Meltdown in the wireless communications industry

The news from the infrastructure manufacturers looks bleak. Motorola have stopped pension contributions for US employees in order to save cash. Analysts are debating whether Nortel would be better off filing for bankruptcy sooner rather than later. Alcatel-Lucent is heading for large losses and even Ericsson has substantially downgraded its sales predictions.

Some of this is in response to the “credit crunch”. While mobile subscribers are not materially cutting back on the amount that they are spending on wireless communications, mobile operators are concerned that they might be less inclined to try new services and that competition will continue to erode the cost of calls and texts. The result would be slightly falling revenue for an industry that has been accustomed to growth year after year. Operators also realise that borrowing money for infrastructure projects is difficult at the moment and are inclined to cancel or delay uncommitted spending.

Some of the pain relates to poor strategic decisions. Both Motorola and Nortel decided to exit from 3G and instead concentrate on WiMAXand 4G. WiMAX always looked like a relatively niche technology compared to 3G/4G and seems even less likely to make an impact as it becomes harder for new entrants to raise the capital to build their network. 4G looks like it will be postponed for some time as operators aim to generate as much revenue as they can from their 3G networks, many of which are still running well below capacity. Without any revenue from 3G sales, these manufacturers could be heading for a bleak few years from which it will be difficult to recover.

Another problem for the established suppliers is competition from the Far East. Manufacturers from counties like China and Korea have now established a strong reputation and product line coupled with a relatively low cost base. The established suppliers, by contrast, are in high cost countries and are often saddled with a high cost base and large pension liabilities.

Underlying all these problems is a fundamental change in wireless communications, away from the “generation game” of new networks being deployed every decade and away from an era of ever more new operators entering the market. The construction of large cellular networks is virtually over, leaving growth in areas such as small cells and network enhancements.

What we are seeing is a long term shift of falling revenue for the established infrastructure suppliers, exacerbated and brought into sharp focus by the credit crunch. Many of the great names from the past will not survive the transition. Others will merge – although the track record for mergers is poor. Many jobs will be lost in the process.

While this is bad news, especially for those personally involved, it has a feeling of inevitability about it. What is less inevitable but potentially just as devastating is the possible collateral damage. Smaller companies with innovative new products and software may get caught up in this upheaval, perhaps because they supply the larger manufacturers, perhaps because the spending cuts from the operators affect them, or perhaps because confidence evaporates from the sector making it impossible to raise finance. Such companies ideally need to find some way to “hibernate” for a year or two as the problems of the sector sort themselves through. Otherwise, there is a risk that many new and important products such as femtocells will be set back many years.

By 2010 the landscape of those supplying the telecoms operators will look somewhat different.

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5 Responses

  1. Times are certainly tough. Some have contended that the mobile sector is relatively immune as phone calls are still made – but the figures I’ve seen suggest otherwise, as call revenues have declined fairly steeply over the last few months. However, one counterargument to the gloomy outlook contends that the recession may increase the focus on the mobile broadband data growth market, and accelerate the deployment of femtocells for both 3G and next-generation as a way of continuing mobile broadband data momentum within tighter capex budgets.

    Time will tell.

    Simon

  2. It seems as though we’ve come to the end of the current wireless technology cycle, and hit a global economic downturn at the same time. Quite a few of us have been through these cycles before and yes they are bad for those caught up in them. But history shows something unexpected will happen which will kick off the next big growth cycle. Even now some team is probably working on a technology that in a few years time will create the next big wave. The UK is usually a leader in such innovation cycles. So look around you and think about what is taking place close to you, and then try to extend it. Maybe out of this gloom we’ll see the rise of one or two new world class companies. I certainly hope so.

  3. Mike

    I quite agree – such times are exactly when investment in innovation is most important, and the opportunity to benefit from growth in value when recovery eventually comes is greatest. But access to capital from conventional sources is arguably tougher now than in the previous couple of recessions and some argue relates to a fundamental readjustment rather than a simple belt-tightening. Putting it another way it’s a great chance for those who do have access to capital and a nose for ‘black swans’ to do well.

    Simon

  4. Here’s a (somewhat) positive datapoint on how at least part of the wireless infrastructure market is holding up so far, courtesy of Will Strauss of Forward Concepts (http://www.fwdconcepts.com/):

    Wireless Infrastructure Holding Up Well

    Shipments of traditional DSP chips were down again sharply in November (results released 12/31/08). Revenue shipments were down a whopping 33% from October and down almost 49% from November, 2007. Shipments to all regions were down over 30%, including Asia Pacific (Taiwan, China, Korea, and Singapore). All applications were down substantially, with the exception of wireless infrastructure, which was down only a modest 3.4%.

    Cellphone processors, consisting of both DSP basebands and application processors are reported in two major categories by WSTS (cellphone DSPs and cellphone SoCs). Combined, their November revenue shipments were down only 12% from the previous month.

    Overall DSP shipments appear to be headed for a 2008 revenue drop of 14% from 2007. To put things in perspective, the DSP drop in 2001 after the “dot-com” bubble burst was a much worse 24%. So don’t you feel better now?

  5. Many thanks for the great info. I had been pondering in case you could point me in the direction of extra resources?.

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