With data traffic from video downloads and on-the-go web surfers clogging up telecoms networks, mobile equipment makers such as Alcatel-Lucent and Nokia Siemens Networks should be booming. But while iPhone-maker Apple Inc's shareholders are waxing rich on a communications revolution driven by smartphones and tablet computers, those who make the infrastructure for the information superhighway are being squeezed.
Telecoms operators have to spend billions to upgrade to super-fast, high-capacity, fourth-generation (4G) networks designed for video and data traffic, but the overall equipment market could actually shrink as they trim budgets for the slower 2G and 3G networks designed mainly for voice traffic.
This unhappy paradox of the telecom equipment sector has chased away shareholders and could force further consolidation to eliminate some of the current five global players.
The impact of low-cost Chinese competitors Huawei and ZTE is partly to blame, such that 4G technology commands little price premium, and struggling telecoms operators are wringing harder bargains from suppliers such as market leader Ericsson.
"Ericsson's 4G sales are going to expand very strongly in the coming years, but the drop in sales in GSM and 3G will be bigger than the growth in 4G," said Martin Nilsson, analyst at Handelsbanken.
Handelsbanken reckons spending on 2G, 3G and 4G network equipment combined will shrink to $45 billion a year by 2020, down from around $59 billion in 2011, even as 4G spending grows to more than half the total.
DATA SURGE
Data traffic overtook voice in early 2009 and is expected to be 15 times today's level by 2017, according to Ericsson, when there will be 3 billion smartphones in use, up from 700 million.
To cope, operators are expected to spend $15 billion this year on upgrading networks to make them 4G ready, a ccording to Exane BNP Paribas. Next year, spending will reach $26 billion.
But as with the evolution of personal computers, each new generation of network does more for less. Cut-price Chinese competition and technological advances have pushed prices down 10-15 percent a year in recent times, cancelling vendors' volume growth and efficiency gains.
As a result, the mobile network infrastructure market is hardly any bigger than the roughly $55 billion it was in 2000, despite huge increase in mobile phone subscriptions, mobile broadband use and smartphone sales. "It hasn't grown in 12 years, despite the explosion of traffic we have seen over that period," Handelsbanken's Nilsson said. "3G has come in, and 2G has dropped out. It is the same thing that is going to happen now."
STATIC BUDGET
In 2009 Nordic operator TeliaSonera led the world to roll out commercial 4G services. Now two in three Swedes has access to 4G at home. In Denmark it's three in four.
"It has happened within the existing capex budget," said Hakan Dahlstrom, president of TeliaSonera's Mobility Services unit. While Telia expects a huge surge in data traffic, Dahlstrom doesn't see the company's investment budget increasing.
"As it is today, there is spare capacity in the 4G network," he said. Outside the Nordic region, operators in North America, Japan and Korea have also been early adopters, but Ericsson reckons that only 5 percent of the world's population had access to a 4G network in 2011.
But many operators are likely to implement 4G gradually, upgrading 3G networks with 4G-ready technology, or rolling it out only in urban areas, and spending plans could slow if economic conditions don't improve.
INDUSTRY SLUMP
Regulatory pressure, competition and economic uncertainty have taken their toll on the industry for years.
Nortel Networks collapsed in 2009, and Motorola left the sector. Nokia and Siemens merged their equipment units in 2007, in search of critical mass, as did Alcatel and Lucent in 2006.
Over the last decade, Ericsson's shares have flatlined, while Apple stock is up 6,600 percent. Alcatel-Lucent's have dropped 90 percent since the merger.
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