Operators squeeze 3G suppliers

Contract! What contract?

ComputerWire: IT Industry Intelligence

Cash-strapped wireless carriers in Europe are now renegotiating 3G equipment contracts and have driven prices down to half the level of two years ago, according to a senior executive of Alcatel SA.

The comments by Marc Rouanne, the head of the Paris, France-based company's mobile networks unit, plunged the whole sector into gloom with Nokia Corp's shares dropping 3.6%, and LM Ericsson Telefon AB's falling 5.3% in anticipation that earnings will be squeezed by the price cuts. But with mobile operators across the continent weighed down with debt and the cost of 3G licenses, the idea of driving down prices for equipment is a hugely appealing one.

Rouanne told the Swedish daily Dagens Industri: "We have been contacted by all the large 3G operators in Europe, with one exception, and asked for offers on equipment. Each time a large operator goes out on the open market and asks for offers, prices are pressured a bit more. This has led to prices falling to less than half of the levels negotiated in the earlier 3G contracts from about two years ago."

He said that Alcatel had no choice but to cut its prices in line with the rest of the market, including in the case of already agreed deals. Given that Alcatel is a tiny player in mobile networking equipment, and only claims a 5% to 7% share in 3G equipment, his comments may well be a calculated attempt to persuade operators to ditch existing suppliers and negotiate a more competitive deal with Alcatel.

Certainly, speaking in the backyard of LM Ericsson Telefon AB, Rouanne could not resist the jibe that Ericsson's prices are too high. He claimed that talks underway would give Alcatel contracts in the Nordic region. "The talks concern both new contracts and deals that had earlier been awarded to other suppliers and are now being renegotiated," he said.

By coincidence, the logic of a price war between suppliers was taken up by Valentin Chapero, president of networks at Siemens AG Information and Communications Mobile unit, who said consolidation in the industry is unavoidable.

"If you look at the market share distribution, which shows five companies with 10% to 12% market share each, that's a typical pattern for market consolidation over the next 18 to 24 months," he told a Deutsche Bank technology conference. "It's such a high investment business that there will be consolidation. It's a question of how long the parent companies can suffer the pain."

A glimmer of optimism was offered by Nokia Corp, whose CFO Olli-Pekka Kallasvuo told the same conference that growth will re-accelerate next year. "China has great upside as has the US with WCDMA," he said. He denied rumors that Nokia's first MMS handset, the 7650 would be delayed due to pre-production problems. He insisted that the handset, with a color screen and built-in camera will be on the market next month.

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