Initial Responses to Huawei-Nortel Broadband Partnership (NT)

Great timing for Nortel, which is set to announce earnings today: Nortel and Huawei announced yesterday a JV for providing ultra broadband access solutions worldwide. The JV will be majority owned by Nortel, and headquartered in Ottawa. According to the press release:

Total revenues for the global broadband access equipment market approached US$9 billion in 2005 and included a US$1 billion IP-DSLAM segment that is forecast to reach nearly US$2 billion in 2008 according to Dell'Oro Group. Huawei is ranked as the world's number one vendor of IP-DSLAM ports for the last seven quarters and currently holds the number one and number two position for BB-DLC voice and DSL ports respectively.

Initial responses from the market:

Ovum: While the numbers around broadband equipment sales look attractive (around $7bn in 2005), it still remains a very low-margin, cut-throat business. Given all the recent turmoil at Nortel, we would question its timing and ability to provide adequate business support to re-launch broadband access. However, the folks at Nortel (and Huawei) are smart people and have no doubt considered every possible angle.

Lehman Brothers: Analyst Jiao Shong writes in a note to clients: "We believe that through the JV Nortel will resell Huawei's DSLAM products in North America, but view little opportunity here as most carriers have already decided on their DSLAM vendors. However, some DSLAM opportunities may still exist in Europe and checks suggested that there may be some agreement between Nortel and Huawei in terms of country coverage in Europe."

[Lehman, incidentally is not overly bullish on Nortel; the same report continues: "We continue to believe that Nortel has possibly been losing share across the markets in which it competes -- wireline, enterprise and wireless segments - and consider that it may be challenging for the company to organically grow its revenues materially faster than 5% in CY06 and beyond.]

Business Week: The broadband bet may be just the beginning of the cooperation, adds [general manager of broadband networks at Nortel Walt] Megura. The partners could later band together on other products, he says, without being more specific. One of many possibilities: collaboration on WiMax equipment, enabling wireless broadband access over large areas, says Paul Sagawa, an analyst at Sanford Bernstein.

CIBC: According to a client note from analyst Steve Kamman, "this is a good first step to re-enter the broadband DSL (digital subscriber line) and fiber-to-the-home market...However, Nortel has a lot of ground to make up here and we see significant potential for further joint ventures or mergers and acquisitions ahead as it seeks to round out its product portfolio."

Heavy Reading: Scott Clavenna, Chief Analyst writes "at first glance, this looks like a great move for both -- access to important markets and working together to develop a real fixed/mobile convergence solution. It gives Huawei better access to North America and gets Nortel into the access game in a huge way. But I would always look on major joint ventures with some real skepticism and concern about just how well these companies can work together and co-develop products across such a gulf. History hasn't been terribly kind to ambitious joint ventures."

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