The Federal Communications Commission, following the preference of phone companies, unanimously awarded a major telecom database contract to Ericsson’s Telcordia Technologies, which the agency said easily outbid incumbent Neustar.
Neustar (NYSE:NSR) had fought fiercely for contract renewal but was expected to lose. Shares of Sterling, Va.-based Neustar, which gets about half its revenue from the number portability administration center contract, fell 35% in the past year through Wednesday over the expected loss. Neustar has managed the contract since 1997, winning three renewals over that period.
Its current five-year contract expires on June 30. Analysts expect it will continue managing the database under current pricing for a year until Telcordia takes over. Sweden-based telecom gear maker Ericsson (NASDAQ:ERIC) acquired Telcordia, formerly the research and development unit of regional phone companies, in 2011. Telcordia is based in Piscataway, N.J. The FCC said Telcordia’s bid was less than $1 billion, or $134 million per year over seven years, far below Neustar’s bid. FCC Commissioner Ajit Pai said Neustar’s contract cost $460 million in 2014.
The database manager, called the Local Number Portability Administrator (LNPA), tracks more than 500 million phone numbers, and ensures that consumers keep their phone numbers after switching service providers. Telecom firms pay the LNPA.
Neustar, a former subsidiary of Lockheed Martin (NYSE:LMT), has made six acquisitions to diversify since former AOL (NYSE:AOL) executive Lisa Hook became CEO in 2010. In 2011, Neustar acquired Targus Information for $650 million. Targus provides caller identification services as well as consumer sales-leads to business customers. Neustar aims to grow by providing marketing analytics.
Source: Investors Business Daily
Randy Giusto, VP & Practice Leader and Michael Balsam, VP & Lead Analyst commented in their recent Outsell Insight:
Changing of the guard in this sensitive, complex technology environment could come at high risk:
- Data privacy: With this contract now held by a competitive foreign telecommunications equipment provider rather than a neutral domestic third party, consumers’ personal information may be at increased risk of theft and use for commercial gain.
- Industry performance: Portability service levels could suffer over the next several years based on retooled infrastructure and/or carrier preference.
- Law enforcement, public safety, and national security: Selection of a foreign firm raises red flags around the increased potential for hacking, wire-tapping and invasion of privacy. Disruption of service and alternative business models could also compromise criminal investigations and already fragile 911 locating systems. These agencies don’t pay for data access today, nor do they have budget to do so. It remains to be seen if Telcordia will charge for data access further down the line after system build-out.
Given that revenue from this contract may well exceed the stated bid value, the focus on lowest cost is misguided and overshadows the significance of risk factors stated above.