NSN Picks at Nortel's Mobile Bones

Are you ready for the next chapter of the Nortel Networks Ltd. story? Because the plot is thickening and there's every chance a corpse might figure in the pages ahead.

Nokia Siemens Networks has struck an initial deal valued at $650 million to buy some wireless assets -- the CDMA business line and (Long-Term Evolution) access technology -- from Nortel Networks Ltd. , while the rest of the Nortel portfolio is now officially up for grabs. (See Nortel: It's All Up for Sale and Richard Lowe, President of Carrier Networks, Nortel.)

That means the telecom sector could enter the next decade with Nortel effectively dead and buried -- a suggestion that would have been dismissed as a fanciful plot line by just about anyone in the industry, and the Canadian business world, at the beginning of this decade. (See The Decline & Fall of Nortel Networks.)

The management at Nokia Siemens Networks (NSN) won't be worried about industry obituaries, though. It's set to pick up what could be something of a bargain, spending $650 million on a business that will give it: significant additional revenues; the much-improved position in North America it craves; some key carrier accounts and relationships; some important patents; and a much better chance to improve its position in the key markets of LTE and professional services, at the very least. (See NSN Sees Managed Services as $277B Market and Operators Face LTE Deployment Dilemma.)

The deal with Nokia Siemens Networks (NSN), though, is not as extensive as had been expected: Industry speculation suggested NSN was bidding to buy a broader range of Nortel assets, including the Canadian vendor's voice platforms (and including its extensive carrier VoIP business, but that packet voice product line isn't included in the proposed deal. (See NSN Linked to Nortel Asset Bid.)

NSN tells Light Reading there are no additional plans currently to acquire Nortel assets other than the CDMA and LTE assets included in the weekend's announcement, though a spokesman for NSN couldn't rule out further negotiations in the future.

So what is NSN set to get for its $650 million?

Well, it seems it's getting some key customer accounts, a profitable business that's still generating more than $1.3 billion in revenues, and some key patents related to LTE, the wireless technology that looks set to dominate the future mobile operator network landscape.

CDMA: NSN's North American opportunity
Nortel has for many years been one of the strongest vendors in the CDMA infrastructure sector, and is still ranked as the second-biggest player with a global market share (according to Nortel) of about 20 percent, second only to Alcatel-Lucent (NYSE: ALU). In North America, Nortel holds a 30 percent share of the CDMA infrastructure market.

But despite pockets of growth, such as China and India, CDMA is an infrastructure market that's declining in dollar value terms, something that NSN CEO Simon Beresford-Wylie admitted today on a conference call for the media.

He also noted, though, that Nortel's CDMA business is profitable and that "CDMA is a technology that will be around for some considerable time," and that Nortel has a "great customer base." Those customers, Beresford-Wylie, could be "a springboard" for LTE business and also provide additional business for NSN's professional services division.

So how big is Nortel's CDMA business?

Well, the vendor's CDMA revenues in 2008 were just short of $2.1 billion, and the business was profitable at an operational level. But the impact of the overall market downturn, greater competition, and, of course, its bankruptcy, means that business is likely to be much smaller in 2009.

In the first quarter of 2009 Nortel generated revenues of $317 million from its CDMA operations, down more than 33 percent year-on-year. If that slide is replicated throughout 2009, revenues from Nortel's CDMA business would be less than $1.4 billion.

What NSN is particularly interested in, though, is the North American penetration Nortel's CDMA business can deliver. Beresford-Wylie's operation is particularly lacking in North American sales in general: In the first quarter of 2009, NSN generated only €169 million ($234 million) in revenues from North American customers, just 5.6 percent of its total first-quarter revenues of €2.990 billion ($4.147 billion).

Among Nortel's CDMA customer base is Verizon Wireless , Sprint Nextel Corp. (NYSE: S), Telus Corp. (NYSE: TU; Toronto: T), Bell Mobility Inc. , SaskTel , Manitoba Telecom Services Inc. , and U.S. Cellular Corp. (See Nortel's $2B CDMA Bump, VZW Taps Nortel, Nortel Expands SaskTel, Nortel Expands Bell Mobility, and Sprint Invests in EV-DO.)

NSN claims that (based on 2008 numbers) adding Nortel's CDMA business to its existing operations would boost its share of the North American wireless infrastructure market from 5.5 percent, placing it sixth in that particular sector, to 30.4 percent, which would make it the second-biggest player.

The potential with all of these carriers is that NSN could help them migrate to LTE, though Verizon Wireless would be the big catch. NSN is already part of the giant operator's LTE plans, as Verizon's IMS (IP Multimedia Subsystem) technology partner for next-generation wireless, but it wasn't selected in what NSN's CEO describes as "the first wave" of LTE access equipment awards, a decision NSN's CEO described today as "disappointing." (See MWC 2009: Verizon Picks LTE Vendors.)

With Nortel's CDMA incumbency to build on, though, "we absolutely see the opportunity to be a supplier to Verizon for LTE access," added Beresford-Wylie.

Nortel, of course, has other CDMA customers, most notably China Telecom Corp. Ltd. (NYSE: CHA), though there are other customers in Asia/Pacific, Central America (Open Mobile in Puerto Rico), and even Central Europe. (See Nortel Wins CDMA Deal, China's Mega CDMA Tender, Nortel Lands Telefónica Deal, and Nortel Wins in Vietnam.)

Adding to LTE developments
The announced agreement includes Nortel's LTE access assets, but not the Canadian vendor's evolved packet core (EPC) developments, which are being developed from its well-established Shasta wireless packet core platform. Nortel is hanging on to those assets for the meantime.

It also includes the transfer of about 400 LTE development staff, though it appears NSN won't quite get the full array of talent it might have snagged only a few months ago. (See Nortel's LTE Brain Drain.)

Beresford-Wylie stated that Nortel's LTE access developments are "complementary" to NSN's own work, and that closing the deal would give NSN "some world-leading development capabilities" and "good innovation, particularly around MIMO."

It might also provide NSN with some additional momentum in the race to be an early LTE market-maker: Nortel has, at least, had its LTE capabilities put to the test by T-Mobile International AG . (See Good News for Nortel! and T-Mobile Beefs Up LTE Plans.)

Currently, though, Ericsson AB (Nasdaq: ERIC), Alcatel-Lucent (NYSE: ALU), Fujitsu Ltd. (Tokyo: 6702; London: FUJ; OTC: FJTSY), and Huawei Technologies Co. Ltd. could be regarded as those with most to boast about in terms of early carrier engagements. (See Core Network Challenges LTE Vendors.)

But it's very early days in a market that's currently worth nothing in terms of significant, reported revenues but which, according to a recent forecast by Infonetics Research Inc. , will be worth $5 billion (for access and packet core) in 2013.

While it's not clear at this stage exactly what NSN might do with Nortel's LTE access capabilities in terms of integration or parallel development, NSN would appear to be picking up some useful patents, according to Heavy Reading senior analyst Patrick Donegan.

"Nortel has a lot of IPR [intellectual property rights] in OFDMA [Orthogonal Frequency-Division Multiple Access] and MIMO [multiple input, multiple output], which is significant to LTE. Nortel is widely acknowledged to have a significant portfolio [in LTE-related IPR] and that's something Nokia Siemens currently doesn't have," says Donegan. (See this Nortel Website page about its LTE-related patents.)

And according to Donegan's Heavy Reading colleague, Gabriel Brown, it seems apparent that Nortel's LTE access product development is not superior to NSN's or anything that would significantly enhance NSN's market position at this point. "If NSN thought the technology would have helped their LTE platform they wouldn't have waited so long to agree the acquisition," Brown believes.

He says the big question for NSN will be how it might integrate any of Nortel's LTE technology into its flexi base station platform, but notes that NSN's platform undergoes regular updates and that, relative to many telecom platforms, would be less problematic to introduce new software elements.

Staff transfers
At least 2,500 staff will get the chance to move to NSN if the deal goes through in the coming weeks. Most of those staff are located in Ottawa, Canada (about 800 staff), and Dallas, though there are some based in Mexico and China, note the vendors. As mentioned, about 400 of those staff are related directly to Nortel's LTE access developments.

NSN's Beresford-Wylie says the intention is to retain Nortel's Ottowa base as a hotbed of wireless innovation.

— Ray Le Maistre, International News Editor, Light Reading