on compatibility for 802.16e-standard WiMAX equipment. It should be noted, however, that the standard includes definitions for both mobile and fixed systems. This means that, after the different types of equipment have been made compatible, the market is expected to switch to buying 802.16e-standard systems for fixed WiMAX, too.
This year, all the players in the sector will take measures to make the different types of equipment compatible, so that every manufacturer’s equipment will work with the equipment of every other manufacturer. This process of trials and completion of compatibility is expected to take over a year, and some believe that it will take two years. Analysts covering telecommunications technologies claim that mobile WiMAX activity will not begin before mid-2007, and perhaps not until early 2008.
Meanwhile, approval of the standard has sparked a mad dash by all the telecommunications equipment manufacturers who want to be players in the mobile WiMAX market. The equipment makers know that in order to be part of the game, they will have to complete development of their systems quickly, begin trials, and be ready with working systems in early 2007.
At this stage, it appears that the new standard has trumped all the cards, and is posing several challenges for Alvarion. One is the expected direct competition against telecommunications equipment giants. It can be assumed that the increasing trend towards unification of fixed and mobile telecommunications networks will increase these giants’ motivation to position WiMAX equipment at the heart of their business. If this happens, Alvarion will find itself competing directly with major equipment makers.
The second challenge is due to the fact that the 802.16e standard will accommodate broadband telecommunications on both fixed and mobile systems. Mobile and fixed WiMAX systems are usually though of as separate. Fixed WiMAX (802.16d-standard) systems are designed solely for fixed telecommunications. The fact that the 802.16e standard makes it possible to integrate mobile and fixed telecommunications on a single system makes the systems that will use the standard next-generation WiMAX systems, and leaves the existing WiMAX systems behind.
This new situation is liable to constitute a problem for Alvarion. Once its OEM partners put new-standard WiMAX systems on the market, it is not clear whether they will need Alvarion’s systems.
At the same time, Alvarion’s dominance is likely to continue in remote regions that lack infrastructure, with the company still supplying its fixed WiMAX systems through OEM agreements, among other things. The widespread assumption up until now has been that, even if Alvarion does not become a significant player in mobile WiMAX, it will continue to lead the fixed WiMAX field.
Fixed WiMAX is a niche market without great potential, but it is nevertheless expected to reach several billion dollars within a few years. Alvarion president and COO Tvika Friedman says, “There’s no doubt that mobile WiMAX is a new market with great challenges, but this doesn’t necessarily constitute a problem. Any new industry undergoing technological changes has room for small companies that are capable of providing quicker, more flexible, and more innovative solutions than the industry giants.
”In a conference call with analysts to sum up the third quarter, we said that the 802.16e standard could be used for mobile and fixed WiMAX solutions. We said that, at some stage, Alvarion would also focus on developing 802.16e-standard mobile and fixed systems.”
With regard to OEM agreements, Friedman says, “Commercial sales of mobile WiMAX systems will begin only two years from now, so no one is in a hurry right now to close OEM agreements. No doubt we’ll find ourselves competing against our OEM partners in certain places, but that’s no surprise. We’ve been preparing the company for it for two years already.
”Furthermore, OEM agreements are not the only form of partnership. It’s also possible to sell supplementary solutions together with other manufacturers, local partners, and systems integrators. In any case, we have to find the best combination of direct sales and partnerships. 50% of Alvarion’s sales are now direct sales.
”It’s clear that Alvarion needs a strategic partner in order to sell to telecommunications giants like Sprint Nextel at the present time. Our first target, however, isn’t necessarily the large existing wireless operators; it’s mostly operators that currently provide fixed telecommunications, and want to enter mobile telecommunications via WiMAX, such as cable companies, large Internet providers, and large conventional wireline telecommunications operators, which are not currently active in mobile telecommunications. Mobile WiMAX constitutes an important opportunity for these operators. It will enable them to enter the fixed-mobile convergence field, and to provide broadband mobile telecommunications services.”
Whatever happens, French telecommunications equipment giant Alcatel (NYSE: ALA; Paris: CGEN), Alvarion’s strategic partner in fixed WiMAX, is responsible for some recent unsettling news. Alcatel currently sells Alvarion’s equipment under an OEM agreement as part of its comprehensive solution.
In the mobile WiMAX field, however, Alcatel has already announced that it will not cooperate with Alvarion. Alcatel initially announced that it planned to develop its own mobile WiMAX equipment. This was not good news for Alvarion, but it conformed to the general mood in the sector.
In September, Alcatel announced that the Delhi-based Center for Development of Telematics (C-DOT), a research center owned by the Indian government, would develop its mobile WiMAX systems. Alcatel owns 51% of the joint venture, called the CDOT Alcatel Research Center, and C-DOT owns 49%.
This announcement indicates that the CDOT will develop an end-to-end solution, including a wireless access network based on the 802.16e WiMAX standard. $49 million has already been invested in CDOT, which employs 300 engineers in Chennai in southern India.
Reading between the lines of the joint announcement by Alcatel and C-DOT, it can be concluded that the joint venture will develop both fixed and mobile WiMAX systems. CDOT will initially focus on broadband WiMAX systems for remote regions lacking infrastructure. The Indian government hopes that CDOT will lead to rapid deployment of broadband telecommunications infrastructures for educational, agricultural, and medical markets in remote regions. Systems designed for these markets usually use fixed WiMAX. It was also announced that products developed by CDOT would be marketed all over the world, i.e. they are not designed solely for the Indian market.
Furthermore, CDOT will initially develop systems designed for remote, urban, and suburban areas in India. Here, it is stated almost explicitly that the joint company will develop mobile and fixed systems.
The solution will include integration of the systems in the core networks of telecommunications operators, the applications platform, and the end-user devices adapted to specific target markets.
If Alcatel decides that all its WiMAX systems will come from India, and if it uses 802.16e-standard systems to provide both mobile and fixed WiMAX, it is very unclear what will happen to its OEM agreement with Alvarion in fixed WiMAX.
Nevertheless, a telecommunications market source believes that CDOT will supply mostly end-user devices, and not necessarily base stations. End-user devices for mobile WiMAX are a sector in which Alvarion will probably not do significant business. The source added that, even if CDOT eventually does supply base stations, it is reasonable to assume that it will focus exclusively on the Indian market.
Market sources believe that it cannot be ruled out that Alcatel will prefer transferring development of its systems to India in order to cut costs. The choice was between Alcatel’s development centers in France and those in India. In addition, conducting its development in India gives Alcatel a foothold in the Indian market. It should be kept in mind that there is still no license in India to operate mobile WiMAX systems.
Published by Globes [online] - www.globes.co.il - on January 23, 2006
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