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.