Earlier this morning Franco-American telecom giant, Alcatel-Lucent, gave CEO Pat Russo and Chairman Serge Tchuruk the proverbial boot after the company reported a disastrous quarter, missing its earnings and revenue targets. The company says they resigned – which is utter rubbish because in this day and age, no one gives up megamillion-euro pay packages just because they’re feeling pious.

Much of the blame was put on macroeconomic factors and the wireless industry’s transition from CDMA to WDCMA. The company tried to point to a silver lining on the horizon (2009), but somehow it feels like wishful thinking.

Today’s turn of the events not only highlights the folly of the unlikely pairing – the worst since Billy Bob Thorton hooked up with Angelina Jolie – it also points to a larger, much deeper problem facing the telecom equipment makers in the West.

Too Many Sellers, Too Few Buyers

At the time the deal was announced in April 2006, I had pointed out that the merger of Alcatel and Lucent was driven primarily by the lack of market control by equipment vendors. As carriers continued to consolidate, most equipment companies have lost their pricing power and have been left to snivel like lowly serfs in front of industry powerhouses such as AT&T and Verizon.

In November 2007, I spoke with Krish Prabhu, the then-CEO of Tellabs, who lamented how carrier consolidation was crushing smaller players like his company. Troubles at Motorola and Tellabs are part of the same trend that has besieged the industry. Nokia Siemens, Nortel and others are also struggling to find a strong footing in what seems to be a quicksand hidden by hot tar.

At the same time, the industry is coming under sharp attack from low-cost Chinese vendors that are essentially subsidized by various governmental entities. By playing the cut-price game, they have won key contracts in fast-growing Asian, African and Latin American markets, and recently have started to mop up in Europe.

The presence of ZTE and Huawei has helped carriers squeeze blood out of a stone and destroyed the money-making potential of Western equipment makers. Companies like Alcatel-Lucent don’t really have much flexibility – they have huge cost bases that include R&D, manufacturing and little ability to play the price game in the rapidly growing Asian markets. If these deflationary forces were not enough, some of these companies are just not prepared for the rapidly changing needs of today’s networks.

The world has gone all “IP” and the needs of telecom operators, especially the new ones with big wallets in Asia, Africa and Latin America, have evolved accordingly. The State of The Telecom Market

The troubles of these companies come at a time when the sales of equipment to service providers and enterprises are going up, totaling $139 billion in 2007, up 13 percent from 2006, according to Infonetics Research. The research firm is predicting total equipment sales will climb to $174 billion in 2011.

Unfortunately, most of the sales are coming in areas where large incumbents such as Alcatel-Lucent have marginal presence. For instance switches, routers and IPTV gear continues to do well, as does demand for fiber broadband-related equipment. (Alcatel-Lucent has been doing well in GPON, but has seen its DSL sales slow down and profits evaporate, thanks to competition from Huawei.) China and India are beginning to account for a much more substantial part of the worldwide capital expenditure.

What makes the situation worse for Alcatel-Lucent is that they blew up in middle of an investment cycle. Why? Because the cycle has hit a plateau in North America and Europe, according to Infonetics Research. In China and India, the Chinese equipment makers are cleaning up. The growth in those two economies, much like rest of the emerging economies, is coming from the mobile buildout and lately, from WiMAX demand as well.

According to Infonetics Research, Cisco was the largest company in 2007, followed by Alcatel-Lucent. In the telecom sector, an increasingly resurgent Ericsson is running neck-to-neck with Alcatel-Lucent, which explains today’s disaster. What Next For Alcatel-Lucent?

The shuffling of management doesn’t really address or fix the structural issues of this company specifically or industry at large. Earlier this week, there was a story in the Wall Street Journal about Alcatel-Lucent’s move into the services business. I am sure that’s going to work out eventually — they reported $1.3 billion in service-related revenues this quarter — but in the long run they would have to buy their way into the market. Alcatel-Lucent could acquire Cognizant, a telecom industry services company, but for that they would have to give up more than half of their company. And even that isn’t going to fix this company’s structural and fundamental problems.

Too bad, for at one time Alcatel looked like the king of the telecom hill. By buying Lucent it turned that hill into a heap of scrap. I think this company is headed in the same direction the relationship of Thornton and Jolie went: south.

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Posted by Om Malik on GigaOM  |  Permalink  |  15 Comments
Tags: Alcatel-Lucent, CDMA, Cisco, Huawei, India Telecom, Nokia Siemens Networks, Nortel, Pat Russo, Serge Tchuruk, Tellabs, WCDMA, ZTE Corp

Coming soon in India – world’s fastest growing mobile market – 3G services by the dozen. And what that means is a looming free-for-all in a market where competition is already fierce, prices super low, profits even lower and consumer is the ultimate winner.

Indian Department of Telecommunications (DOT) is getting all set to introduce about a dozen 3G licenses in some of the more densely populated regions including the South Indian states of Andhra Pradesh, Tamil Nadu (including Chennai), Karnataka, and Kerala. The information comes to us from our friends at Packetology, a Telecom research firm focused on the Indian market.

Other states getting 3G will include North Indian state of Haryana (right next door to Delhi and home to many outsourcing outfits), while ten licenses will be up for grabs in Kolkata (Calcutta) and Madhya Pradesh. In other large markets such as Mumbai (Bombay) and Delhi, the number of licenses available be far fewer because the available spectrum is in limited quantities. Delhi will have only four licenses while Bombay can accommodate upto eight licenses.

According to initial DOT 3G policy, each carrier was going to get 5 MHz of spectrum and only 25 MHz of total spectrum was available. However, more spectrum has become available, hence the boost in the number of players who can bid for the spectrum.

The availability of such a huge amount of spectrum and licenses makes India one of the few unique places to have aggressive and highly competitive 3G market from get go. Most countries have between 2-to-5 players. UK has five, US has four, Brazil has four and most Asian countries have two or three. With this kind of liberal licensing of spectrum, and the existing 2G operations in place, some regions might get over a dozen operators offering phone services.

Thanks to fierce competition in the 2G services, India continues to be one of the fastest growing mobile markets – about 300 million at last count – mostly because prices are seriously low. Still, the presence of such a high number of players makes you wonder if there will be anyone who will be able to make money. The looming WWF style competition is going to keep large US and European carriers out of the market, though there has been news that AT&T and Verizon are very keen on entering the Indian market.

The new 3G players in India will be looking to build their networks very cheaply in order to compete and offer ultra low prices to end consumers. This would mean despite a huge buildout, companies like Siemens, Nokia, Nortel, Alcatel-Lucent and others should forget about making any real profits. The Chinese vendors – Huawei and ZTE – can mop-up, because they are willing to sell at a loss in their bid to gain market share. Infonetics Research, a Campbell, Calif.-based market research firm recently said that China and India are two major drivers of telecom equipment sales.

So who wins in this? Qualcomm & Nokia! The spread of 3G technologies brings a lot of royalty money into Qualcomm’s coffers. Similarly, Nokia is the strongest mobile brand in India and has a 3G portfolio of phones to match.

The big question that looms large in my mind: by introducing so many players in the market, is DOT killing the golden goose? In other words if there are too many players – dozen odd – and no one is making money, it would (and could) lead to a situation where they start shutting down. It could in the end the competition would decline and might result in an increase in prices. 

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Posted by Om Malik on GigaOM  |  Permalink  |  29 Comments
Tags: 3G Wireless, CDMA, Ericsson, gsm, Huawei, India Telecom, Nokia, Qualcomm, Siemens, WCDMA, ZTE Corp

Indian incumbent BSNL plans to spend about $750 million on a nationwide WiMAX network that will primarily target rural areas and small towns and cover a sixth of the country’s ever-growing population. This has to be one of the largest WiMAX rollouts anywhere on the planet.

The funds for the first phase of deployment are coming from a universal service fund set up for broadband access. BSNL will roll out the WiMAX network in large cities later as a separate buildout. The initial network will connect schools and telephony kiosks in villages.

The state-owned incumbent that is often the target of choice four-letter words because of dropped calls to my parents in Delhi has been dabbling with WiMAX for a while now. The announcement comes close on the heels of the Indian government clarifying its 3G policies.

The primary beneficiaries of this new network are going to be local WiMAX gear maker Telsima Networks, Aperto and Cisco-owned Navini Networks. India is fast becoming a big WiMAX testbed. From Intel, Alcatel-Lucent to small startups, all are betting on the WiMAX rollouts promised by incumbents and private sector players such as Reliance and Tata.

Wireless technologies seem to work well in India vs. wired broadband, which is popular in other fast-growing telecom markets such as China. Maybe it is easier and faster to roll out wireless infrastructure and start making money.

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Smartbook No More — What Should We Call Them? jkOnTheRun – by James Kendrick "; Dealing With the Avalanches In Life and Business WebWorkerDaily – by Amber Riviere "; Inbrics Android MID with QWERTY Slider Coming to CES jkOnTheRun – by Kevin C. Tofel "; MacGraPhoto Bundle: Grab 7 Graphics Apps for Cheap TheAppleBlog – by Darrell Etherington ";

Posted by Om Malik on GigaOM  |  Permalink  |  22 Comments
Tags: BSNL, India Telecom, WiMAX, Wireless Broadband