UBS: Bell GPON picks coming in July

Verizon Communications is likely to select its first supplier of gigabit passive optical networking (GPON) equipment within the next two weeks, according to UBS Investment Research. In a research note issued this morning, UBS said decisions from both Verizon and AT&T--which issued a GPON request for proposals jointly with BellSouth last November--“are likely to be made in the next few weeks.”

Though many analysts expected Verizon to select a GPON vendor in the first half of this year, it still hadn’t happened two weeks ago, when Morgan Keegan analyst Simon Leopold conjectured that the “selection process [had] slid out by several months.”

Analysts have long maintained that the vendors most likely to win a Bell GPON supplier contract are Verizon’s two existing PON suppliers, Tellabs and Motorola; AT&T’s existing fiber-to-the-node supplier, Alcatel; global heavyweight Hitachi Telecom and startup Entrisphere, partnered with industry giant Ericsson.

A GPON vendor contract has potentially significant implications both for the vendors that win one and for those that don’t.

If Entrisphere and Ericsson were to win a Bell GPON contract, Ericsson would probably acquire that partner, UBS wrote. But analysts have described Tellabs and Alcatel as more likely winners. If Tellabs wins a Bell GPON deal, Ericsson--given its apparent interest in the space and its large cash balance--could look to acquire Tellabs. But such a move would be unlike Ericsson, given the company’s current focus on integrating the former Marconi assets and its historical sensitivity to the dilution effects of acquisitions, UBS said. Even a modest premium paid for Tellabs would dilute Ericsson’s 2007 earnings, UBS predicted.

The GPON contest also has potentially significant implications for Motorola, which is a secondary supplier to Verizon’s current PON deployment but, according to UBS estimates, represents less than 20% of that business.

“Motorola has yet to gain traction outside of its second-vendor status in [Verizon’s] PON deployment,” UBS wrote. “Should Motorola fail to secure GPON business, this could hasten a strategic decision regarding [its wireline] business. With little access market share or wireline market share in general, we view large-scale wireline M&A as unlikely.”

In addition, because the GPON contest is highly competitive, analysts have long expected any vendor that wins a contract to be saddled with the low margins that result from intense price competition. In fact, UBS believes GPON prices per line will be at least 10% lower than current PON prices, and margins for GPON optical network terminals (ONTs, the customer premises gear) to be 10% next year--about half the margin for current PON ONTs.

Further illustrating the increased competitiveness of the bid, if Tellabs should win a Verizon GPON contract, UBS does not expect the vendor to enjoy the same dominance it did with Verizon’s current PON deployment, of which Tellabs is said to supply more than 80%.