Telecom Gear Consolidation Is Stalled Over CDMA Conundrum

A host of questions plaguing the telecommunications gear industry -- from why so many companies' financial results are going from bad to worse, to why the long forecast and badly needed consolidation in the space has been slow to materialize -- can largely be answered with one word: CDMA.

CDMA, which stands for Code Division Multiple Access, is a major technology that is behind much of the wireless communications today and sold by many large telecom gear makers from Alcatel-Lucent SA (ALU) to Nortel Networks Corp. (NT). The technology is essential to phone operators that offer wireless service, but for the companies that sell CDMA gear, it is a little more complex. Currently a critical chunk -- and often one of the strongest parts -- of their business, CDMA is on a road to obsolesence as the cell phone industry evolves from standard 2G phones that use CDMA and offer basic voice communication, to next generation, or 3G smart phones, which require something more advanced than CDMA, such as GSM, or Global System for Mobile Communications.

That transition, of course, won't happen overnight, and for a long time the thinking was that CDMA would remain a large enough business for long enough that it would be a valuable asset for companies to hold onto, or even acquire, in order to boost their wireless presence and better navigate the transition to 3G. After all, even if forecasts calling for half of all cell phones to be 3G by 2011 prove true, that still leaves an awful lot of 2G phones requiring support beyond that date. Gasoline-powered cars wouldn't disappear from the road overnight just because electric cars have been introduced, and the same basic principal applies to cell phones, even if the pace of innovation is decidedly quicker.

Recently, however, a couple of wrenches were thrown into that thinking. Widespread economic weakness has cut into telephone companies' CDMA spending and consolidation among phone carriers is further constraining their spending. In recent weak earnings reports from Alcatel-Lucent and Nortel, the companies both cited a sharp drop in spending from a key U.S. customer, not named but widely believed to be Sprint Nextel Corp. (S), which has struggled since it was formed in a $35 billion merger in 2005.

As what initially looked like short-term spending cuts turns into a long dry spell, companies selling CDMA gear find themselves in the curious position of holding out for a rebound in sales of a technology that they know will inevitably fall in the longer term. In its latest quarterly report showing a $113 million loss. Nortel cited a sharp drop in orders, largely related to CDMA. In subsequent comments from the company and the industry, Nortel was said to need a rebound in CDMA, as well as an investment in next generation wireless technology and more industrywide consolidation, to see a meaningful improvement.

That's a tall order for a company operating in a soft economic environment where spending is slowing. While everyone agrees consolidation is needed, no one appears interested in being the consolidator. One analyst argued that Alcatel-Lucent's best strategy would be to signal it is focused on the future by selling all of its CDMA assets, either to Nortel or Motorola Inc. (MOT). With both those would-be buyers distracted by their own internal problems or reorganizations, his recommendations seem more theoretical than practical. No one is moving to buy anyone else's CDMA assets. 

Even more problematic is that for all the weakness in these companies' CDMA operations, they often remain one of the best performing parts of the operation, given that phone carriers are being equally cautious about spending on next-generation technologies. CDMA is an asset that gear makers can't seem to live with, or without. In his recent downgrade of Nortel's shares, Jefferies & Co. analyst George Notter noted that as bad as Nortel's performance was currently, it stood to get even worse, given that CDMA was still profitable. "Any meaningful hiccups create further downside," he wrote. Seeing no clear path to recovery, either through operations or M&A, Notter titled his research report on Nortel "We're Giving Up."

Comments

[From the da...:]

The article is correct in it's conclusion. The arguments used don't support the conclusion as the facts are incorrect.

CDMA is a more advanced radio technology than GSM's TDMA. The best evidence is that all 3G technologies make use of CDMA radio principles.

CDMA started as a 2G technology and has evolved into a 3G technology. GSM with GPRS reached 2.5G with EDGE reached 2.75G, but does not reach 3G.

GSM needs replace cell sites to reach 3G (UMTS) or 3.5G (HSPA).

What GSM has going for it is far larger scales of economy. A more cooperative launch across Europe that ensured international roaming between operators enticed other operators to select GSM, since it would work in more places and at lower expense.

Adding to the further downfall of CDMA is the intent of the remaining CDMA service providers to either (a) use the 4G technology, LTE -- Verizon Wireless, KDDI; (b) switch over the UMTS/HSPA -- SKT, KTF, Telstra, Telecom New Zealand; or (c) switch to GSM -- mostly in places that haven't licensed UMTS spectrum -- Reliance, Vivo, Movistar. By the way, Sprint's 4G technology selection is WiMax.

2008 Aug 06 10:31 AM

[xela19115:]

What technical qualifications does the author have to proclaim that GSM is a more advanced to CDMA? Both CDMA and GSM are 2G solutions. CDMA 1x EV-DO Revs. 1 and A are both 3G just like GPRS/EDGE, UMTS and HSDPA and HSPA are for the GSM crowd. Before spouting rubbish get your facts straight. What you should have said that most of the CDMA and GSM/UMTS operators will be migrating to a common 4G solution in a near future which will be LTE.

For a CDMA operator to move to GSM from a technology point of view would just be an asinine step back not forward. Where GSM/UMTS has an advantage is in economies of scale.

And another thing.... 3G wireless service are already deployed on a mass scale. Yesterday's news. Look forward to 4G.

2008 Aug 06 11:43 AM

[Saterley:]

3GSM, UMTS, WCDMA, HSDPA, and HSPA are all CDMA with a CDMA air interface. CDMA will be around for a long time.


On Aug 06 10:31 AM From the damned company wrote:

> The article is correct in it's conclusion. The arguments used don't
> support the conclusion as the facts are incorrect.
>
> CDMA is a more advanced radio technology than GSM's TDMA. The best
> evidence is that all 3G technologies make use of CDMA radio principles.
>
>
> CDMA started as a 2G technology and has evolved into a 3G technology.
> GSM with GPRS reached 2.5G with EDGE reached 2.75G, but does not
> reach 3G.
>
> GSM needs replace cell sites to reach 3G (UMTS) or 3.5G (HSPA).
>
>
> What GSM has going for it is far larger scales of economy. A more
> cooperative launch across Europe that ensured international roaming
> between operators enticed other operators to select GSM, since it
> would work in more places and at lower expense.
>
> Adding to the further downfall of CDMA is the intent of the remaining
> CDMA service providers to either (a) use the 4G technology, LTE --
> Verizon Wireless, KDDI; (b) switch over the UMTS/HSPA -- SKT, KTF,
> Telstra, Telecom New Zealand; or (c) switch to GSM -- mostly in places
> that haven't licensed UMTS spectrum -- Reliance, Vivo, Movistar.
> By the way, Sprint's 4G technology selection is WiMax.

2008 Aug 06 06:44 PM