NSN to ramp up US operations in wake of $7 billion LTE deal

One day after Nokia Siemens Networks (NYSE:NOK, NYSE:SI) CEO Rajeev Suri acknowledged that NSN was “weak” in North America, the vendor demonstrated considerable strength in the very region in which it previously had fell short. NSN announced a $7 billion, 8-year deal 4G infrastructure and outsourcing deal with new long-term evolution (LTE) operator LightSquared. According to NSN’s North America chief the deal is the vendor’s largest single contract to date and would greatly expand not only NSN’s competitive position in the US but the size of its operations.

“I believe this is the largest deal we’ve ever done,” said Sue Spradley, NSN head of North America and member of the executive board. “It just happens to be in North America.”

LightSquared, a privately held operator funded by hedge fund Harbinger Capital Partners, will build the country’s first purely wholesale LTE network using satellite spectrum from SkyTerra. The nationwide network will blanket US metropolitan markets, covering 92% of the population by 2015, with the remaining 8% covered by LightSquared’s satellite network. NSN will be responsible for the terrestrial component, selling and deploying 40,000 base stations, the evolved packet core and network operations and support facilities. But the deal is far more than an infrastructure deal for NSN. The vendor will take over maintenance and operations of the network, making one of its biggest outsourcing contracts globally.

While Spradley couldn’t provide a breakdown of what part of the $7 billion would go to infrastructure and what part would go toward operations, she said the equipment portion of the contract would logically be front-loaded, focusing primarily on deployment in the first years and shifting toward operations and maintenance after the network goes commercial in the latter half of 2011. What Spradley can say for certain is the contract will entail a significant ramp up of NSN’s current North American operations and staff.

To handle such a large deployment, NSN will need to add new engineers and technical staff to its current 2200 North American employees. Some of that new hiring rush may be mitigated once its planned acquisition of Motorola networks (NYSE:MOT) is complete in December, bringing in 7500 Moto employees, 1600 of which are based in Illinois alone. Spradley said it’s still far to early to project whether Motorola Networks can pick up all the slack since NSN isn’t sure which Moto employees will choose to stay with the new company or what NSN’s post-acquisition restructuring plans will be. Also, many of Motorola’s US employees are in research, product development, sales, marketing and other divisions, while its network implementation engineers are spread throughout the world.

As the network deployment phase winds down, many of those employees will transition to network management side of the operations, Spradley said. Unlike NSN’s other large outsourcing deal in the US with Embarq or Ericsson’s (NASDAQ:ERIC) mega-managed services deal with Sprint (NYSE:S), NSN isn’t taking over an existing operation so it won’t be taking over a huge roster of employees. It will be left to NSN to either hire new employees or incorporate the new operator into its already sizable global managed services operations. Spradley said she expects NSN to do both. The vendor will leverage the 250 former Embarq employees that currently run its US network operations center and tap into its primary global outsourcing facility in India, Spradley said. But given the size and scope of LightSquared’s network, NSN will definitely have to ramp up its US-based managed services operations, Spradley said.

“That model allows us to be as cost effective as you can be,” Spradley said. “We’ll spread our operations footprint out among multiple operators, but we will definitely grow.”

NSN’s total revenues for 2009 were 12.5 billion Euros (US $16 billion), but North America has traditionally been its most underperforming region. In Q4 NSN North American accounted for only 6.7% of NSN’s 3.625 billion in revenues, and that was after considerable quarter-over-quarter and year-over-year gains. One of NSN’s prime motives in acquiring US-based Motorola’s non-iDen network businesses was to address that big hole in its portfolio, expected to catapult it from No. 5 to No.3 in North American market share. “There’s no point in being in North America without having a profitable and sustainable business,” Spradley said.

But even without the Moto acquisition, the LightSquared deal will go lengths to increasing NSN’s scale in the US. The estimated $7 billion contract will be spread out over eight years and will include capital and operational revenues, but given the five year nationwide rollout target LightSquared has mapped out, the deal should have a significant impact on NSN equipment sales in its first few years.

Though NSN and LightSquared haven’t broken down specific equipment costs, the deal is likely the largest single 4G infrastructure award in North America to date. LightSquared doesn’t have existing network footprint to fall back on, meaning it will have to procure cell-sites and backhaul while operators like Verizon Wireless (NYSE:VZ, NYSE:VOD) and AT&T (NYSE:T) can re-use much of their 2G and 3G network investments. Most significantly though, NSN is the sole vendor for all radio access and core equipment, while other operators have chosen to divide their contracts among several vendors.

LightSquared chief marketing officer Frank Boulben said that the operator evaluated six different LTE vendors, but decided to select NSN as sole supplier for not only its technical expertise but because it was one of the few vendors with managed services capabilities to quickly handle a large-scale rollout and outsourcing project.

“When you go with a dual-supplier network it is very difficult to outsource the deployment,” Boulben said. “We wanted a turn-key solution so we could come to market as soon as possible. By partnering with NSN we gained a lot of time.”

Spradley said NSN had some advantages due to experience in implemented dual-mode satellite networks with Terrestar, another Harbinger investment. NSN has developed satellite filters that help manage hand-off and coordination between the terrestrial LTE and orbital satellite networks. NSN also has strong relationships with LightSquared’s executive staff, going back to the days when CEO Sanjiv Ahuja was CEO of Orange.

“When you do a deal like this it can’t just be a cold contractor-supplier relationship,” Spradley said. “There has to be mutual trust.”