BILLION-DOLLAR WIRELESS DEAL LEAVES DETAILS IN THE DARK

The $1 billion deal Verizon Wireless signed with Nortel Networks last week to deploy the vendor's CDMA 1x equipment in seven markets sounds like news worth shouting throughout a wireless industry suffering from dismal infrastructure spending. However, the lack of details regarding how and when the $1 billion will be spent should discourage other carriers and vendors from shouting too loud.

Until the two companies announced the agreement last week, the infrastructure sector was mired in mostly bad news. Going into 2003, many vendors were forecasting revenue declines of around 10% for their infrastructure groups. Some vendors further lowered expectations as the year unfolded—Nortel was alone in predicting only a slight decline for the year. Second quarter revenue, however, grew slightly from the first (see figure below).

Last week's $1 billion deal likely will do little to change those dismal assessments. The money committed appears to fall well within previously stated capex plans of Verizon Wireless, which has one of the largest capex budgets among wireless carriers.

A Verizon spokeswoman said the carrier already has begun spending some of the money mentioned in the three-and-a-half-year agreement by placing orders with Nortel last week. But that the $1 billion commitment isn't being broken down into yearly increments, making it difficult to determine how much Verizon is spending in the short term.

The agreement with Nortel doesn't change Verizon's budgeted capex of $4.4 billion to $4.7 billion this year, the spokeswoman said. By comparison, Nextel Communications will spend less than $1.8 billion this year. “We equate spending with network quality,” the Verizon spokeswoman said. “We haven't said we'll increase it again, but I don't think we'll shrink it either.”

Despite its windfall, Nortel is stopping short of calling it an industry-wide trend. “It's tough to say if capex is actually improving,” said Bruce Gustafson, director of strategic marketing for wireless networks at Nortel. “There's always an uptick in spending in September through the end of the year.”

Furthermore, the true significance of the purchase agreement is difficult to fathom without knowing how the $1 billion is being allocated, said Iain Gillott, principal at iGillott Research. “How much of it is being shipped now, and how much is equipment and how much is maintenance and services?”

Gillott also said it is unclear whether it was “a good billion-dollar deal or a bad billion-dollar deal” for Nortel.

“What did Verizon get for its money? The average price of switches and base stations tumbled in the last few years,” he said. “One billion dollars is a lot of money for a vendor, but they may have sold it at lower margin than they would have earlier.”

Another analyst with close ties to several carriers echoed the sentiment. “All of these carriers are demanding maintenance services or other extras thrown in essentially gratis, and getting that,” said the analyst, who requested anonymity.

The Verizon spokeswoman said the bulk of the agreement's estimated total value covers equipment.

The contract includes 1x RTT base stations, switching, Passport IP platforms and other equipment, as well as installation and maintenance services. The equipment will expand Verizon's existing 1x RTT deployments in San Diego, Los Angeles, Las Vegas, Detroit, Atlanta and Cleveland while giving Myrtle Beach, S.C., its first exposure to a 1x network.

“Verizon named the categories of equipment they want to buy in the next few years,” Gustafson said. “The agreement doesn't spell out how exactly many switches and base stations, but that will bear out later.”