While Congress has passed legislation to devote 700 MHz D block spectrum to public safety and build out a nationwide LTE (Long Term Evolution) network, few have yet to realize the massive disruptions this technological direction will have. Most public safety organizations today use land mobile radio – a basic two way radio technology based on Project 25 (P25) digital standards that involve antenna base stations dependent upon “line of sight” for moving radio waves around. The players in this market today have had a relatively unfettered marketplace for many reasons. Land Mobile Radio is a unique niche. It’s highly specialized. It’s the law enforcement and public safety culture. And, last but not least, two- way radio is an old technology and evokes about as much enthusiasm in today’s tech world as Dixie cups and string. LTE is another animal altogether. It’s like the cellular world has just taken over the radio world, but as long as the radios are still chirping, nothing seems to have changed.
Disruptive Trends Repeat Themselves – Shaking Down the LMR Supply Chain
As a long time telecom pundits, we’ve seen it before, and history is such a great prognosticator of the future. It was 2000, as our team sat in front of a CEO of a major utility company showing him the charts and graphs of our research indicating demand was going to fall far short of supply in the great fiber build out because of compression, software apps, and end users preferences. We agreed with this fortune 500 CEO to disagree, and his company is no longer in business. They were one of America’s oldest utility companies. Many people, even industry veterans and experts, can’t see the subtle changes in their market because they are too close to it. Land Mobile Radio, as we know it, is going away, and in its place will be a new supply chain of technology tagging along behind LTE. As with the telecom bust of the early 2000’s, the entire industry is going to change, including the manufacturers, the integrators, the engineers, the installers, the antennae, base stations, and all of the peripheral industries that make money off of public safety today. Those include advertisers, media outlets, consultants, lawyers, politicians, PR firms, training organizations, and other suppliers. The public safety media better develop a new business model in a hurry because their advertising base is going to change. It is likely that they will be overcome by new entrants who approach the market through broadband and mobile wireless media rather than public safety. This is a mirror of the LTE market which now plays to the supply chain of big network carriers not the boutique marketplace. If you doubt this, just flip through the advertisements in the public safety magazines. You don’t need the same towers, radios, backhaul providers, and base station equipment in creating an LTE network as you do in LMR. Additionally, print media is already getting ransacked by the move to Kindle and online only publications. When the telecom market went bust in the early 2000’s, it took with it magazines, lawyers, private equity, venture capital, and PR firms. The editors we worked with at Business Week and major publications of the day like Tele.com, ran for cover in other markets.
Like All Markets, the Herd Stampedes through the Gate – then the culling occurs
As a 3GPP consortium standard, adopted by mobile wireless carriers globally, LTE brings with it the carrier grade network players like Nokia Siemens, Ericsson, Alcatel Lucent, and players in the broadband public safety space like Motorola Solutions, and other providers. Because public safety will need very specific solutions end to end, there will be a lot of room for many players initially. There are challenges in integrating handsets, radios, backhaul, security, and multiple protocols like LTE to WIMAX, WiFI, and satellite. New demands for integrating new data nodes into broadband, like UAV data for public safety, and sensor data, will bring military like challenges learned from the wars in Iraq and Afghanistan, giving the defense boys a shot at the big prize. Specific solution sets by the likes of Raytheon, Thales, Harris, General Dynamics, and EADs/Cassidian, to name a few, will be sprinting forth with lessons learned from military combat and Joint Tactical Radio System (JTRS). These defense guys are also in a pretty good position to roll out the red carpet to public safety on the UAS/UAV utilization in public safety and emergency response. They also will bring the best of “big data” analysis that will transform today’s public safety organizations into super sleuths, armed with acoustic sensors and precision technology used for finding Osama Bin Laden, for ferreting out the common criminal.
Winners and Losers
As LTE subsumes the older Land Mobile Radio networks, the picture gets ugly for traditional providers of two way radio infrastructure. Microwave backhaul carriers might get to live another day if other alternatives cannot be found as infrastructure planning gets underway. Eventually, we think, the big winner here will be Chinese manufacturers. Oh, you’re thinking “..Chinese companies are banned from public safety, right?” Yes. And to you Gentle Reader, our reply is, “So What?” When it comes to LTE, all roads lead to China. Chinese manufacturers pretty much own the LTE standard and the supply chain. Even though Huawei, China’s largest manufacturer is presumably banned by the U.S. Department of Commerce from participating in the public safety build-out, there are just too many ways make the argument or to work the cracks in the system, via grey labeling, joint ventures, and creative corporate formations. So, whether the part is grey labeled, relabeled by another manufacturer, or sold by a reseller, it’s nearly impossible to build an LTE network without Chinese gear. And, soon, there might be only one supplier of some core network components. Despite recent Congressional hearings lambasting both ZTE and Huawei over their potential as a “security threat”, Huawei is the market leader in key network components and will continue to acquire network segments that allow the company and its Chinese counterparts to dominate the LTE supply chain as it usurps market share from weaker players globally. Ok, you’re probably saying “You’re crazy, how is that going to happen?” For starters –it already has happened. The Broadband Stimulus that recently plowed federal funds into public safety projects created a number of public private partnerships. The networks they intended to build included broadband supporting “public safety”, particularly in rural areas and along the SW border. The equipment specified included Chinese manufacturers. Furthermore, these products are showing up a rural telcos nationwide. Secondly, LTE was well supported by China, who has one of the world’s largest telecom markets. Huawei is a dominant player on the 3GPP standards board dominating the Security Committee and pioneering new standards for M2M (machine to machine) – you know, the ability for your phone to talk to your computer and do downloads and software updates without you knowing it or the ability for your smart phone to talk to the airline kiosk. LTE is a standard that completely favors Chinese telecom manufacturers like Huawei, who will have significant influence over the identified modifications to the standard required for the public safety community’s new network, FirstNet.
Over the last five years, this supply chain has become almost end to end dominated (core processors, security, routers, switches) by Chinese companies. Since it hasn’t happened in our history, it is difficult to comprehend the buying and investment power of a nation the size of China when it focuses its power on a single market. Below market pricing and cheap financing arrangements for selling products into Africa, Asia, South America, and Europe have rapidly taken business away from competitors Alcatel Lucent, Nokia Siemens, and Ericsson – all of which had one of the most poorly performing 2nd quarters ever in 2012. These companies were hammered by the global downturn in 2009, currency devaluations, and crisis in the Eurozone. Now they are piling up losses and looking for ways to cut costs. As if that is not enough, most American and European companies already manufacture many subcomponents in China. So, crack open a router and let the pieces come rolling out and see for yourself where they’re made. Lastly, the public safety community is very price sensitive, and it’s unlikely that there will be a move toward custom manufacturing for this marketplace. Huawei has denied interest recently in a public offering, but should it do so, it would be a hot commodity. If you’re an institutional investor, like Blackrock or Morgan Stanley, where are you going to place your bets?
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