Hughes Network wins major BellSouth contract Cellular equipment pact put at $400 million

November 30, 1993|By New York Times News Service

LOS ANGELES -- Hughes Network Systems Inc. of Germantown said yesterday that it won a major contract to provide BellSouth Corp. with cellular-telephone equipment in a deal that executives close to the negotiations valued at $400 million in the next five years.

Industry analysts said the contract is a major victory for Hughes, a relative newcomer to the market for cellular telephone switching equipment, which is expected to total about $2.6 billion in 1993.

Hughes had to discount heavily to win the contract over established equipment providers like American Telephone and Telegraph Co., Motorola, L. M. Ericsson, and Northern Telecom, the analysts said.

While Hughes and BellSouth declined to discuss details of the contract, executives familiar with the deal said the contract requires Hughes to install the switches for free in many cities if its system fails to meet performance requirements.

Since 1983, cellular carriers have spent about $12.7 billion in cellular transmission infrastructure, analysts estimate. As these companies continue to modernize their cellular systems to digital technology from the current analog standard, their investment is expected to reach $18.8 billion by 1995.

Under the contract announced yesterday, Hughes will provide 54 cities in the southeastern United States with its GMH2000 cellular network, including placement of wireless transmission equipment at 450 sites.

Hughes Network Systems -- a subsidiary of Hughes Aircraft Co., which is a unit of General Motors Corp. -- and BellSouth declined to discuss the contract's price.

On the New York Stock Exchange yesterday, General Motors Class H stock, which is linked to the performance of the Hughes units, gained 37.5 cents, closing at $36.75.

Hughes said the network will initially serve several hundred thousand BellSouth customers in such large cities as Orlando and Jacksonville Fla., Birmingham and Mobile, Ala., Memphis and Nashville, Tenn., Richmond, Va., and New Orleans.

The Hughes system uses switching technology provided by Alcatel SEL of Germany, the world's largest supplier of telecommunications equipment. The system can accommodate both analog and digital systems. Cellular technology links radio calls to the wire telephone network.

"This sets up Hughes to be a major player in the cellular equipment market, mainly because working with a big company like BellSouth adds credibility to your product line," said Herschel Shosteck, who heads Herschel Shosteck Associates Ltd., a cellular market research firm based in Silver Spring.

Mr. Shosteck said the Hughes-BellSouth deal is a blow to AT&T because it gives Alcatel a foothold in AT&T's main territory, a development that Alcatel could use in marketing itself worldwide. The contract is also a setback to Ericsson, which had been the only major European switch supplier in the United States until the Hughes-BellSouth alliance, Mr. Shosteck said.

Hughes Network Systems entered the cellular transmission equipment business 2 1/2 years ago.

Jack Shaw, chairman of Hughes Network Systems, said that with the BellSouth contract, that Hughes now controls 3 percent to 4 percent of the cellular market and hopes to capture about 10 percent over the next several years.

The biggest area of growth for cellular infrastructure, Mr. Shaw said, will be in developing countries, where cellular telephone service is expected to replace inadequate conventional

telephones.

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