Vendor Financing: The New Competitive Edge

Service providers appear to be facing a buyers' market as they prepare for what some industry insiders refer to as the biggest network build-out in history.

As suppliers of wireless-infrastructure equipment and services scramble for new contracts, they continue to fall under increasing pressure to finance customer purchases, thereby ab-sorbing some of the risks involved in the industry's pre-parations to offer next-generation services. The proof lies in recent vendor disclosures.

In a July divulgence to shareholders, Nortel Networks listed the increasing need to supply customer financing as a business risk. Also in July, Motorola reported to the Securities and Exchange Commission that purchasers continue to require financing from infrastructure-equipment suppliers for all or a portion of the purchase price. In an August disclosure, Lucent explained that the company had, as of June 30, laid aside approximately $7.7 million to finance customers' purchases.

Lucent said that it increasingly provides or arranges financing in conjunction with infrastructure bids. The company reported that the value of long-term financing agreements can range from modest sums to more than a billion dollars.

Start-ups account for some of the financing. For instance, this past July, Lucent announced that Leap Wireless International had agreed to purchase approximately $900 million in its infrastructure equipment and services. The deal expanded Lucent's 1999 agreement to make $330 million in financing available to Leap for infrastructure purchases.

Earlier this year Ericsson, Harris, Lucent and Nortel provided $1.8 billion in financing to a broadband start-up known as VeloCom for its operations in Brazil.

But vendor financing doesn't end with start-ups. More settled companies also are reaping benefits from these vendor deals. For example, Motorola recently revealed that it set aside $457 million in equipment financing for Nextel Communications. Nextel disclosed that, as of March 31, McCaw International in Brazil had borrowed $104 million from Motorola Credit and had been allotted another $21 million for future loans.

In early September, Lucent and the issue of vendor financing made headlines after Lucent tried to sell at a discount loans it had extended to Winstar. Addressing the issue, an article in the Sept. 4 issue of Barron's predicted vendors, driven by investors' concerns, will begin seeking alternatives to vendor financing.

But Debi Lewis, Lucent spokesperson, said the company will continue to make decisions about financing the same way it always has.

"Our policy has always been to examine each opportunity on a case-by-case basis," she said.