On June 19 Alcatel-Lucent’s new CEO Michel Combes announced the company’s latest strategy to turn around the faltering network equipment vendor. Dubbed “The Shift Plan,” in broad terms it changes the company’s focus from being a network generalist to focusing on IP networking and mobile and fixed ultra-broadband access technologies. While the merits of the full plan warrant a discussion all their own, here we are analyzing the impact of the Shift on the company’s wireless division. For 2012, wireless accounted for approximately 23.6% of total corporate revenues – only the services division had a higher revenue contribution (27.9%) for the year. The new plan essentially focuses the company on areas of the wireless market where it has had success and sees growth, and pulls back in areas of decline and where it has limited footprint.
Pullback on CDMA, GSM, and WCDMA reflects market position
Alcatel-Lucent’s rationale for moving away from the CDMA and GSM space is obvious: neither area has much promise for future revenue growth. Ovum expects the CDMA market to decline by double digits every year from 2013 through 2018. While Ovum doesn’t have a specific GSM forecast, we believe it is declining at a similar rate, giving way to 3G (WCDMA/HSPA) and LTE.
Alcatel-Lucent’s de-emphasis of WCDMA does appear questionable on the surface as there remains near-term growth in that market. However, the vendor has never been particularly successful in selling WCDMA networks, so this move is really an admission that at this stage of market development it doesn’t believe it can improve its market position. This doesn’t mean Alcatel-Lucent is completely abandoning CDMA and WCDMA – where the company has ongoing contracts, such as with Sprint in the US for CDMA, it will fulfill those obligations. But it rightfully doesn’t see much value in putting its resources into expanding offerings in those areas.
Network overlay is the way forward for LTE macro cells
While pulling back on CDMA and WCDMA, the vendor sees its big macro cell opportunity coming from operators looking to deploy LTE as an overlay network, not as a converged network. With a converged network an operator would be looking to upgrade its existing 2G/3G network to support LTE. Given Alcatel-Lucent’s limited WCDMA success, this obviously leaves the vendor out of many opportunities where the mobile operator wants to deploy LTE as part of a single RAN converged network.
Instead the company thinks its best opportunity is to sell LTE as an overlay network. With a network overlay, LTE is deployed as a separate network that resides on top of an existing 2G/3G network. Alcatel-Lucent estimates that two-thirds of the world’s LTE capex spend will be for overlay networks, not converged networks. Ovum certainly feels this figure is up for debate, but even if the two-thirds figure is correct, it does mean the vendor has removed itself from pursuing around one-third of the market.
Focus on small cells, although meaningful revenue contribution will not be immediate
With small cells Alcatel-Lucent will continue to support 3G along with LTE. The reason for this has to do with small cells being more of an underlay network – small cell networks reside “under” the macro cell layer. Also small cells are a relatively new market opportunity, and one that requires both 3G and LTE support.
Alcatel-Lucent’s LTE-only focus applies to macro cells, not small cells. As an early leader in small cells, the vendor believes it is well positioned to capture a significant portion of the small cell opportunity as the market matures. It already has wins with Verizon Wireless, AT&T, and Sprint. However, Alcatel-Lucent does not expect small cells to be a significant revenue contributor for several years: under its current three-year plan, it will be 2015 before small cells’ revenue contribution to the wireless division will be in the 10–20% range.
The challenge here for Alcatel-Lucent, as it still wants to grow revenues even during this Shift, is to get its LTE and small cell revenues to offset its declines in the wireless areas it is de-emphasizing. One key to this will be for the vendor to sell small cells into operators where it isn’t the incumbent macro vendor. This won’t be a small task, but it did recently win a contract with StarHub (Singapore) for small cells despite not being the macro vendor, so it can be done.
Geographic focus not as narrow as previously thought
When the Shift was announced, it sounded as if Alcatel-Lucent’s wireless ambitions were going to be limited to the US, China, and its home market of France. This, however, is not the case. Instead those markets serve as examples of where the vendor has already had success with network overlays and small cells. It plans to take lessons learned from those markets to help guide it in targeting other opportunities.
Of course this means that in regions such as Western Europe, where converged networks are popular, the company will not be as active. However, it reports that some operators in that region such as Telefonica are becoming more open to deploying LTE as an overlay. Furthermore, in areas where Alcatel-Lucent has no existing presence or relationships, the vendor will be conservative about committing resources even if the market fits its new more focused wireless strategy. Investing in regions where it has little chance of winning doesn’t fit the Shift’s goal of profitable revenue growth.
