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Alcatel-Lucent’s Small Cell Focus Could Bode Well for Shareholders

Alcatel-Lucent (NYSE: ALU  ) is an enormous company with many moving parts. Therefore, it's no surprise that many of Alcatel-Lucent's initiatives with small-cell technology have gone unnoticed. While small cell is not yet a wide-known technology, Alcatel's connection with the likes of Qualcomm (NASDAQ: QCOM  ) , AT&T (NYSE: T  ) , and Sprint (NYSE: S  )  further signal that small-cell technology could be crucial to the company's future.

What is small-cell base station technology?
This technology is still very much in its infancy, but considering its purpose, it's something that could be very useful in the future. Essentially, the goal of developing small-cell technology is to handle the continued rise in data consumption and demand.

For the last several years, telecom companies like AT&T and Sprint have made acquisitions and spent many millions to invest in spectrum. Spectrum is used as a way for data to flow, like an interstate. By widening the interstate in a crowded city, traffic flows better, which is the quintessential concept as it relates to acquiring and investing in spectrum to improve networks.

However, the Federal Communications Commission, or FCC, has recently placed restrictions on spectrum to avoid giving certain telecom companies an unfair advantage. Specifically, the FCC put restrictions on the amount of spectrum that can be purchased by the country's largest two telecoms at next year's auction.

Also, the FCC is expected to implement rules restricting any one telecom company from owning more than 33% of spectrum in a single region via mergers and acquisitions. Clearly, this could have a negative impact on Sprint's well-known acquisition goals, along with AT&T in its attempt to boost its own spectrum.

Therefore, telecom companies are being capped, which is where small cells come into play, which are low-powered cells with a tight range that operate on licensed and unlicensed spectrum. An example is Alcatel-Lucent's lightRadio technology, which uses cell towers to provide mobile broadband, consequently removing cars from the crowded spectrum interstate.

The bottom line is that regulators want to restrict spectrum, and Alcatel-Lucent has figured out how to make spectrum more efficient. While the program is in its infancy, both AT&T and Sprint have already partnered with Alcatel-Lucent on the initiative.

The Qualcomm-Alcatel small-cell initiative
With all things considered, Alcatel-Lucent is not alone in its attempt to redefine the use of spectrum, as Qualcomm made a $130 million investment in Alcatel last year to jointly develop products for the small-cell base station market. The two companies play very different roles, but the combination is essential to turning this idea into a widely used reality.

Alcatel-Lucent obviously has the hardware, the device that consolidates and redistributes the capabilities of a cell tower. But, Qualcomm, a world leader in wireless solutions, is creating the network itself. Qualcomm is using different kinds of small cells that serve purposes like range expansion, voice capabilities, transferring data, etc., to give lightRadio more capabilities.

Currently, Alcatel-Lucent is tightening its lightRadio and small-cell solutions to begin installing the infrastructure on a large scale. If successful, these initiatives could make Alcatel-Lucent and Qualcomm even more of a backbone in the fast-growing data consumption market.

Final thoughts
Alcatel-Lucent and Qualcomm have nearly $20 billion and more than $25 billion in annual revenue, respectively. Yet, according to Alcatel-Lucent, the market potential for lightRadio sits at nearly $16 billion annually, more than half of the total RAN market. Moreover, in addition to its rather obvious spectrum-related benefits, Alcatel-Lucent claims that the technology saves mobile operators up to 50% on tower ownership costs and energy usage.

Therefore, lightRadio, and Alcatel's partnership with Qualcomm, could fuel significant fundamental gains in the years ahead. But also, it's a win for telecom companies as well, saving on costs and making networks more efficient.

While Alcatel-Lucent continues to implement The Shift Plan, focusing on strong businesses while divesting laggards, it's clear that management believes small-cell technology is part of the future for telecom. Looking at the facts, Alcatel-Lucent might just be right.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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