Analysis: NSN’s Moto Networks buy looks beyond CDMA, WiMax

For its $1.2 billion in cash, Nokia Siemens Networks (NYSE:NOK, NYSE:SI) gets Motorola’s (NYSE:MOT) broad range of wireless network technologies ranging from CDMA to WiMax as well as an established customer base for those products that brought in $3.7 billion in revenues last year. But while the new customers are important to NSN, just as important to the vendor are the technology decisions those same customers make in a few years' time.

While CDMA is still a big business for the CDMA vendors Alcatel-Lucent (NYSE:ALU), Ericsson (NASDAQ:ERIC), Huawei and, if all goes as planned, soon NSN, it’s one with a limited upside. While there are still new CDMA networks being built — Cox Communications being a prime example in the U.S. — the major CDMA operators have all set their sights on 4G technologies, most of them focusing in on long-term evolution (LTE). Consequently, most of the development on new CDMA technologies — and the opportunity to sell new generations of CDMA networks to existing customers — has ceased. 

The same can be said for GSM, a business in which NSN is already the No. 2 vendor but will further strengthen its position with the inheritance of Moto’s 80 global contracts. GSM networks are still selling like hotcakes. Ericsson, the world’s largest wireless infrastructure vendor, still counts GSM as its largest business despite its long lead in 3G technologies and its large-scale expansion into managed services. But those GSM sales are primarily occurring in developing countries, which are in the process of building their first public wireless infrastructures. As those buildouts are completed, those same operators will begin to look toward 3G technologies just as operators in North America, Europe and much of Asia are now looking toward 4G.

While NSN wants the revenue from those CDMA and GSM contracts, along with any future CDMA contracts, it’s hoping to get much more than a steady cash stream, said Sue Spradley, NSN's head of the North America region, which will inherit much of Motorola’s U.S. operations. NSN will have an inside track when those new customers make their future network decisions, Spradley said. “We now have an incumbent’s install based among those customers as they’re evolving to 4G,” she said.

But NSN gets more than first crack at network trials. It also gets scale. Motorola may not have been a very big vendor, but it’s big in the markets that count to NSN, specifically the U.S. and Japan. When the acquisition closes, NSN will vault from being the No. 5 telecom infrastructure vendor to the No. 3 slot, and those two rungs make a world of difference to perspective and current customers planning billion-dollar rollouts, Spradley said.

“This shows NSN’s commitment to the market, not just with the scale we bring, but also our ability to put a stake in the ground,” Spradley said. You could look at it as a $1.2 billion acquisition but also a $1.2 billion commitment to North America and other key regions, Spradley said. “This helps us move into a much more secure space,” she said. “That’s important because customers want to know that who they’re buying from is fully committed to the market and their products for the duration.”

Ericsson used the same strategy when it outbid NSN for Nortel’s CDMA and LTE assets after the Canadian vendor declared bankruptcy. Ericsson already had made sizable gains in North America with LTE contracts wins with Verizon Wireless (NYSE:VZ, NYSE:VOD) and AT&T (NYSE:T) and a network outsourcing contract with Sprint, but it used Nortel’s CDMA assets — and to a lesser extent its later purchase of Nortel’s GSM switching business — to catapult itself into the No.2 slot behind Alcatel-Lucent. North America is now Ericsson’s largest operational region outside of Europe.

NSN has similarly tried to make inroads into North America through organic means, but its attempts have been less successful. After building out good portions of AT&T’s GSM network, it was left watching on the sidelines as the operator embarked on first its 3G rollout and now its LTE plans. NSN competed fiercely for Verizon’s LTE contract and did score part of its IP multimedia subsystem award, but it failed to win the much bigger radio network prize. A WiMax contract with Clearwire fizzled out, resulting in Huawei being named Clearwire’s third radio vendor and NSN largely exiting the WiMax market.

NSN has made some progress, though. It’s now a leading optical vendor in North America and is building high-speed packet access networks for T-Mobile (NYSE:DT), Telus (NYSE:TU) and Bell Mobility (NYSE:BCE) — the last two of which could turn into 4G contracts. But on a conference call with media today, CEO Rajeev Suri was rather frank about NSN’s stalled expansion efforts in the US. “We’ve been weak,” Suri said. “This was a space we needed to cover, not just here but in Japan.”

Of the mishmash of CDMA, wideband-CDMA, GSM, LTE and time-division LTE business units NSN will acquire, WiMax stands out as the oddball. Though a new technology geared toward mobile broadband’s future rather than its current state, WiMax has been dismissed by much of the industry as an also-ran technology. NSN effectively did the same when it decided to pack in its WiMax portfolio, staying in only loose contact with the market through a reseller agreement with WiMax specialist Alvarion (NASDAQ:ALVR).

But with Motorola’s 4G business the equation changes. NSN will become one of the two dominant mobile WiMax equipment vendors along with Samsung. But perhaps most significantly NSN will have a foot in the door with WiMax operators that are weighing the switch to LTE. Clearwire (NASDAQ:CLWR) CEO Bill Morrow has held out the possibility on several occasions that Clearwire will adopt LTE in the future or pursue a merged LTE-WiMax standard. Other global WiMax operators like Yota have already announced their intentions to move to LTE.

Spradley said NSN is remaining neutral in the LTE vs. WiMax debate. Ultimately, NSN wants to be a dominant 4G vendor and views WiMax as an alternative technology that some, if not many, of its customers will pursue, Spradley said. If Clearwire chooses to stay on the WiMax path, she added, NSN will be more than eager to support them. “When Clearwire makes the decision to go beyond its [current WiMax deployment], we would definitely like to be a part of their plans, but we’re not prodding them in one direction or another,” she said.