Patent Wars Complicate Networks Market as NSN Buys Motorola Assets

(May 4 2011) 3G , 4G , LTE

1. by Caroline Gabriel, Research Director, Rethink Technology Research. 

   Nokia Siemens Networks (NSN) finally completed its acquisition of Motorola’s networking activities on Friday, but Huawei, whose lawsuits had helped postpone the event, was already onto a more surprising legal attack – against compatriot ZTE. The smaller of the two Chinese giants promptly hit back with its own countersuits, but is already embroiled in a tit-for-tat round of patent disputes with Ericsson, indicating the intensifying competition in the wireless space, and the players’ desperation to gain a strong IPR foothold in LTE. The fights for market share, and for patents share, are intertwined, and both will define the wireless infrastructure market as it takes on the LTE challenge.

   Huawei chose Europe to file its complaints, which focus on LTE and, specifically, on mobile broadband data cards – ironically an area where the European Commission (EC) has been probing the firms after accusations of dumping. ZTE hit back a day later with a lawsuit in China, citing LTE patents and demanding compensation. ZTE said it would also take action outside China.

   Huawei said its rival had failed to heed various “cease and desist” letters and it had been compelled to file suit, choosing the favorite European center for such actions, Germany, plus France and Hungary. "Huawei was compelled to initiate this action in order to protect our innovations and registered intellectual property in Europe," said Song Liuping, chief legal officer, in a statement. "Our objective is to stop the illegal use of Huawei's intellectual property and resolve this dispute through negotiation so that our technology is used in a lawful manner,” he continued, stressing that patents were “among Huawei’s most valuable assets,” the company having spent $2.5bn on R&D last year and a further $222m on patent licensing fees for third-party technologies.

   Huawei’s high-profile European case, focused on 3G and 4G modems and data cards, was settled last year when it came to an agreement with Belgian specialist vendor Option. However, there could still be wider EC investigations of claims of dumping and price fixing.

   For its part, ZTE said in its statement that it was "astonished" by Huawei’s action and said: "ZTE respects and adheres to international intellectual property laws and regulations without reservation, and absolutely rejects that there has been any patent and trademark infringement."

   It then rapidly countersued, claiming: "ZTE believes the rapid and orderly development of the global telecom industry with innovation is closely related to ZTE’s active involvement and collaboration with many other telecommunication corporations around the world." 

   Meanwhile, the growth in mobile broadband build-out drove Ericsson to beat analyst estimates and treble its first quarter profit. The Swedish firm reported net income of SKr4.1bn ($675m), compared to SKr1.3bn a year earlier, and way ahead of forecasts of SKr3.06bn.

   Revenue climbed about 17% year-on-year to SKr 53bn, also ahead of expectations, with rollout of 3G and 4G networks, to meet rising demand for mobile broadband services, seen as the main contributor. Despite intense competition from Huawei and signs of a rejuvenated challenge from NSN and Alcatel-Lucent, Ericsson is holding on to its market lead, especially in the newer technologies. 

   “The increase in group sales was driven by the networks segment,” according to CEO Hans Vestberg’s statement. “The strong demand for mobile broadband resulted in five out of 10 regions showing growth year over year.” Ericsson expects global mobile broadband subscriptions to double to one billion this year.

   However, there are challenges, particularly to margins. The Swedish giant is announcing a wave of LTE deals, but has been open that most of these – especially outside the U.S. – remain localized build-outs in their first wave and may be heavily financed. A significant boost to revenue will have to wait for 2012 and later, while LTE will never generate the premium margins of the early 3G rollouts, because of budget pressure on carriers, and the consequent need to deliver keenly priced kit from day one. In many cases, cellcos are relying on flexible base stations and commoditized designs to support 4G, squeezing the vendors’ prices and profits.

   However, much of the growth this year in mobile broadband is actually in fairly basic 3G build-out in emerging economies, most importantly India, where margins will be even more pressurized.

   Another storm cloud for Ericsson and its rivals is the wave of carrier consolidation – both in terms of mergers and network sharing deals – which is reducing the number of new network opportunities. For instance, T-Mobile is sharing networks in the U.K. and Austria and selling its U.S. arm to AT&T; VimpelCom is buying Orascom/Wind; Russia’s initial LTE rollout will be based on just one wholesale network, to be shared by all four cellcos. Such ventures are promising multibillion dollar capex and opex savings, which will hit the equipment makers.

   This means Ericsson must spend this year building up its newer revenue streams. The most important is managed services, which is also a key trend among carriers in many markets. The firm is also investing in white label Web service and cloud platforms for operators; multiscreen video; device modules; and most significantly, the expected growth in networks to support machine-to-machine and other embedded wireless devices. 

   As for Ericsson’s main joint ventures, Sony Ericsson had already reported better than expected results by turning in a Q1 net income of €11m, when analysts had predicted a loss. But the chipmaking venture ST-Ericsson reported an increased loss of $178m, widening from $154m a year earlier. Sales shrank to $444m from $606m.

   Always lurking behind Ericsson’s shoulder is Huawei, which said this week that it aims to more than treble annual sales to about $100bn in the next 5-10 years, particularly via expansion in cloud computing and small business networks. The Chinese giant forecasts sales this year will climb to CNY199bn ($31bn) from CNY185.2bn last year, according to Chief Marketing Officer Richard Yu. “Traditional industry boundaries are blurring and the telecommunications industry will be redefined in the next 10 years,” he said at an analyst meeting. “Low cost, huge capability networks will be the industry requirement.”

   However, Huawei is constantly looking for new revenue streams, like Ericsson. This year’s sales growth will be less than half the 24% the company enjoyed last year, as it grapples with appreciation in the Chinese currency, the yuan, plus labor shortages and rising inflation. “The traditional telecom industry market will have a growth in volume that can only support our expansion to about $40bn in annual revenue,” Yu said. “So we are looking to expand our business with enterprise, devices and cloud computing.” The firm is targeting its enterprise and government unit to expand to $20bn in revenue within five years, 10 times its 2010 level, while it aims to increase handset sales from $5bn last year to $20bn by 2016, entering the cellphone top five. 

   Another Ericsson challenger, NSN, turned in a small but welcome surprise profit in its first quarter, though it spoiled the effect by forecasting a low profit level in Q2. The joint venture made an operating profit of €3m, after a profit of €15m a year earlier – analysts had expected a €45m loss. NSN expects Q2 sales to be between €3.2bn and €3.5bn with an underlying operating profit margin of 1% to 4%. Q1 revenue was up 17% year-on-year to $4.34m with growth seen mainly in Greater China, Latin America and Asia-Pacific.

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