What Nortel’s 3G/4G assets will do for Ericsson
LTE technology and CDMA packet core expertise are part of the equation, but the primary incentive is Nortel’s relationships in the US, head of radio networks says
Nortel Networks’ long-term evolution (LTE) advances and the size and profitability of its CDMA unit are both good reasons for Ericsson (NASDAQ:ERIC) to scoop up the bankrupt vendor’s primary 3G and 4G businesses, but Ericsson vice president and head of radio networks Ulf Ewaldsson has a reason that trumps them all: North America is simply where things are happening.
“The US has become the absolute driver of 4G,” Ewaldsson said in a recent interview. “We will gain 450 engineers in North America. We do that because of all of the commitments in the US to LTE. We are showing our commitment to the support all of the US market.”
When 3G came to fore, North America lagged much of the developed world by several years in getting high-speed data networks up and running. But with the advent of 4G, roles have reversed. North America is now on the leading edge. Clearwire (NASDAQ:CLWR) has already begun its nationwide commercial rollout of WiMax. Verizon Wireless (NYSE:VZ, NYSE:VOD) will likely bring the world’s first LTE network online in 2010, and AT&T (NYSE:T) will be hot on its heels with a planned LTE launch in 2011. LTE commitments have come from unusual quarters. Cable company Cox Communications, satellite provider TerreStar (NASDAQ:TSTR)and rural wireline operator CenturyTel (NYSE:CTL) all have LTE plans in their future, as do more traditional Canadian mobile service providers Bell Mobility (NYSE:BCE) and Telus (NYSE:TU). Even tier-two operators in the US may beat their tier-one counterparts in Europe to 4G. Regional CDMA operator MetroPCS (NYSE:PCS) has announced an LTE rollout plan that matches Verizon’s.
By acquiring Nortel’s CDMA and LTE assets, Ericsson not only gets a sizable base of operations in the ripe North American market but established access to the more than half of US operators that Ericsson previously had no relationship with, Ewaldsson said. Ericsson had already begun making headway with CDMA operators before the deal—it’s LTE contract with Verizon and its network management contract with Sprint (NYSE:S)—were closed long before the bidding began on Nortel’s business units. But Ewaldsson said becoming the second largest infrastructure vendor in North America cements its position, making it an incumbent rather than a challenger in the CDMA market.
Relationships, while the primary driver, weren’t the only benefits of the deal, Ewaldsson said. Ericsson gains expertise in some key areas particular to the North American and CDMA markets as well as the sizable amount of research and development Nortel has put into LTE. With Nortel’s CDMA business comes its expertise in the high-rate packet data (HRPD) core and the packet data serving node (PDSN), which will be critical in linking the CDMA EV-DO data core to the new LTE evolved packet core. Nortel also has made more headway than Ericsson in developing LTE technologies for the 700 MHz band favored for 4G in the US but still unknown in other regions of the world, Ewaldsson said.
On the LTE side, Nortel’s R&D achievements and software development in orthogonal frequency division multiplexing (OFDM) technologies and multiple-input multiple output (MIMO) smart antenna techniques are the envy of the industry. Ewaldsson said Ericsson’s LTE base station and software are no slouches either and have won Ericsson several contracts without the advantage of Nortel technology. Ericsson won’t simply replace its base station with Nortel, but he acknowledged that there are some technologies Nortel has developed Ericsson will likely incorporate into its own 4G portfolio.
“There is never one company that gets everything right,” Ewaldsson said. “I know of some stuff that I can’t yet reveal that Nortel has that is quite good.”
Ericsson bid $1.13 billion for Nortel’s CDMA business and LTE assets, beating Nokia Siemens Networks’ (NYSE:NOK, NYSE:SI) original stalking horse bid of $650 million. Ericsson has said it hopes to close the deal this quarter, which ends on Wednesday, but earlier this month it cleared a significant roadblock when the Canadian government declined to review the acquisition despite controversy surrounding it. BlackBerry-maker Research in Motion (NASDAQ:RIMM) has lobbied hard to keep Nortel’s assets in Canadian hands and has claimed that Nortel has blocked it from bidding in the auction.
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