MOT, ERICY, and NOK stifling innovation.
MEN behaving badly
Motorola, Ericsson, and Nokia are doing everything they can to remain the power trio of wireless--even if it means stifling innovation.
By Dan Briody
July 23, 2002
redherring.com
Forget about the sway Ma Bell once held over the communications world. Today there's a bunch of international companies dominating the industry, known simply as MEN. It is the derisive acronym for Motorola, Ericsson, and Nokia, the three powerhouses in the mobile-networking business.
Many startups complain of MEN's unassailable market position, control over the pace of change in wireless, and potentially anticompetitive practices. Take Don Listwin. The CEO of Openwave Systems, a wireless software firm, complains that the threesome kept his company from taking part in the development of a wireless instant-messaging standard last year. "MEN shut us out," he says of MEN's endeavor, Wireless Village. "They don't care if the pie is smaller, as long as it's still their pie."
Naturally, Motorola has a different take on the creation of Wireless Village. "The motive behind it was to get together and quickly drive some standards," says Craig Peddie, general manager at Motorola. "I guess Openwave did ask if they could join, and we politely told them they could wait a bit. I guess that didn't sit well with them." It wasn't until after MEN had developed and adopted their instant-messaging standard that they opened the standards body to other companies, including Openwave.
Stories about MEN's alleged abuse of their dominance abound in the wireless industry. There are even accusations of possible collusion: the claim is that MEN are purposely holding back the technological progress of wireless networks so they can cash in on their existing product lines.
One startup claims Ericsson admitted that wireless carriers would benefit from its technology, but instead of offering it to the carriers, insisted that the carriers could "muddle through the next two or three years" without it. "I couldn't believe they were admitting that to us. We were amazed," says the CEO of the company, who requested anonymity. Ericsson declined to comment on this story. Nokia says such claims are overblown and unfounded. "Of course we have the upper hand because of our customer relationships," says Jaakko Myllymäki, general manager of marketing and sales for IP mobility networks at Nokia. "But I doubt that there is anything that we can really control. We can't tell the carriers what they should and shouldn't do."
Whether this is just startups sniping at larger rivals or business as usual, MEN, along with Lucent Technologies, Nortel Networks, and Siemens (a far less catchy acronym), are effectively the gatekeepers for new technology in the wireless industry. MEN's position is strengthened by its global reach: Motorola, Ericsson, and Nokia are based in the United States, Sweden, and Finland, respectively; all three sell into worldwide markets. And at a time when so many economies are struggling around the world, the need has never been greater for wireless carriers to have access to next-generation technologies that increase efficiency and that might get businesses and consumers spending on telecommunications again.
With so much need, the dominant positions of MEN are anything but guaranteed. Hordes of startups want to unseat them and gain the chance to sell their products to wireless carriers. And now that one of the main tools MEN used to achieve inordinate power, vendor financing, has dried up, the empire is ripe for a coup.
In the late '90s, wireless operators couldn't buy network equipment fast enough. As carriers built their networks for the anticipated avalanche of wireless subscribers, the value of wireless equipment contracts more than doubled, from $22 billion in 1999 to $47 billion in 2000, according to the investment bank U.S. Bancorp Piper Jaffray. This tremendous growth was a boon for MEN. The big three combined owned nearly 55 percent of the market in 1999, and raked in $96 billion in revenue.
LOAN SHARKS
The equipment makers then used their cash stores to further lock in their customers; MEN offered vendor-financing deals, lending billions of dollars to carriers to buy more equipment. "They were like banks," says Ed Curran, executive director of network purchasing at Verizon Wireless. He adds that Verizon did not participate in the money handout.
Vendor financing became popular in Europe, as struggling wireless carriers there borrowed their way into corporate bondage. In June 2001, for instance, Nokia had more than $3.5 billion in credit commitments to carriers. In a one-week lending binge, it lent nearly $2 billion to Hutchison 3G and Orange. All told, the nine largest manufacturers of telecom equipment had more than $25 billion at risk in vendor finance by summer 2001, according to McKinsey & Company, an IT consultancy.
This quickly inverted the usual vendor-customer relationship. Many carriers found themselves shackled to their vendors and their products, unable to buy equipment from competitors. In addition to borrowing money from Nokia in summer 2001, Orange also borrowed from Ericsson, bringing its total debt to $1.3 billion. Carriers became beholden to their vendors, unable to green-light a new technology without vendor approval.
"The vendors were saying, 'Look, I'm financing your network, so why would I lend you money so that you can buy equipment from someone else?' " explains a vice president at Cisco Systems, another company eager to break the hold of the incumbent equipment makers. "It became a source of tension."
Then, as now, many startups had products that target wireless base stations, the million-dollar hardware at the bottom of every cell tower. It was the main source of income for MEN, and they had no intention of letting anyone else in. "You could not get into the base station; that's where MEN thrive," says Peter Lojko, CEO of WaterCove Networks, a Chelmsford, Massachusetts, mobile data startup. "They would not give that up."
NETWORK OUTAGE
But in summer 2001, everything changed. Just as MEN had tightened their lock on carriers, Wall Street lost patience with wireless carriers. Investors called for them to stop building networks--and start showing profits. Network equipment sales tanked as carriers canceled order after order, sending equipment providers into a tailspin--one made worse by vendor financing. Nokia lost $3 billion of its $100 billion market capitalization when Turkey's Telsim Mobile Telecommunications Services, the country's second-largest carrier, defaulted on a $719 million loan. And Lucent was stung badly when Winstar Communications, a wireless broadband provider, defaulted on a $2 billion line of credit.
MEN had little choice but to make dramatic cuts. Ericsson and Motorola laid off some 78,000 workers combined--enough people to populate a small city. Research and development also suffered. This spelled opportunity for startups.
"In almost every case, the startups continue to innovate much faster than the incumbent equipment providers," says Bruce Sachs, a partner at Charles River Ventures and an investor in WaterCove Networks and Flarion Technologies, two of the firms battling it out with MEN. "The incumbents are no longer onto the next big thing. Startups have as good a chance as ever to walk into a wireless operator and make a deal happen."
Carriers are in need of any technology that can save or earn them money, even if it is from an unproven startup. MEN are vulnerable when it comes to making networks more efficient and upgrading them with IP-based technology, the same technique of data communications that underlies the Internet and some advanced voice communications. The adoption of IP networks is widely viewed as the critical step for carriers to offer mobile data services and unlock new revenue streams. Yet MEN have resisted building new IP-based efficiencies into networks because efficient networks require less of their network equipment. They have focused instead on existing voice networks.
"There is a huge gap between the expertise of the hardware incumbents in the voice market and their level of expertise on the data side," says Ray Dolan, CEO of Flarion. By offering a mobile data product that rides on top of existing networks, essentially relegating MEN to the role of voice equipment providers, Flarion aims to be the next Qualcomm: an underestimated startup that hit the big time. "We are at a crossroads," says Mr. Dolan. "The solutions the hardware incumbents are proposing for wireless voice and data, 3G [third-generation wireless services], is just like ISDN was on the wireline side." ISDN, a colossal failure, was proposed in the mid-'90s by equipment providers to telecom firms looking to provide data-communication services. "You really think the carriers want to do that again?" asks Mr. Dolan.
MEN, of course, are hoping to avoid that mistake. For instance, to gain IP-network expertise, Ericsson has partnered with the router giant Juniper Networks, and Nokia has struck a similar agreement with Cisco. Though these alliances could be viewed as an acknowledgement of weakness, they are also proof that MEN are dynamic and worthy competitors. "If I have an embedded position, I'm going to play to my strengths and hide my weaknesses," says Jeff Corley, director of strategic alliances and partnerships for Lucent, referring to wireless equipment vendors. "If my weaknesses are IP, I'm going to try to slow that up."
FUD POISONING
One stalling tactic cited by many startups is that MEN are spreading FUD--fear, uncertainty, and doubt--about the startups' organizations and technologies. The tactics vary from questioning a startup's financial solvency with carriers to spreading misinformation about a new product's capabilities. And as these seeds of discord take root, MEN are buying time to develop rival products, the startups claim. In some cases, if carriers add a new technology to their existing base stations, or "boxes," without consulting MEN, the warranties on those boxes will be nullified automatically, a paralyzing tactic. "Everyone making base stations is saying you will void the warranty if you crack open the box," says Mike Dolbec, general partner at Orange Ventures, the VC arm of the European wireless operator Orange. "It's their last beachhead. It's a way for them to protect their market position," says Mr. Dolbec.
And while some startups claim that MEN work together to stifle competition, the only real claim they have is that incumbents are opposed collectively to carriers' making the switch to IP networks, a stance that could backfire eventually. "A lot of this has to do with the pacing of the market," says the Cisco vice president. "On one level, it works for a while, but it is a very dangerous game. Sooner or later your customers realize what you're doing."
Others are more bold. "Are MEN holding back wireless? Absolutely," says WaterCove's Mr. Lojko. "The capabilities are there, and going without them is hurting the carriers' revenue." As for the charge of collusion, the Cisco vice president chooses his words carefully: "I don't think the proof is necessary, if their interests align enough." Marty Cooper, the cell phone's inventor and the outspoken CEO and cofounder of ArrayComm, a smart-antenna company, calls it "accidental collusion."
Thus far, government has held back. The European Commission is watching the situation, but it feels that competition is healthy in Europe. "If we were to find that the market is being dominated by two or three big players that have the power to slow down the rate of change, we would look close," says Michael Tscherny, a spokesperson for the European Commission. The U.S. Federal Trade Commission would not discuss whether it was monitoring the situation.
As for the wireless carriers, they are retaking control of their networks' destinies. The pressure to make their networks profitable, coming mostly from Wall Street, is at last steering them toward cost-efficient solutions, regardless of vendor. In the past, startups often were thwarted by carriers when attempting to pitch their products. In most cases, carriers redirected startups to their equipment providers for vetting. The ostensible purpose: carriers had to be sure that a new technology worked with their existing network. In practice, this process became a killing field for new products.
Now, however, some carriers are wising up and listening to startups. "If you have something that the operators need today, you get them to go beat the crap out of MEN and tell them to make it work," says Doug Smith, CEO of Cyneta Networks, a maker of mobile data-networking hardware. Carriers have also beefed up their testing labs to conduct more in-house reviews of new technologies, slowly weaning themselves off MEN.
All this suggests that MEN's dominance could soon be over. For instance, MEN eventually opened its Wireless Village standards body to include 157 companies. Ultimately, the charge that an exclusive MEN's club exists may depend on whether a company is a member. "It's all a matter of perspective," says Kevin Wagner, director of technology at Openwave, tempered by its newfound membership in Wireless Village. "Any time there's a group that you're not a part of, you view it as closed. But if you're in the inner circle, things seem just fine."
It will always be hard for startups to unseat established companies. And it should be. With carriers staking their reputations on the quality of their networks, it is easier for them to do business with long-standing suppliers. But more often than not, the best technology wins--once enough carriers demand it. Let's hope that happens soon.
Write to Dan Briody. |
