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Wedding bells ring for telecoms vendors

update Faced with competitive pressure and fragmenting research efforts, telecoms vendors hope consolidation will lead to matrimonial bliss.
Written by Aaron Tan, Contributor

update The telecoms industry can expect to ring in more merger deals as vendors grapple with the emergence of competitive players in the market, an analyst says.

In the past year, there have been various courtships--with some leading to marriages--between telecoms equipment makers and operators alike. More recently, in June, Nokia and Siemens announced a union between their network infrastructure businesses.

The merger, following a similar deal between Lucent and Alcatel, creates one of the largest telecoms equipment companies. The new entity, called Nokia Siemens Networks, will become the second-largest company in mobile infrastructure and services, and third-largest in fixed infrastructure and in the overall telecoms infrastructure market, according to a study released by telecoms consultancy Ovum in June.

Commenting on the telecoms consolidation wave, David Kennedy, research director at Ovum, said: "What we believe is driving this consolidation is the emergence of major new competitors in the market, and Huawei is the obvious example of that."

Kennedy said Huawei has pushed up the level of price competition in the marketplace and is developing technological innovation very quickly. Coupled with the fact that the company plays in a large domestic Chinese market that allows it to develop economies of scale, he noted that Huawei is "a disruptive influence in the vendor space."

As a sign that the Chinese company has been encroaching on the turf of Western competitors, Huawei won an estimated US$100 million contract to build a 3G cellular network for Telfort, a Dutch operator that had previously been an Ericsson customer. Early last year, Huawei also beat Motorola and Ericsson to secure a US$187 million contract to build a 3G network for Communications Authority of Thailand (CAT), one of the two largest state-owned telecom carriers in Thailand.

Kennedy said: "The long-standing vendors realize that as the global market is expanding, they need to maintain scale advantage and the mergers are designed to achieve that."

"In future, we think there will continue to be further mergers. One of the major vendors that have no [merger] partner right now is Motorola, and we think they will be looking around for opportunities." he added.

In fact, Motorola on Jul. 25 this year announced a new collaboration with Huawei to bring an enhanced and extensive portfolio of 3G and HSPA (high speed packet access) infrastructure equipment to customers worldwide.

Part of this joint venture is the creation of a joint research and development center in Shanghai, where employees from both companies will collaborate on the development of 3G products and services. Both parties expect this relationship to provide time-to-market advantages while enhancing their ability to rapidly evolve their 3G portfolios for the global market.

A Hong Kong-based Huawei spokesperson told ZDNet Asia: "Joint ventures are common for companies trying to enhance their competitive position. The telecommunications industry will continue to evolve to become what is considered a 'traditional' industry, where profits growth stabilizes over time. This means that success will depend more on whether companies can deliver an overall superior value proposition."

Apart from mergers and joint ventures, Ovum's Kennedy said there will be continued acquisitions of smaller companies by larger vendors.

One such deal was Marconi, which was acquired by Ericsson last October.

Ann Emilson, president and country manager of Ericsson Telecommunications in Singapore, said: "In a competitive industry like telecoms, consolidation of organizations is one of the ways to strengthen one's position in the market."

She told ZDNet Asia that Ericsson's acquisition of Marconi is "a good way for us to gain scale, to deepen and to extend our technology and product portfolio so as to provide our customers with an even more complete end-to-end telecommunication offerings and products."

"Marconi's transmission portfolio has elevated Ericsson's position to an even higher level of broadband access offerings," Emilson added.

Another Ovum analyst Jean-Charles Doineau, wrote in a research note last October that the Ericsson-Marconi union was all about convergence and gaining territory in the network world. "This acquisition is all about network convergence," he said. "Buying some of Marconi's assets, Ericsson complements its product portfolio in areas which will be of a very strategic importance for mobile operators and for convergent network operators, at the same time."

At what price?
With mergers and acquisitions abound, there is always a concern that innovation might take a backseat. And like most newly-wedded couples, the merged entities also need time to learn how to live with their new family members.

Kennedy however, does not think innovation will suffer as a result of the recent vendor unions, since one driver of mergers and takeovers is to achieve scale in research and development (R&D) efforts.

"There is a concern that there is too much fragmentation in R&D efforts in the marketplace right now," he said. "It's also getting difficult for smaller vendors to maintain a level of R&D spending that's necessary to develop new products. The mergers are aimed at addressing those issues."

Barry French, communications director for networks at Nokia, said bringing together R&D skills and resources from Nokia and Siemens in the joint venture, will help accelerate innovations and create extensive synergies to deliver customer insight with "true end-to-end" capabilities.

Mergers also come with the risk that customers will be lost if both companies share the same clientele, and problems with managing customer relationship can arise during the transition period. Technology integration can also prove to be a challenge in cases where merging parties have similar products.

Kennedy explained: "If you look back at history involving large companies, quite often they're not very successful, such as the AOL-Time Warner merger, where it was difficult to integrate the cultures of the two organizations.

"Cultural integration is a major issue, particularly if the merger [cuts] across different countries, such as Alcatel and Lucent [in France and the United States, respectively]," he added.

When asked about the potential challenges in technology and cultural integration between Ericsson and Marconi, Ericsson's Emilson told ZDNet Asia: "The integration process is well underway and progress is better than expected."

To Singapore-based telco StarHub, the impact of the consolidation wave remains uncertain.

Said David Storrie, head of network and wholesale services at StarHub: "These mergers [between] network suppliers have been long expected, so it will be interesting to watch how things turn out. Obviously, as customers, we would need to find out if there is going to be any impact or change, operationally, to the current support we are getting from the vendors.

"And, of course, by the end of the merger process, it would be helpful for us to find out as soon as possible what the future direction and roadmaps of the new [merged] company will be, so that we can plan for any future network rollouts accordingly," Storrie added.

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