With the onset of standardization and modular technologies, the market shares of the big infrastructure players have continued to see constant declines, according to an upcoming report from the Yankee Group.
The picture looks even gloomier in the year ahead as Nextel Communications Inc.’s capital expenditure will drop in 2004, according to its Chief Financial Officer Paul Saleh in a speech to investors at a Goldman Sachs conference in New York last week. He said Nextel’s capex will drop by “a few hundred million,” below its 2003 figure of $1.8 billion.
The company’s chief executive, however, noted elsewhere that it expects the industry to enjoy “solid revenue growth in the third quarter.”
The Yankee Group report, titled “Profitability for Wireless Vendors,” looks at main vendors such as Nokia Corp. L.M. Ericsson, Motorola Inc., Nortel Networks Ltd., Lucent Technologies Inc. and Alcatel Corp., which derive a large chunk of revenues from base transceiver stations, base station controllers, mobile switching centers and transmission equipment.
Ericsson, which continues to lead the field, witnessed a market-share decline from 31 percent to 28 percent. The report says that while Nokia increased market share, its operating margin is dropping. Lack of switching infrastructure brought down Motorola’s standing, although both Alcatel and Siemens strengthened their positions in the market-share hierarchy, according to the report.
“We might have parity in market share through consolidation,” said Philip Marshall, director of mobile technologies at Yankee Group and author of the upcoming report. “It will happen within 18 months and 24 months.”
The report expects two major hardware vendors to exit the market during the next five years.
The study noted the major equipment vendors provide 45 percent of the total capital expended by wireless service providers, with 55 percent consisting of such non-electronic infrastructure as civil works, antennas, cables, buildings, radio spectrum and transmission.
The study said vendors will focus on developing market opportunities, differentiating on price and service, evolving their technology to enable cost control and furthering operational efficiencies as well as their supply chain and inventory management. These efforts will, however, confront the challenge of new technologies and standards.
“Although incumbency will continue to be important, we believe that its benefit will continue to be diluted as equipment architectures mature and progressively standardize,” said the research. “The major issues that still need to be addressed are the maturity of the standardized modular architectures, the appropriate timing for the introduction of these solutions and the impact of developments that have already been made using non-standardized techniques.”
The emergence of two base station standardization initiatives comes up in the report as a positive development. The two initiatives are the Nokia-led Open Base Station Architecture Initiative and the Ericsson-led Common Public Radio Interface. Both groups claim to be open, but are apparently in competition, trumping expectation of a single standard.
While many vendors use proprietary systems, Marshall notes the trend toward uniformity.
“We believe that these initiatives are long overdue and will have a massive impact on the business models for wireless equipment vendors, which have traditionally relied upon proprietary base station equipment for the lion’s share of revenues,” according to the report.
While underlining the importance of new technologies in the modular level, the research observed that vendors and service providers are relatively conservative in the adoption of new technologies. One of the shortcomings among service operators, said the Yankee Group, is the inattention to efficiencies in technical operations, paying more heed to solutions that enable rapid network deployment.
Operators expend more energies and resources on the backhaul and leases, a trend that favors companies such as Alcatel, Lucent and Tellabs, which offer products tailored to that space.
“We believe that these solutions will continue to see robust demand, and that within the next five years, alternative low-cost transmission protocols such as digital subscriber line will become sufficiently reliable for widespread adoption in wireless networks,” the report said.
