This week Alcatel-Lucent ceased operations as an independent company and is now part of Nokia. I competed for many years against Alcatel, especially their Broadband Access Unit. They were tough competition and worked very hard to keep AFC at arms length. Now Nokia is back to being the large carrier supplier of Access Gear in North America. I find it interesting that the companies that want to crack Verizon and AT&T never call any of us that beat Alcatel to help them do the same. Be that as it may, this transaction is yet another harbinger in the changes in the market. These changes have ramifications for consumers and we will talk about them here.
Both at AFC and at Tellabs, we were aware of this ongoing trend of consolidation both in the carrier business and in the equipment business. This has extended itself to the semiconductor business. I posted a bit about this but want to use Alcatel-Lucent as an example and give some views to what it means. The first thing is the change to price cap carriers from rate of return. When carrier pricing was based around rate of return, it made sense to gold plate the network. This would grow the “rate base” and thus the return allowed by price changes. In those days (even in 2000 this was a bit of an issue), the regulators (particularly at the State Level) were more interested in keeping prices down instead of encouraging investment. The whole way people thought about CAPEX was different than it is today. Let’s use Voice over IP services as an example. These products are slowly working their way into the Telephone companies. Essentially at the rate of retirement of older TDM switches. Why is that? Because the TDM switches are paid for and no equipment is cheaper than equipment that is already paid for. But the bigger impact is that once a spot in a network is filled, it is not rebid. In the old days, it was typical for network equipment to be rebid every 3 – 5 years. This means that there is no entry point for new players into existing markets. Once products are chosen, the book is closed and then things move on. This means investment in Systems products (and y extension Semiconductor products) has gone up in both risk and potential reward. Go big or go home, because their is no second place. Ask the former Motorola PON team about its experience in FiOS. They got 5% or so market share. Not enough to make any business out of.
The only reaction to this is vendor consolidation to limit the risks. Large institutions can have more swings and misses than smaller ones. We see that trend now with their being fewer and fewer firms. The firms that remain are also larger. When is the last time that a Communications Equipment startup went anywhere? Was it Juniper? This combined with the fewer new pieces of silicon means that the industry is headed to having all carriers offering the same things. The ideas of Software Defined Networking (SDN) and Network Function Virtualization (NFV) are supposed to be the new drivers based on creating new carrier products and services. I am highly skeptical about these. The reason is that I spent time in the Software as a Service (SaaS) world and saw how we thought about bandwidth. It was all the same and our customers needed generic IP access to our service. We built an overlay for our own needs (a private network on top of the layer 3 network that we had access to). Because of this flat view of the network and the availability of large scale Open Source Software, a handful of Software Engineers can make new things very quickly. They don’t even need to buy an infrastructure, as they can rent one from a player like Amazon Web Services (AWS). This means that there is a huge number of new and innovative services coming to market every day. This is where the innovation is and a big company like an ISP simply can’t keep up, nor should they try. They just need to enable these new providers.
Where does this bring us on Alcatel-Lucent? Well, they like other players were caught with some winners (Broadband Access and IP Networking) and a number of losers. It made sense to combine with a company with other winners and be stronger overall. If you want to see this play our in another market, take a look at the Commercial Aircraft Business. Where there were a dozen or so suppliers there are really now 2 major suppliers and a number of niche suppliers. Then compare it to the Communications Equipment Business. You will see many parallels!
Have a great weekend.
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