Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
Wireless infrastructure OEMs such as the likes of Ericsson, Nokia Siemens Networks, Alcatel-Lucent, Huawei, etc., face new challenges in the era of increased competition, shorter technology cycles and eroding margins. Consolidation within this space with prior mergers within NSN and ALU and the recent acquisition of Nortel by Ericsson will somewhat ease the competition and margin erosion, but hungry OEMs like Huawei, ZTE and NSN bent on building market share will not eliminate the problem.
Presently, technology upgrades are being driven mainly by competition amongst the operators to have the fastest network and technology that is the most spectrally efficient. This puts the infrastructure vendors in a predicament of being able to recoup their R&D investments on legacy technology before they have to roll out the next generation technology. Think about how long TDMA networks lasted before GSM came along. GSM was then quickly overhauled to UMTS and now barely 3 years into UMTS, there are plans for migration to LTE. Sure the legacy technologies continue to generate revenue for years to come, but is it really in the best interest of the operator to maintain multiple technologies and also the OEM to support these multiple technologies, given that better and more efficient alternatives exist?
For infrastructure OEMs looking to generate more predictable revenue, maintain a more captive customer and improve gross margins in services, I believe the business model needs to evolve. In my opinion, the three main changes required are:
–Focus on technology IPR and innovation, not production;
–Simplify technology to be plug and play with self configuring network (SCN) capabilities;
–Evolve commercial model from one of asset sale to lease and operate.
With technology cycles shortening and network complexity increasing, here is a novel though – make products cheaper to build that are also simpler to install, integrate and operate! OEMs need to create open standards, collaborate and innovate in product development to ensure scale is increased and product costs are lowered. Wireless OEMs tend to cringe at the thought of true open standards in wireless technology thinking that this will kill differentiation and eventually margins, but this is short-sighted thinking. Instead focus on being the innovator in new standards and patents and let the royalty fees collected substitute for the decreased margins of providing cheaper and simpler commercial technology. An eventual goal path for OEMs could be to only focus on creating the technology standards and patents and letting partners and VARs build and actually sell or lease the commercial solution. Being at the forefront of creating the technology standards would position the OEM to be the best intellectual partner to operate the technology too and offer high value managed services.
As an example of simplification, there is no reason why a radio base station (RBS) or switching node cannot be added to a wireless network, and have it automatically seek out its connecting nodes, download optimal configuration parameters and bring itself on-air without manual intervention. Similarly, for networks operation, the OSS platforms should evolve to the point that they collect network data, analyze and correlate the data and finally make changes to the network real-time and automatically to ensure coverage, capacity and network quality are optimal. When problems occur that require human intervention, such as site physical changes or hardware additions, job requests should be automatically generated to technicians.
Dealing with carriers
In terms of how OEMs structure their commercial deals with operators, a little different approach is required to solve problems both for the seller and purchaser. Wireless operators are high FCF (free cash flow) producing companies with large capital reserves. Traditionally, mature operators prefer to use their capital reserves for asset purchases in order to use depreciation to lower taxable income, however structuring the right asset operational lease can be more beneficial for shareholders as shown below. It is assumed that by having the OEM lease and operate the assets, cost of goods sold (COGS) can be reduced 25% and lease fees are assumed at 20% premium over depreciation. Weighted average cost of capital(WACC) assumed is 12%.
It can be inferred from the net present value (NPV) above that over a 3 year period, the lease and operate option is a more profitable option for an operator to pursue. For the operator, this also means more predictable earnings with higher margins as costs scale with revenue growth. Emphasis can be placed on returning net income to the shareholders via higher dividends rather than spending on asset purchases, which should further improve the share price and market capitalization of the company.
So it makes sense for the operator, but what about the OEM? From the OEM’s perspective, as seen below, the lease and operate model is also more profitable and provides the additional benefit of a loyal captive customer for bundled products and services.
In conclusion, OEMs will have to rethink their fundamental business and what their core advantages are that they can monetize to be successful. These core benefits in addition to the market/operator requirements should be carefully aligned with the changes I have outlined to create the right strategy for evolution.
Sanjay Ambekar is the Co-founder and Partner at NGN Consulting LLC. (www.nextgnconsulting.com) and can be reached at sanjay@nextgnconsulting.com.
