Everything you need to know about Ericsson vs. Nokia, Alcatel-Lucent, RIM and Canada

Ericssons attempt to buy parts of collapsing Canadian company Nortel has opened up a huge can of worms. Analysts are saying that the result of this would be an Ericsson so large that its competitors need to merge together to stay in the game – particularly Nokia Siemens Networks and Alcatel-Lucent. The Canadian government has yet to approve the acquisition, but public opinion (spearheaded by a very vocal RIM) is firmly against it. This is a huge deal, with a lot to win or lose for the people involved. So in this article we’re going over what you need to know for a good overview of the entire situation.

In the face of global competition and an economic downturn, Nortel ran up losses of almost $7 billion in two years. It applied for bankruptcy protection in the United States, Canada and Europe back in January of this year. Bankruptcy protection basically allowed the company to enter into a restructuring period, rather than being liquidized. And by “restructuring”, Nortel meant auctioning off parts of its business until it was profitable again. And the wireless part of its business has been of particular interest – its network equipment provider (NEP) technology for LTE and CDMA.

So let’s start at the start.

What’s a Network Equipment Provider?

Network Equipment Providers quite literally build the networks that your mobile device works on. Not just your mobile device but your internet connection and, increasingly, your home phone and TV. They install base stations, switches, routers, cable and everything else necessary for a mobile operator to actually run a network on. When an operator announces that it is upgrading to 3G or 3.5G, what it really means is that it has contracted an NEP to upgrade its network infrastructure. The four largest companies involved in network equipment provision in the world are Ericsson, Nokia Siemens Networks, Alcatel-Lucent and Huawei.

So Nortel is selling it’s wireless assets, which comprises both 3G (CDMA) and 4G (LTE) technology. Both of these assets are massively valuable. Nortel built almost all of Verizons 3G network in the USA. So whoever buys Nortels CDMA assets immediately becomes the main equipment provider for the largest wireless network in the States. The LTE portion of Nortel is a real prize as well. LTE is the next step in wireless communications. Operators all over the world are getting ready to roll out LTE services – including Verizon. Dubbed as “true 4G”, it promises to be everything that 3G is and so much more. It is planned to vastly increase both the speed and capacity of wireless communications. Just today, Nortel and LG demonstrated how a CDMA network can be made communicate with an LTE network. And Ericsson wants it. But it’s not the only one.

A brief look at the players involved

Nokia Siemens Networks and Alcatel-Lucent

NSN was created in 2007 by a merger between mobile manufacturer operator Nokia and engineering/electronics company Siemens. It provides network services for operators in around 200 countries. Alcatel-Lucent is likewise a product of a merger, between Alcatel and Lucent Technologies in 2006, and operates in over 130 countries.

Both companies offer broadly the same services as Ericsson. They provide mobile networks with the infrastructure they need to operate, including upgrading, maintenance and network management.

Ericsson

Ericsson has existed since before 1900, and is quite simply huge. It covers a range of telecoms, data and other technologies, but it is especially involved with mobile networks. The Swedish firm has separate business units for providing mobile operators with networks, and for running operators networks for them. Most NEPs also have a unit that will actually run an operators network for them, but since the start of the year we’ve seen Ericssons unit enter multi-year contracts deals with Telefonica O2 and Vodafone in the UK and American giant Sprint. At an auction in Manhattan last month, Nortel awarded the bid for its wireless division to Ericsson – ahead of both Nokia Siemens Networks and MatlinPatterson.

The Canadian Government

The government of Canada has the power to stop this deal from going ahead – and there are quite a few interest groups who think that they should do so. The government has the power to block any deal it views as a “threat to national security”, or which is incredibly high value but doesn’t benefit the Canadian economy. Opponents of the deal say that this deal falls into both categories. They feel that a foreign company taking over most of the countries mobile telecoms networks represents a security. They also claim that Canadian tax payers money went into LTE development, and that LTE itself represents a significant investment in the future of Canada – and that as a result, in order to benefit the economy, Canada should retain control of Nortel LTE.

RIM

The Canada-based developer of the Blackberry is fiercely opposed to the Ericsson bid. It’s own bid to buy the CDMA and LTE tech was rejected back in January, after Nortel claimed it refused to comply with “court approved” procedures. That rejection saw an immediate drop in RIM stock prices. It is now the most vocal opponent to the Ericsson purchase of those exact same parts of Nortel.

Should the merger be stopped?

Obviously, Ericsson doesn’t think so. It isn’t just buying technology – it’s bidding for Nortel patents in LTE. Patents that some parties estimate could generate as much as $3 billion over the lifespan of LTE. Those opposed to the Ericsson bid say that those patents, and those potential earnings, should remain with Canadian parties. Ericsson is offering the promise of future investment in Canada as a counter. It says it spent almost $130 million on R&D in Canada in 2008 alone, and that a succesful bid with Nortel would see that yearly investment increase by 40% or 50%

How would a Nokia – Alcatel merger help?

It won’t help RIM or Canada at all, but it might help NSN and Alcatel-Lucent to stave off overwhelming competition. Not only would this deal see a much larger Ericsson gobbling even more of the marketshare, but Chinese NEP Huawei has been gaining a huge amount of steam with Western operators. Over the last year, both Ericsson and Huawei have been making gains, while NSN and Alcatel-Lucent have watched their marketshare slide. There was a ray of hope for NSN while the Nortel bid was still up for grabs – it could have greatly boosted its existing size through the Verizon network, but it also would have increased its potential in the coming LTE boom.

What we think?

There are two reasons I find this story SO interesting. First, it has caused an enormous stir in the network equipment provider world. NEPs are unimaginably important in the world of mobile communications, and this is a rare opportunity to have a look at them scrabbling at one another. The second reason is that it’s not just about buying existing networks – it’s about buying the future. Nortel has significant LTE assets. With major 4G implementations just around the corner, this kind of technology suddenly appearing for sale is unprecedented. Whoever buys the wireless division of Nortel is not just buying into the largest mobile network in America, but also into a huge future technology. And barring some kind of miracle, it is going to be Ericsson who gets it.

As for NSN and Alcatel-Lucent… the future doesn’t look particularly bright for either of them. Alcatel-Lucent has never turned over enough profit to be worth the initial investment in it, and it’s rumoured that Siemens has no interest in keeping NSN alive past the end of the deal in 2013. It could very well be that within a few years, Ericsson and Huawei will be the only NEPs that count, while the joint-ventures slide out of view.