AT&T Inc.’s planned acquisition of BellSouth Corp. could be great for consumers, but the news isn’t so great for telecom equipment vendors, already suffering from declining profits.
“In our view, carrier consolidation is a net negative for equipment vendors,” stated a recent report by analysts Tal Liani and Vivek Arya of Merrill Lynch.
The report cited Verizon Communications Inc.’s recent unification of its procurement activities for wireline, wireless and its MCI long-distance business, and highlighted an expected 40-percent reduction in fiber-to-the-home deployment costs, only part of which is due to equipment costs. Cisco Systems Inc. also has brought up the fact that consolidation makes determining prices and negotiating contracts more challenging, the report said.
But the biggest problem by far consolidation poses for vendors is lower demand for their equipment as carriers stop building out parallel networks.
The saving grace for vendors may come as carriers converge their networks, attempting to maximize the amount of services they can provide from their existing investments.
According to Merrill Lynch, if AT&T drives network decisions for the combined company, Lucent Technologies Inc. stands to benefit.
“Lucent recently won several Internet-Protocol Multimedia Subsystem contracts at AT&T, BellSouth and Cingular [Wireless L.L.C.], and IMS was highlighted several times as a service differentiator on AT&T’s conference call,” the report stated. “Lucent could also benefit from more aggressive UMTS spending by Cingular.”
But Joe Chiasson at Susquehanna Financial Group, disagrees. “Lucent has not had much success at AT&T over the past five years, with an inability to permeate the former SBC in any substantive way, but most notably in optical.” Chiasson added that Lucent has had much better success at BellSouth, which is Lucent’s third-largest customer after Verizon and Sprint Nextel Corp. As for Lucent’s IMS win, Chiasson said, “The fact that Lucent’s IMS solution was selected by all three service providers involved here obviously insulates the company from any risk on that decision; however, there is very little indication of imminent material IMS revenue.”
The analysts also disagree about Alcatel Alsthom’s post-merger fate.
Chiasson says Alcatel will be a big winner because of its end-to-end footprint in AT&T by virtue of the Project Lightspeed deal, as well as its large presence in Access that predates Lightspeed. Assuming that half of BellSouth’s residential customer base is expected to be eventually targeted for a Lightspeed upgrade, Alcatel could pick up about 6 million IPTV lines. Chiasson concludes that this consolidation may ultimately enhance capital spending since AT&T may be more aggressive than BellSouth on its own in rolling out IPTV in the BellSouth territory.
But the Merrill Lynch’s report points out that the future of IPTV is unclear, and says AT&T could change its strategy and decide to deploy FTTH instead of IPTV, which wouldn’t bode well for Alcatel.
