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Handset maker ZTE to cut 12,000 jobs, company faces tough times

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July 16, 2012

Chinese mobile handset maker ZTE is facing some tough times as it may have to cut up to 12,000 jobs. And it's stock today is taking a beating. ZTE is second in China's market for handset makers behind Huawei, and it warned last week that its net profits for the first half of this year could fall by as much as 80 percent year-on-year.

Beijing-based IT consultancy Marbridge Consulting published rumors on Friday that ZTE may be preparing to cut about 12,000 jobs this year, with overseas workers particularly at risk.

Marbridge said that there has already been three rounds of employee recalls and lay-offs in overseas offices since the Chinese New Year caused by dropping market share.

ZTE added that severe cash-flow issues have intensified in some markets where big contracts have led to long delays before payment.

And as if all that wasn’t bad enough, ZTE has been rocked by a series of probes into shady business practices. The European Commission is investigating ZTE and its Shenzhen neighbor Huawei over allegations that the Chinese government illegally subsidized the two companies, enabling them to offer their products to customers at below cost, an illegal process known as dumping.

Additionally, news emerged last week that the FBI is also looking into allegations that the company illegally sold U.S. technology to Iran and then tried to cover up its dealings when exposed by journalists.

The U.S. House of Representatives' Intelligence Committee is also on the case, investigating the firms’ ties with the Chinese government and accusations that ZTE's products could pose a national security risk to the United States.

And while all of this is happening, executives from both companies were sentenced in their absence to serious bribery offences in Algeria.

In December 2011, wireless industry analysts voiced some concerns about ZTE, with Gartner downgrading its evaluation of the firm's strategy from "positive" to "promising".

Last year, ZTE added enterprise telecom solutions and cloud computing to its portfolio of products, further expanding its business. But this market expansion had a negative impact on the company's cash flow in the first quarter. As a cost leader in the market, aggressive expansion could put its financial status at risk.

ZTE didn't immediately respond to a request for comment on the rumor of mass lay-offs at its plant. We will keep you posted on this as well as other developments in the company.

In other mobile news

The U.S. Justice Department (DoJ) is holding up Verizon Wireless' $3.9 billion bid to acquire more wireless spectrum from a group of cable operators.

But the Federal Communications Commission, which also has to approve the deal says it's ready, however. Verizon announced in December that it planned to acquire about 20 MHz of Advanced Wireless Services (AWS) wireless spectrum from a consortium of cable companies that includes Comcast, Time Warner Cable, Cox Communications and Bright House.

The proposed transaction is the largest spectrum transfer the FCC has ever considered outside of a merger. Verizon has worked closely with the FCC to address its worries over controlling too much mobile spectrum in certain markets. In April it agreed to divest itself from some of its 700 MHz spectrum in the lower A and B blocks.

Then in June, it announced another deal to sell T-Mobile USA some of its existing AWS spectrum. Verizon's promised spectrum divestitures are contingent upon the completion of the license transfers from the cable operators, Verizon has said repeatedly.

Sources close to the FCC say that it's been rather pleased with Verizon's responsive and willingness to work with the agency to address worries over concentrating too much wireless spectrum under just one carrier.

Most wireless industry observers are confident that the agency will approve the deal with only a few other minor conditions, which would likely include data roaming requirements and a shorter time frame for building the network using this spectrum.

The proposed deal will give Verizon additional mobile spectrum that it can use to build its 4G LTE network. The company already has begun building this network with 700 MHz wireless spectrum it acquired in 2008.

The cable companies' spectrum will allow it to add capacity in a higher frequency so that it can better cover large urban markets.

However, the wireless spectrum sale is only one part of the overall deal, which was announced in December 2011. In exchange for getting the much needed spectrum, Verizon has also agreed to a co-marketing arrangement with the cable operators selling the spectrum.

As part of the proposed deal, Verizon Wireless can also sell and market cable broadband and TV services to its customers, while cable operators can include Verizon Wireless service in its bundle of choices, so the deal is a win-win for everybody.

The issue with this deal for the FCC and regulators is that Verizon Wireless' parent company Verizon Communications also sells broadband and TV services in markets where it competes with the cable operators, so the deal does have some of its controversies.

Regulators at the Justice Department fear that this transaction means the cable operators and Verizon Communications have effectively agreed to not compete, when in fact they are.

Neither the DoJ nor the FCC would comment on these issues or state where the deal is in their regulatory approval processes. Verizon Wireless has already begun marketing cable services from Comcast and Time Warner along with those of other cable partners in some markets where Verizon's Fios-branded broadband and TV services do not compete.

However, the companies have said that eventually, the cross marketing deal will be in effect throughout the U.S., including areas where cable operators compete with Verizon's Fios services.

Mike Ritter, the chief marketing officer for Verizon Communications, said in a recent interview that Verizon will have to compete even more aggressively with U.S. cable operators when the co-marketing deals go into effect in Fios territories.

"We are going to have to be better to aggressively compete for more customers," added Ritter. "The way I look at it is that the cable companies will be in Verizon Wireless stores, and we'll be there too."

Ritter explained that even today, Verizon's Fios service is only sold in about one-hundred Verizon Wireless stores. But he said that the deal with the cable companies will push the wireless side of the business to look at Fios and other video services more strategically.

And he added that this means the distribution for Verizon Fios services will also increase as it ramps up for the other cable companies as well.

"We will be more aggressive than ever in selling our Fios services," said Ritter. "And we'll have an even wider distribution than we've had previously."

But officials at the Department of Justice don't seem to be buying this argument. They are particularly concerned with the joint marketing arrangement within Verizon's Fios territory. And they are also worried with the language of the deal, which would extend the marketing pact for many years.

For now, it's still unclear whether objections to the joint marketing will unravel the wireless spectrum deal as well. Verizon's chief technology officer Tony Melone said at a conference in June that the deals are completely separate, and that the approval of one has nothing to do with the other.

But Comcast's head of regulatory affairs, David Cohen, has already testified before Congress that if one aspect of the deal is changed too much, it could also jeopardize the entire deal.

In a conversation earlier this year, Cohen reiterated the importance of the marketing piece of the deal. "There is no secret that our interest is not just in selling spectrum," he said. "This is a strategic asset to enable us to develop a complete wireless strategy. When our Plan A of building our own network didn't work out, we still planned to leverage this valuable asset to help us strategically. That's what the Verizon deal gives us."

The FCC was originally expected to issue a decision on the deal next week, but with the new agreement with T-Mobile to also consider, the earliest the agency could make a decision is late August or even early September. FCC Chairman Julius Genachowski plans to recommend the approval of the spectrum transfer to the rest of the agency's commissioners in late August.

In other mobile news

Stories are coming out from the blogosphere that the BlackBerry app developer morale and overall loyalty is at an all-time low and trending rapidly downward. Some say that Research In Motion (RIM) is bleeding developers dry.

Alec Saunders, RIM's vice president of mobile app developer relations defended the company in a blog post disputing those allegations, and said he wished the media would get its facts straight.

"I was shocked because the numbers in the report do not agree with what we're seeing in the real world. The allegations contradict much of what we are seeing and hearing in our developer community," said Saunders.

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According to him, RIM's app developer events are well attended and popular, and the number of device vendors using BlackBerry App World (RIM's app store) has grown 157 percent in the last twelve months.

"The other item I hear consistently is that RIM simply treats app developers better than anyone else in the wireless industry," Saunders added, stating that BB app developers have been giving enthusiastic feedback on RIM's new developer tools for the BlackBerry 10 operating system, even it won't be ready until sometime later in 2013 instead of this year as RIM has repeatedly said for the past several months.

But playing cat-and-mouse in public forums is getting to be a real habit for RIM. Last week, RIM CEO Thorsten Heins took to Canadian radio stations to deny that the company was in "a death spiral."

To be fair, the original Baird Equity report doesn't exactly predict a mass exodus from the BlackBerry platform-– not now, anyway. "We believe that many app developers who planned to jump ship have already made the move," the report reads, "leaving a BlackBerry developer community that is rapidly reducing in size."

The report also suggests that the morale and the overall enthusiasm is at an all time low for those that are staying. RIM recently announced that BlackBerry App World has served up 3 billion downloads since it launched in 2009. But not everybody agrees with such a high number.

By comparison, Apple's iTunes App Store has managed over 10.2 billion downloads in the same amount of time, and its current number is now closer to 31 billion according to some people that work for Apple.

The success of RIM's BlackBerry 10 OS depends largely on when customers will be able to get their hands on the devices. It was supposed to be in October of this year but now RIM has pushed that to sometime late in 2013. Some even think that RIM may not last long enough as a company to deliver BB 10.

With less than two billion in cash left in its coffers, RIM is rapidly running out of options. Some predict it will run out of cash in less than six months from now.

It's actually the second time that RIM has pushed back BB 10's launch date, and some people now are losing confidence in the company. If it delays any more, stopping the exodus of its mobile app developers will be the least of its worries.

RIM's stock closed at $7 and some change yesterday in the US markets, and is trading at an all-time low. RIM's shares are down 95 percent from their all-time high of $148.70 reached in June of 2008.

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Source: Marbridge Consulting LLP.

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