GSM not the stop-gap vendors have been hoping for

Wireless voice service in developing countries is growing like gangbusters but infrastructure vendors aren't reaping the benefits. That's because GSM has quickly become a low-margin network rollout. While vendors continue to announce billion-dollar GSM deals in China and India, it doesn't appear they are are making any significant profits from them.

No more is this issue playing out than in India, where Bharat Sanchar Nigam Ltd. (BSNL) is poised to award a $2-billion plus contract for some 22 million GSM lines. BSNL is reportedly losing patience with Nokia Siemens Networks because it won't lower its price and may end up awarding the deal to Ericsson, which has already been awarded 60 percent of the contract because it was the lowest bidder, or competitors such as Alcatel-Lucent and Nortel. According to, Ericsson reportedly has quoted BSNL a price of $91 per line while Nokia Siemens is trying to stay at $177 per line. For Nokia Siemens, it is damned if it waivers because it won't make much money off the deal and damned if it doesn't because a loss of the contract could hurt its market share.

One thing appears to be certain: GSM is not the stop-gap that vendors have been hoping for as they wait for major markets like China to upgrade their networks to next-generation technologies or issue new 3G licenses. Worldwide GSM networks sales increased just 7 percent in the third quarter, despite a 40 percent rise in base station shipments, according to the Dell'Oro Group.

And Ericsson is primarily to blame. Its superior scale has meant that it has been able to significantly undercut its competitors and still make good margins. But the strategy appears to have caught up with the vendor. In October, Ericsson cut its guidance for Q3 citing a fall in sales for its mobile network upgrades. Network upgrades are more profitable deals than GSM infrastructure wins. Last week the world's largest infrastructure vendor said it expects to just hit the lower end of its performance forecast. 

Ericsson shareholders have to be hoping for a nice uptake of 3G services in 2008 and a move by the Chinese government to issue long-awaited 3G licenses. Because when Ericsson starts to falter, the industry gets really nervous.-Lynnette