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Ericsson: Nortel GSM deal about the voice core

Nortel’s mobile switching business fills the final hole in Ericsson’s North American expansion, giving it a complete wireless portfolio for all carriers and all standards

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Ericsson (NASDAQ:ERIC) bought Nortel’s CDMA business with the aim of increasing its customer base in North America and establishing itself as a major vendor of the world’s second-largest wireless networking technology. But today Ericsson announced it would also take a piece of Nortel’s GSM business, despite the fact it is already the world’s largest GSM access vendor. Why? The answer, said Angel Ruiz, Ericsson head of North American operations, doesn’t lie with Nortel’s GSM business but rather with the legacy switching business that comes with it.

Ericsson and Kapsch CarrierCom jointly bid and won Nortel’s global GSM business for $103 million, less than a tenth of what Ericsson paid for Nortel’s CDMA business and long-term evolution (LTE) assets. But Kapsch and Ericsson are dividing the spoils regionally. Kapsch will take Nortel’s European and Asian GSM groups, which handle most of Nortel’s GSM radio access contracts, while Ericsson will take the North American group, with its strong focus on 2G and 3G voice switching.

“The idea is more to leverage the core assets,” Ruiz said. “We want to help customers migrate their legacy switching infrastructure to into LTE.”

In doing so, Ericsson is filling in the only remaining hole in the company’s growing North American wireless empire. With the close of the CDMA deal earlier this month, Ericsson now has a presence in every major North American wireless operator’s business and portfolio that covers every major wireless network element from CDMA, GSM, HSPA and LTE access and IP radio backhaul to IP multimedia subsystem (IMS) and the 3G and 4G packet data cores. The sole exceptions are WiMax—which Ericsson long ago wrote off as an also-ran technology—and the mobile switching center (MSC), a segment in which Nortel is particularly strong. Its MSC Servers are the workhorses in both the AT&T (NYSE:T) and T-Mobile (NYSE:DT) 2G and 3G voice networks.

Ericsson hasn’t been absent from the North American mobile switching space—Ericsson MSCs sat behind SBC Communications’ original timed division multiple access (TDMA) networks—but as the industry moved from 2G to 3G, the voice core took a back seat to its much larger radio and packet core businesses. Most of Ericsson’s MSC sales in the last five years have been to smaller GSM operators such as SunCom Wireless and Dobson Communications. As AT&T bought many of those smaller GSM players, Ericsson found its switches scattered throughout the AT&T network, but it never landed a deal to become a primary next-generation MSC provider for a tier-one operator, Ruiz said.

Combined with Nortel’s CDMA packet MSCs, the Nortel GSM business will give Nortel a switching platform geared toward every major operator and standard. It will even supply the MSCs that Motorola (NYSE:MOT) resells to its iDEN customers. The switching business, however, is a legacy one that, like CDMA and GSM, has a limited life as voice migrates to VoIP and switching platforms succumb to new IMS architectures. But Ruiz said Ericsson isn’t so much interested in sustaining an obsolete business as it is in creating a bridge between the old technologies and new. While many operators like Verizon Wireless (NYSE:VZ, NYSE:VOD) and AT&T are being aggressive in deploying IMS alongside LTE, most of the world’s operators aren’t so ambitious. They will either use 4G as a data-only technology or use their legacy voice infrastructure for their voice services even while using VoIP to deliver the calls over the 4G access network. And even operators will full-bore IMS and 4G plans will have to maintain their 2G and 3G voice cores for some time; they’ll also need to link calls between their legacy cores and their new IMS-powered softswitches, Ruiz said.

“These existing platforms still have a lot of gas left in them,” Ruiz said. “Both the existing 2G access and switching businesses will be around for some time.”

Of the approximately 680 Nortel employees in the GSM group, 350 will come over to Ericsson, further swelling Ericsson’s ranks in North America. Counting the 2500 employees from Nortel’s CDMA group and 4G R&D arm and the 6000 employees from Sprint Ericsson will take on to handle its new network outsourcing contract with that operator, Ericsson will have well over 14,000 employees in North America, making it the largest Ericsson regional division outside of Sweden.

The deal isn’t final until both US and Canadian bankruptcy courts sign off, and then Ericsson also must gain regulatory approval in both countries. But Ruiz said Ericsson has already gone through close government scrutiny over its acquisition of Nortel’s CDMA assets, which should help speed the approval process along. “I think both the US and Canadian governments are becoming very comfortable with our presence,” Ruiz said.

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© 2014 Penton Media Inc.

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