We’ve all seen the tantalizing curve that represents the mobile data explosion. A good example is that Cisco report from last February projecting 18-fold increase in mobile data traffic between 2011 and 2016. Another is that Ericsson piece projecting tenfold expansion in mobile data traffic by 2016. Anyway, huge growth; and much of it driven by smartphones and funneled through mobile networks.
Since Motorola and Nortel were knocked out of the next-generation mobile infrastructure market, the list of likely benefactors from rapid mobile data growth is short. Ericsson and Alcatel Lucent have a lock on LTE deals with many of the biggest operators across North America, Western Europe and Asia. Huawei and ZTE are challenging the Western leaders, but surely the ongoing data explosion is so massive it can drive profitable growth for a couple more vendors, right?
That is the trap many investors have walked into over the past two years — and what a murderous meat grinder the network sector has turned out to be. Following yet another profit warning today, Alcatel Lucent’s share price has tumbled from $5.27 to $1.11 in less than a year. Ericsson is down from $14.47 to $8.27. ZTE just warned about an 80% decline in profits in the first half of 2012.
It is no secret why the infrastructure market is so difficult right now. Giant European operators are among the biggest spenders in the world, and each of them is saddled with tens of billions in debt. The entire telecom industry is watching the ongoing sovereign debt crisis in Europe and holding its breath. Will the government debt drama in Spain and Italy spill over to the corporate debt market and freeze the access to cheap money that has been the engine of mobile carrier growth over the past two decades?
The operators must prepare for that scenario — and so they have been cutting down on 2G and 3G network upgrade and maintenance spending. 4G expansion has been held back as well. Carriers that used to lean heavily on Ericsson and Alcatel have started sneaking in dirt-cheap Chinese contracts to lower CAPEX spending.
What is fascinating here is how surprised investors still are about every network market warning. Both Alcatel Lucent and ZTE dropped by more than 15% immediately following their dismal comments about margin trends, and yet Wall Street is still dazzled by those hockey stick-shaped charts showing projected mobile data growth.
In reality, the entire global mobile telecom market is lurching towards a weird new equilibrium. Apple and Samsung are not only grabbing all of the profits in the handset sector — they are close to hogging all of the profits of the combined, global mobile handset and infrastructure market.