Calix gets boost from Ericsson buy but still needs to earn global stripes

By Kamalini Ganguly, Analyst, Network Infrastructure, Ovum

On August 22, Calix announced that it was acquiring Ericsson’s fiber access assets.

It also struck a three-year partnership deal for Ericsson to resell and distribute Calix’s Unified Access Systems and software (augmented by Ericsson’s GPON EDA 1500), giving it access to Ericsson’s tier-1 customer relationships in 180 countries.

The deal will push Calix’s annual PON sales to more than $100m, for a rank of sixth in PON global revenue. Ericsson, a leading global infrastructure vendor, has hit many hurdles with its GPON strategy, so selling its GPON portfolio was a logical decision.

For Calix, already doing well in North America, the deal is most likely a cheap opportunity to buy an additional GPON portfolio, the expertise of mainly ex-Entrisphere GPON personnel, association with a global brand, and access to a global sales network.

But the acquisition and the partnership won’t necessarily earn Calix its global stripes.

Most logical option for Ericsson; leaves door open for NG-PON

For a dominant mobile infrastructure player, Ericsson’s wireline strategy never really elevated its share to the same level.

Ericsson acquired Marconi and then Entrisphere for their DSL and GPON portfolios respectively, but subsequently it suffered from a combination of bad timing and bad strategy.

There have been GPON wins in Europe, Asia, the Middle East, and Africa, but ultimately its standing appeared to rest on its wins in two markets: China and the US.

With Huawei, ZTE, Fiberhome, and Alcatel-Lucent in play in China, it was almost inevitable that Ericsson would not be in the top four. Further, we have seen severe price wars in China reducing the revenue opportunity.

In the US, as AT&T’s preferred domain supplier in fixed access, Ericsson has been shipping GPON, but AT&T has stayed firmly on the FTTN path, deploying GPON FTTH only in selected greenfield areas.

In our opinion, Ericsson suffered from deficiencies in both product and market strategy.

Ericsson’s GPON messaging highlighted the density and capacity of its OLT platform, yet FTTH customer take rates have stayed low in many countries, restricting the need for high density and capacity.

Ericsson resisted bringing GPON and DSL together in a platform because it would mean over-engineering the DSLAM, but many customers want to upgrade to only one network that supports both new FTTH customers and existing DSL ones on a single chassis.

Ericsson’s lead in active Ethernet P2P did not translate into consistent revenue growth as the market stayed small and limited compared to PON. Parts of Europe have lagged in GPON deployment, and Ericsson did not have a presence in areas where the GPON market was expanding.

Most importantly, Ericsson has appeared to be closed to outside perspective and the advances made by competitors Huawei and ZTE. In contrast, Alcatel-Lucent has been receptive to criticism and continued to evolve its portfolio and market strategy.

Ericsson’s access revenues have grown over time but are not commensurate with its global standing. In 2Q12, its fixed access revenues plunged to $12m, one of the lowest levels ever. Consequently, it makes sense for Ericsson to divest its GPON assets while keeping its WDM-PON portfolio for when the market for NG-PON comes alive in a few years.

Calix will need to overcome the constraints that Ericsson faced

Calix has said it is facing (and presumably adapting to) a nexus of global secular trends: Global, Mobile, Digital, and Virtual. The Ericsson GPON acquisition is ostensibly to fulfill the global part of the strategy, but the longer term objective includes leveraging Ericsson’s true strengths – in mobile infrastructure and services.

Calix has done well in North America, garnering the bulk of stimulus broadband awards.

It has been deploying PON for a long time, including GPON. Its Occam acquisition brought a larger active Ethernet P2P portfolio, and it has a better feel for customer requirements – for example, its multi-service platforms bring copper and fiber together on the same chassis, and its ONTs can be configured as either GPON or active Ethernet, providing the flexibility the market demands.

Calix is already selling into international markets, but the bulk of revenues are still from North America.

Last year, Calix launched a strategy to go global with the appointment of key people in Europe, and it has had a couple of international GPON wins, for example in Poland.

We think Calix needs to grow internationally (see our comment “International growth critical for mid-sized fixed broadband vendors in US,” December 2011), but it will face all the constraints that Ericsson was facing.

Many of the large currently announced and expected GPON deployments will dwindle after 2014, though smaller opportunities will continue.

Competition will be fiercer, including for tier-2 and tier-3 wins, especially if they are profitable. Tier-1 customers in developing countries may exert intense price pressure. Immediate access to 180 countries through the partnership sounds impressive.

However, if Ericsson had trouble selling its own wireline products successfully, it may be difficult for the same sales force to sell Calix’s products and software, valuable though they may be.

Calix is stepping into a vanishing mid-sized vendor space

Due to intense competition in the global GPON market, Tellabs and Nokia Siemens Networks have withdrawn from the residential GPON access market (though Tellabs is still championing optical LAN, and Adtran bought NSN’s fixed assets).

Motorola’s future remains in question since Motorola Mobility was acquired by Google.

As a result, the GPON market is now bipolar. The heavily favoured side is dominated by Huawei, Alcatel-Lucent, and increasingly ZTE, which have benefited from growth within China in particular; together these top three vendors make up 80% of the global GPON market in revenues.

On the other end is a crowd at the bottom, with shares in the 1–5% range. Calix will be bigger as a result of the Ericsson acquisition, but the reality remains that it is hard to be a mid-sized vendor in this market, let alone a global one.

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