RIM, an infrastructure vendor?

The most surprising revelation from Research in Motion (NASDAQ:RIMM) today was not that it’s bid for Nortel Networks’ wireless assets was blocked, but that it was interested in those assets in the first place. RIM apparently isn’t content with its sizable share of the high-end wireless handset market anymore. It wants to be a wireless infrastructure vendor.

But why? As industry experts, analysts and executives constantly point out in research notes, conference calls and quarterly earnings reports, the telecom industry is becoming a market where scale matters above all else. One of the main reasons Nortel couldn’t survive on its own was the incessant competetive pressure from the world’s new mega-vendors: Alcatel-Lucent (NYSE:ALU), Nokia Siemens Networks (NYSE:NOK, NYSE:SI) and Ericsson (NASDAQ:ERIC).

While there is definitely still interest in Nortel’s assets, the vendors picking over Nortel’s pieces are doing so to increase their market share and therefore achieve more scale. NSN aims to solidify its No. 2 wireless vendor ranking and open up the North American market by purchasing Nortel’s CDMA and long-term evolution (LTE) assets. Avaya would pass up Cisco Systems (NASDAQ:CSCO) as the world’s largest enterprise voice equipment supplier. RIM, on the other hand, would find itself in same position as Nortel if it purchased its wireless business: a small player competing in a market dominated by huge, ruthless competitors.

Granted, RIM would take over a Nortel wireless business that was not only profitable but free of debt, and it would likely gain those assets for bargain prices. In its public statement, RIM said it was prepared to offer up to $1.1 billion for the CDMA and LTE business and “certain other Nortel assets,” which could, by far, trump NSN’s offer of $650 million depending on what other assets RIM was eyeing. But let’s take a closer look at the businesses RIM might be interested in:

  • CDMA: With annual revenues of $2 billion, CDMA is one of Nortel’s most profitable businesses. If RIM were to take it over it would automatically become the second largest CDMA vendor behind Alcatel-Lucent, which would most certainly provide it with scale in that sector. But CDMA is also a limited business going forward. CDMA network operators will need to maintain, upgrade and expand their CDMA 1x and EV-DO networks for some time, but the age of big new network deployments–and big new contracts–is over as the operators look ahead to 4G technologies like LTE and WiMax. NSN itself acknowledged that CDMA was a declining business, saying its main interest in the asset was Nortel’s impressive base of CDMA customers–all of which NSN wants to turn into LTE customers.
  • GSM: Though RIM didn’t specify interest in the GSM group, it is another high-revenue ($1.5 billion annually) and profitable business for Nortel, but one with an even more limited shelf life than CDMA. Nortel’s small group of GSM radio customers also will need their networks supported, but Nortel has no 3G component to upsell them on, having sold its UMTS business to Alcatel long ago. Perhaps more attractive to RIM is Nortel’s switching group which supplies many of the world’s largest operators with mobile switching centers, but just as 2G and 3G are making way for 4G, legacy voice switches will eventually stand aside for IP routers.
  • LTE: Nortel’s LTE group is difficult to characterize as business since it doesn’t have any actual products. What it does have is technology backed by intellectual property that many vendors in the industry wouldn’t mind getting their mitts on. Yet, even if RIM were to commercialize one of the most sophisticated LTE base stations in the industry, it might still have trouble finding buyers due to its lack of scale. Sure, it would have built-in incumbency status with its CDMA customers, but Ericsson has already shown you don’t need to be on operator’s Christmas card list to win big LTE contracts.

That raises the intriguing possibility that RIM is actually more interested in becoming a licensor of technology in the mold of Qualcomm (NASDAQ:QCOM) and InterDigital (NASDAQ:IDCC) rather than a seller of boxes. After all, NSN wasn’t planning on selling the Nortel LTE base station; it was planning on raiding the kit for its software and algorithms, incorporating that technology into its own Flexi radio architecture. If it NSN can use Nortel code to make a better product, then half a dozen other vendors could do the same, which could translate into sizable licensing business for that code’s owner. RIM could ride the maturing CDMA business, and possibly the GSM business, to the end of their useful lives, while shoveling their profits into LTE research and development.

Of course, this conversation is purely academic if RIM can’t even bid on Nortel’s assets. That’s why RIM has taken its case to the public and started waving the Canadian flag, trying to pressure Nortel to let it back into the loop. It looks like RIM will have competition for Nortel’s attentions, too. In just the last hour, Nortel’s creditors led by MatlinPatterson Global Opportunities submitted a challenging offer to NSN’s bid, offering $725 million for Nortel’s CDMA and LTE assets.

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