The expected entry of communications equipment giants with their own systems into the mobile WiMAX (IEEE 802.16e wireless broadband standard) market is liable to force Alvarion (Nasdaq: ALVR; TASE: ALVR) to accede to its own acquisition in the next few years. Alvarion has been claiming for a long time that the company is not for sale, and that it aspires to compete with the giants, and become a large company in its own right. At the same time, industry sources believe that, very quietly, behind the scenes, the company is considering a possible acquisition.
Alvarion supplies systems for fixed wireless broadband communications for areas that lack land-line infrastructure. The company currently supplies both non-standard wireless-local-loop equipment, and fixed WiMAX standard equipment. Once the mobile WiMAX standard is closed, it will facilitate broadband wireless communications on the move. The main target markets for mobile WiMAX will be the developed countries, mostly Western Europe and the US.
Over the next 5-7 years, the mobile WiMAX market is expected to reach a total of $10-20 billion. This huge potential is leading the equipment giants to develop internal WiMAX systems. For this reason, market sources believe that, once the mobile WiMAX standard is closed, all the major communications equipment manufacturers will enter this market, including Ericsson (Nasdaq: ERICY; SAX: ERIC), Lucent Technologies (NYSE: LU), Alcatel (NYSE: ALA; Paris: CGEN), Siemens (NYSE: SI; XETRA: SIE), Huawei, ZTE and others. These sources say that the vast majority of equipment giants will prefer having their own mobile WiMAX systems to depending on original equipment manufacturers (OEM) suppliers.
If and when this happens, the main consideration for communications operators in buying a mobile WiMAX solution will be economies of scale. It can be assumed that they will prefer buying WiMAX equipment from the large vendors. The question now arises where these developments leave Alvarion.
There is no doubt that Alvarion will reach the mobile WiMAX market with considerable capabilities. It has leading technology, an extensive customer base, and its management has proven its long term execution ability. Alvarion also recently won the 2006 World Communications Award for Best Technology Foresight. Despite all this, the expected developments in the mobile WiMAX market present Alvarion with an enormous challenge.
Limited land-based growth potential
If Alvarion is not acquired, it will have to find its way among the giants, and that will be no simple task. It is reasonable to assume that the company will have to find sufficiently large and profitable niches within the mobile WiMAX market that can be defended, and which the large companies will not find it worth their while to enter. One example is mobile WiMAX for cable companies.
Alvarion currently controls the fixed WiMAX market. In contrast to mobile WiMAX, the fixed WiMAX market is expected to continue as a niche market, in which the main players will continue to be Alvarion, Airspan Networks (Nasdaq: AIRN), and other medium-sized companies. The problem is that this market is fairly small, and is expected to reach only $1-2 billion in a few years. The growth potential that it generates for Alvarion is therefore small.
Furthermore, Alvarion currently cooperates (through OEM agreements) with Lucent and Alcatel in fixed WiMAX. Communications giant Motorola (NYSE: MOT), Alvarion’s largest competitor in the non-standard fixed wireless market in North America, passed over fixed WiMAX, which it regards as a small niche market without significant opportunity.
Nortel Networks (NYSE, TSX: NT) and Ericsson have cooperation agreements in fixed WiMAX with Airspan. Siemens, one of Alvarion’s partners in non-standard fixed wireless communications, is apparently planning to develop its own fixed WiMAX systems. The number of partners for cooperation in this field is therefore limited, and it appears that the same is true of Alvarion’s ability to growth in the field in the future.
Alvarion’s major growth is due to come from the mobile WiMAX market. However, the company’s chances of gaining a substantial share of the Western European and US mobile WiMAX market, where the major potential is, are very small. Alvarion lacks the marketing, sales, and support capabilities that the major companies have.
The giants’ considerations
Even if Alvarion decides that it wants to be acquired, it won't be easy. One of the main obstacles to acquisition is liable to be the price. Alvarion’s market cap is nearing $450 million. At this stage, it is not known if there are communications equipment vendors who are seriously considering the possibility of acquiring Alvarion. The considerations for and against such an acquisition, however, can be calculated for most of the equipment giants.
Nortel announced cooperation with LG Electronics Mobile Communications Company in mobile WiMAX, although it is not clear what stage development has reached. In addition, Nortel is also cooperating with Airspan in fixed WiMAX. The chances that Nortel will acquire Alvarion are therefore not great. Motorola plans to reach the mobile WiMAX market with an internal product, and development is in full swing. Ericsson has a strategic cooperation agreement with Airspan, as well as its own expertise in wireless communications. It is therefore reasonable to assume that it will want to develop its own mobile WiMAX system. At the same time, it is not clear what stage its development has reached, so the possibility of Ericsson acquiring Alvarion cannot be ruled out.
Alcatel, which has an OEM agreement with Alvarion in fixed WiMAX, has announced that it plans to develop an internal mobile WiMAX system. Siemens is ostensibly the best candidate for becoming the owner of Alvarion, particularly because its infrastructure lacks the radio section (the communications element transmitted through the air). At the same time, Siemens’s current financial situation is quite poor, and the company is closing sites and projects. It is not clear whether it can spend $450 million on acquiring a company.
Nokia (NYSE, LSE, HEX: NOK), with which Alvarion has been negotiating an OEM agreement in mobile WiMAX for a long time, does not appear to be a likely candidate to acquire Alvarion, mostly because Nokia acquires very few companies. On the other hand, Nokia is entering the WiMAX market relatively late, so it cannot be altogether ruled out that it might want to acquire Alvarion. The chances, however, are not great.
The main consideration in favor of one of the major companies acquiring Alvarion is the latter’s leading technology, which has already proven itself in fixed WiMAX. Alvarion does not yet have a mobile WiMAX system (the standard has not yet been closed, and therefore none of the manufacturers has mobile WiMAX yet), but development is going ahead at full speed. Since Alvarion already has good technology for fixed WiMAX, market sources believe that it has an advantage over the others in developing a mobile WiMAX system.
It is very possible that some of the major communications equipment vendors that have not yet begun development will prefer acquiring a company with a solid technological basis to starting development of a system from scratch. It appears that the decisive question in this matter is how fast the equipment players can develop internal WiMAX systems, and how much it will cost to do so, compared with the cost of acquiring Alvarion.
Niche markets
If Alvarion continues operating as an independent company, it will have to find niches in the mobile WiMAX market that will not be worthwhile for the giants to enter, and in which it will have a great advantage. Sources close to Alvarion claim that the portable WiMAX market could be one such niche. This consists of devices that can be hooked up to a wireless modem from anywhere, but which are effective when stationary, not in rapid movement (in contrast to mobile WiMAX, which is designed for broadband communications transmission on the move). These devices are expected to answer a large part of the demand for mobile WiMAX.
Another niche is cable companies wanting to enter the mobile WiMAX field, which will need special adaptation. A third niche market consists of operators interested in scalable networks, starting with a limited deployment of their network, and expanding it later, according to the number of subscribers.
Alvarion’s advantages include its being first in the field, its innovativeness, and its quickness, which are characteristics of a smaller company. Another advantage is its focus on WiMAX, while the communications giants also sell 3G wireless equipment. Budget conflicts can arise between the group in a major vendor that sells mobile WiMAX equipment and the group that sells 3G wireless equipment.
Furthermore, sources close to Alvarion assert that, at this stage, it still cannot be determined with certainty whether all the major equipment makers will want to sell their own systems. They say it is possible that, in the end, at least some of them will want to operate through OEM agreements. In addition, the operators may want to work with more than one equipment vendor.
The sources added that when the DSL market began, for example, all the major equipment vendors announced that they planned to enter it with their internal systems. Eventually, Alcatel was left in control of the market, with a few additional smaller players. Keep in mind, however, that the small DSL players have several product lines, while Alvarion operates only in WiMAX. It is also entering the compact cellular antennae field, but that is a very limited market.
Falling prices for systems
The process of making all the manufacturers’ fixed WiMAX equipment compatible is slated for completion sometime in 2006. After that, WiMAX equipment made by every vendor will work in combination with equipment made by every other vendor. For example, a base station of one vendor will be fully compatible with both a base station of another vendor and end-user devices of a third vendor. Since all the systems work according to the same standard, operators will be able to choose whatever vendor they want for all purchases of new systems.
This trend is expected to significantly lower prices for fixed WiMAX systems. Lower prices will increase the number of systems sold, but it is not clear whether it will increase or decrease the revenue of the companies making these systems. The answer to this question depends on the number of systems sold, and on the elasticity of demand.
Fixed WiMAX equipment is designed for operators who provide fixed wireless communications in rural areas that lack infrastructure. Currently, these operators provide non-standard wireless communications systems. In the absence of a standard, all operators become captive customers of the first vendor from whom they buy a system, because the equipment of a different vendor will not work with the equipment that they already have. Operators wishing to buy equipment from a different vendor must therefore replace all the systems working on their networks.
Alvarion declined to comment on this report.
Published by Globes [online] - www.globes.co.il - on November 21, 2005