Ericsson on CDMA purchase: This time will be different

Ericsson’s successful bid to purchase Nortel’s wireless assets isn’t the first time Ericsson (NASDAQ:ERIC) has tried to get into the CDMA business. But there is a big strategic difference between Ericsson’s purchase of Qualcomm’s CDMA infrastructure unit in 1999 and its $1.1 billion auction win of Nortel’s equivalent business unit last weekend, according to Hans Vestberg, Ericsson’s chief financial officer and future CEO.

“We believed CDMA technology would spread out worldwide,” Vestberg said at an analyst call today. When Ericsson launched its CDMA operations at the turn of the millennium, it was trying to build a portfolio and a customer base in CDMA’s early days with a potential market of 180 countries globally, Vestberg said. Ten years later, CDMA is an established technology with limited growth opportunities and a much smaller global footprint than the industry envisioned. But that market is focused squarely on North America, where Ericsson is trying to make strategic inroads, and Nortel has already established itself as the technology’s second largest vendor, Vestberg said. “I think it is a big differentiator: the concentration of this asset and what it brings us compared to trying to bring up the business from zero,” Vestberg said.

Ultimately Ericsson’s first venture into CDMA failed. Qualcomm (NASDAQ:QCOM) had built up only a small market share, which Ericsson managed to build on in the emerging markets, but not enough to compete with CDMA giants Alcatel-Lucent (NYSE:ALU) and Nortel. Ericsson shut down its US-based CDMA division in 2005 to focus solely on the GSM and wideband-CDMA technologies and eventually long-term evolution (LTE), which turned out to be a smart bet as the GSM-WCDMA continued to dominate worldwide and LTE was adopted as a 4G technology by CDMA operators. While Ericsson wasn’t able to score a 2G or 3G infrastructure win with the Tier I CDMA operators in the US, it was able to land their business by other means. Earlier this year, Verizon Wireless (NYSE:VZ, NYSE:VOD) named Ericsson one of its primary vendors for its forthcoming LTE network, and Sprint (NYSE:S) has selected Ericsson for a mammoth managed services contract that will see Ericsson taking over much of its employee base and day-to-day network operations.

But in the last month, interest in Nortel’s declining CDMA business has skyrocketed. Several vendors have emerged to bid on the asset, tempted by the possibility of a bargain deal while Nortel is in bankruptcy and Nortel’s sizable North American presence. Nokia Siemens Network (NYSE:NOK, NYSE:SI) kicked off the auction with a stalking horse bid of $650 million, but even Research in Motion (NASDAQ:RIMM) said it was a willing buyer, but claimed it was blocked from bidding by Nortel. NSN would not comment on whether it had raised its bid or stuck to its original $650 million offer.

"Our final offer for Nortel's assets represented a fair price, and we did not enter this process with a win-at-any-cost mindset," NSN chief marketing officer Bosco Novak said in a statement. "Ours was an opportunistic bid aimed at supporting the great progress we've made in North America in the past 18 months, and we are very confident that momentum will continue to grow."