By Magnus Hansson
Of DOW JONES NEWSWIRES
STOCKHOLM (Dow Jones)--Europe's big telecommunications equipment makers are leading the global race to combine telecom services with Internet-based multimedia networks and more consolidation is expected, telecom company executives say.
"In the industry for years we have been talking about consolidation - and now over the last months we really see something happening," said Jurgen Walter, head of strategy at Germany's Siemens AG's (SI) Communications unit. "We will continuously see M&A in the telecom space, particularly when it comes to smaller companies."
On Thursday, shareholders of France's Alcatel SA (ALA) and Lucent Technologies Inc. (LU) of the U.S. will vote on a merger that, among other things, brings Lucent's network integration know-how to Alcatel's fixed-line and wireless operations.
The expected tie-up highlights a shift in focus for telecom companies toward new streams of revenue, such as Internet and entertainment services, as more traditional fixed-line revenues decline amid increasing competition. To introduce these new services, operators need to upgrade networks with new technology.
Alcatel last week announced it would buy Nortel Networks Corp.'s (NT) third-generation access network - a series of technology assets and patents that underlie mobile phone networks - to add bulk to its own assets in a bid to become a major player in the market.
In June, Finland's Nokia Corp. (NOK) and Siemens agreed to combine their telecommunications infrastructure units into a jointly held unit operated by Nokia and in January, Sweden's Telefon AB LM Ericsson (ERIC) finalized its SEK16.8 billion ($2.3 billion) acquisition of U.K.-based, mainly fixed-line telecommunications equipment maker Marconi.
The new combinations would make Alcatel, Ericsson and Nokia the world's top three producers of telecommunications network equipment in terms of revenue, looming over U.S. and Asian competitors.
Industry observers expect consumers to increasingly use so-called "quadruple play" packages that bundle fixed-line voice telephony, broadband Internet connections, cable TV programming and mobile telephony services.
The price of falling behind is high. A recent report by Moody's Investor Service projected that fixed-line voice revenues in Europe alone would be less than EUR60 billion by 2011 from over EUR100 billion in 2001.
U.S. market researcher IDC of Farmingham, Ma. sees worldwide broadband Internet subscriptions nearly doubling, expanding to nearly 400 million by 2010 from a little more than 205 million in 2005, and add-on services, such as Internet television, will fuel the rise. Another U.S. researcher, Multimedia Research Group, forecasts revenues from Internet TV rising to nearly $10 billion in 2009 from $880 million last year.
U.S. telecom operators haven't been idle.
In May 2004, U.S. telecom operator Verizon Communications Inc. (VZ) began a large-scale deployment of fiber-optic technology to individual homes and businesses, replacing the copper wires that connect customers to the Verizon network today. Called fiber to the premises, or FTTP, the new technology delivers significantly higher capacity to accommodate high-speed Internet access, voice communications and a suite of video services.
"We're going through a huge transformation in our business which is unprecedented," said George Dowell, vice president of supply chain services at Verizon which invested close to $15 billion last year to upgrade its networks and introduce new services.
New technology based on so-called Internet Protocol, or IP, has made it possible for new telecom operators and companies from other industries to enter the voice communication market while at the same time offering new data and entertainment services.
Most consumers still typically buy fixed-line telephony, mobile telephony, broadband Internet connections and cable TV programming from separate providers, but both operators and equipment vendors are positioning themselves for the changes that are expected to come.
"Consumers have not yet made their choices," said Chris Dedicoat, president of Cisco Systems Inc.'s (CSCO) European operations.
Cisco's largest business is selling networking equipment to corporate users but around 25% of sales now go to telecom operators and other service providers, a figure that has steadily risen over the past years.
The changes are set to pitch old incumbent telecom operators against newer alternative telecom operators, cable TV companies and in some cases Internet companies such as Yahoo! Inc. (YHOO) and Google Inc. (GOOG).
Older telecom operators, like Verizon and Europe's France Telecom SA (FTE) and TeliaSonera AB (TLSN.SK) are fighting back, distributing TV, music and other content over their networks under their own brand names. Many operators aim to combine their wireless and fixed-line networks to offer integrated voice, data and entertainment services.
For telecom operators and other network owners, the entrance of Cisco and other data networking companies means an increased choice of equipment suppliers in a market traditionally dominated by the likes of Alcatel and Lucent.
"There are new suppliers coming from related industries (such as Cisco) and also from other geographies," said Haakan Dahlstroem, chief technology officer at Stockholm-based TeliaSonera, the incumbent telecom operator in Sweden and Finland.
These new suppliers, which include companies such as China's Huawei Technologies Co. (HWI.YY), can often deliver attractive new products at competitive prices, Dahlstroem said.
Further consolidation is expected as increasingly complex networks are needed to deliver the new integrated multimedia services and more competitors fight for the same market.
"When we move into 2007 and 2008 it's going to be extremely important from a marketing and sales point of view to get the right positioning in order to really leverage a larger R&D machine," said Johan Bergendahl, Stockholm-based vice president of marketing at Ericsson.
Ericsson's acquisition of Marconi strengthens its fixed-line equipment division and prepares the company for the convergence of fixed and wireless telephony. Ericsson's largest business is systems for wireless networks, accounting 79% of its revenue in 2005.
Analysts say future merger candidates could include Nortel, Motorola Inc. (MOT) and Huawei, major players that have become dwarfed by European link-ups this year.
Huawei and Motorola in July said they would form a joint venture around third-generation wireless technology, preferring strategic partnerships rather than seeking acquisition targets.
Some operators are going a different route. Nortel, for example, claims it has a viable strategy to survive without being bought. George Riedel, Nortel's chief strategy officer, said it's enough to concentrate on specific segments rather than trying to supply services across the board.
"You can still be relevant, you can still be serving the needs of some of these customers, but maybe not the whole opportunity," Riedel said.
However, smaller operators, particularly in emerging markets, are likely to use equipment suppliers to build, maintain and develop their networks.
"We choose suppliers mainly on a long-term strategic partnership basis," said Manoj Kohli, president of Indian telecom operator Bharti Airtel Ltd. (532454.BY). Bharti's key suppliers are Ericsson and Nokia which also manage and develop designated parts of the operator's network.
"The global trend is that operators are moving towards asking more from the supplier," said Olivier Baujard, chief technology officer at Alcatel.
"In two to three years, I believe the number of companies that can position themselves as end-to-end providers will be three to five. If we move fast maybe there will be only three and not five," Baujard added.
-By Magnus Hansson, Dow Jones Newswires; +46 8 545 130 91, firstname.lastname@example.org
(END) Dow Jones Newswires
September 06, 2006 01:46 ET (05:46 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.
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