Outsourcing Economics

Bharti just announced a $500 Million deal with Alcatel-Lucent. The relevant part is quoted below:

Telecom major Bharti Airtel Thursday awarded a $500-million deal to Alcatel-Lucent for outsourcing the management and servicing of its broadband and fixed line network for five years.

The deal involves creation of a joint venture with Alcatel Lucent holding 76 percent of the equity, and Bharti having the remainder 24 percent.

I think this is a much better deal for Bharti than for Alcatel-Lucent. They get the brand name and the customer relationship, while only putting in 24% of the skin in the game, offloading the majority of the cost to Alcatel-Lucent. While I am not familiar with the exact structure of the deal, I am going to assume that the cost is going to be heavily front loaded to set up the integration, test, qualification, design and operations organizations and processes, plus the core CAPEX for equipment, CPE purchases and so on. The Alcatel-Lucent guys are thinking they are going to recover the cost towards the 2nd half of the contract (think of this as the vendor financing equivalent of forward pricing). Taking a look at the past, we have Cisco funding Cogent. So, to cut the story short, I think this deal is going to be either a huge disaster for all involved, or failing that, Alcatel-Lucent is going to be losing their shirt.

See you in 3 years and we can do a checkpoint.

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4 Responses to Outsourcing Economics

  1. Director of Test says:

    Alcatel-Lucent has made similar deals before, even in North America. Specifically, they were the system integrators of the AT&T (SBC at the time) U-Verse network. Not only were they the sole network vendor, but they were also responsible for program management, testing and certification of the complete design with Microsoft and Scientific Atlanta providing the video solution. In addition to being system integrator, they were also responsible for the installation and turn-up of the infrastructure. Alcatel-Lucent has an extensive consulting and program management arm to handle these functions and they’re getting quite experienced at doing these roles for carriers who don’t want to do it themselves.

    • vijaygill says:

      Absolutely makes sense, some companies also bid out for the AOL UK Local Loop Unbundling access project. it is a good model to outsource, but I remain unconvinced this is good for both parties in the long term.

      • Director of Test says:

        What will make this difficult is if the customer wants to change any part of the architecture or vendors, they’ll need the buy-in from Alcatel-Lucent. The way the contracts are generally written, Alcatel-Lucent has to sign off on all design and architecture documents and directives. Without competition in such a domain, a customer can become stuck to future pricing of Alcatel-Lucent products. Up until earlier this year, one major telco was paying $48,000 per 10GigE port on a router.

  2. eyecon says:

    (AUNZ)

    Makes perfect sense for a vendor of de facto infinite supply-generating products to seek to move away from the ever-shrinking product vendor role and into the more stable recurring-service-provider role (c.f., digital reproduction/distribution has pushed popular musician-recording artists in the same direction). The opposite is probably equally true on the buyer side, but vendor financing can be hard to resist when upfront capex is a big hurdle. It’s a risky strategy, I agree, but (like many such things) it seems be sustainable and potentially lucrative when implemented in large but relatively isolated/enclosable markets.

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