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20 November 2018

Ericsson must not waste potential of Edge Gravity with narrow telco focus

The place that edge compute will play in the telco’s network, and its business model, is a topic we have been tracking with interest this year. While there is a strong logic to convergence of compute, storage and connectivity – all in locations close to the user to improve service response times – it is not clear that operators will always take the leading role in deploying and monetizing edge networks.

Many industrial and IoT applications will rely on edge locations that go far beyond the sites and central offices in a telecoms grid, and as some of those sectors look for edge cloud resources on a global scale, the real power may lie with organizations that can aggregate physical assets from many owners – not just operators – and create a scalable, flexible, virtualized platform.

A large operator could perform this role, as could a webscale provider like Amazon, or an industry-specific player, such as GE in the heavy manufacturing segment. Another type of company which could take on this powerful coordination and orchestration role is the equipment vendor. Nokia is combining its network and cloud products with its orchestration and virtualization software to form the basis of various edge-oriented cloud services for industries, with or without the involvement of operators (see lead item).

And Ericsson is responding with Edge Gravity, its own take on a strategy which seeks to exploit its expertise at the intersection of networks and the cloud, while keeping the plum role in the value chain for itself, not its telco customers.

Edge Gravity is an extension of the Swedish company’s Unified Delivery Network (UDN) initiative, which has its own roots in the firm’s acquisition of Microsoft MediaRoom in 2013, as the foundation of a push into the media business. Ericsson has pulled back from that sector considerably, offloading a controlling stake in the division to an equity firm in January.

However, it is clearly looking for ways to harness some of the technology assets more widely, and there is a logical progression from the original UDN, launched as an integrated content delivery network (CDN) in early 2016, and Edge Gravity. For many telcos, after all, the most immediate application of edge compute is to support CDNs that are closer to the users and can deliver lower latency, higher quality mobile video.

Edge Gravity is presented as a far broader platform though, with the potential to support many latency-sensitive or personalized applications that benefit from being closer to the device. The idea is to use UDN-type underpinnings to create a virtualized, global network of edge cloud assets, linked to data centers, and each other, via the wired or wireless networks of more than 80 operator partners. These include MNOs, wireline telcos and cablecos, said Ericsson, and in future might also add private and industrial network providers.

The initial foundations of Edge Gravity are built around a core of 22 central locations,  based in Equinix data centers and on Ericsson’s own servers and MPLS backbone. The software stack is mainly open source, using OpenStack and Kubernetes. These are connected to the edge networks supplied by over 80 partners. These will offer rack space, power, connectivity and other capabilities depending on location and requirement. The combined network has about 4Tbps of capacity so far.

Among the service providers on that list of 80+ are Vodafone group, China Unicom, Telstra in Australia, Canada’s Rogers, Telefonica group, NTT Docomo of Japan and Bharti Airtel of India.

“Rather than selling to the service providers, we are making them suppliers to us,” Yves Boudreau, CMO for the Edge Gravity unit told LightReading. “They can’t act globally as a webscale company can. This is our attempt to help our customers and the service providers come to the table collectively.”

Edge Gravity is part of Ericsson’s Technology & Emerging Business unit, which focuses on new activities housed in ‘accelerated units’ – designed to have the autonomy to behave more like start-ups. It is the first unit to use this model, and so mimic the norms of the cloud and web worlds rather than telecoms. Boudreau said it was harnessing the agility enabled by virtualization and resource flexibility, to drive global scalability.

The firm expects a wide range of companies, in sectors from content delivery to smart cities to automotive, to want to use the edge cloud platform. It might support their internal decision making (for instance, predictive maintenance in near -real time for a transport operator) or allow them to deliver new or improved services to their own customers (e.g. better video and low latency gaming) without having to build their own edge clouds.

Initial customers include Limelight Networks, which will use the network to expand the reach of its content service; Net Insight, and two start-ups, Haste and Mode. The former has built a low latency service for gaming, and the latter has developed algorithms to accelerate the decision-making process for routing low latency requests, in applications such as collaboration.

This is a similar model to that pursued by the webscale providers, and the ideas of elastic scalability, and global aggregations of cloud resources, are familiar from AWS and Azure. But the cloud giants are not necessarily the best placed to extend the model they dominate to the edge. Their power has rested on investing in vast data centers, but in many areas, their ability to access edge sites is inferior to that of telcos or other enterprise types. That is not to say AWS and others will not seek to keep pole position by turning themselves into the orchestrators of many others’ edge cloud and connectivity assets, but they are not the only game in town.

Nokia has worked extensively with AWS in the edge area, particularly on integrating its MEC capabilities with the Amazon unit’s Greengrass developer and cloud services ecosystem. That has raised the prospect of an alliance between these two companies to pool their respective strengths and offer a powerful combination in the edge cloud, almost certainly confining operators to a supporting role.

Ericsson could leverage Edge Gravity for a similar strategic relationship, or try to dominate the whole value chain itself.  It will experiment with various value chain positions, first within the starting segment of content delivery, and then moving into other, more industrial applications. In its first model, it will charge fees to the content provider for the edge CDN resources that should improve the quality of delivery, and therefore customer satisfaction. It will then share part of those fees with the connectivity provider.

Ericsson, at its recent Capital Markets Day, was keen to emphasize that efforts like Edge Gravity do not signify a return to the diversification strategy of its previous CEO, Hans Vestberg, now at Verizon. Current CEO Börje Ekholm reversed that approach, triggering the sale of the media business and a pull-back from enterprise expansion, especially activities which might involve selling directly to vertical sectors, rather than via operators.

So Edge Gravity, despite its potential to be the starting point for an AWS-style business that looks well beyond telcos, is clearly positioned in the traditional, telco-driven market of content delivery, and was positioned by Ericsson as part of a cautious move into “close adjacent markets”.

It is clinging to the change of heart it announced with Ekholm’s plan – to stop targeting enterprise customers directly, by contrast with Nokia and Huawei (though Nokia has also, in public statements if not behaviour, pulled back from appearing to challenge its own core customers). In 2017, Ericsson said: “We will build our IoT business with service providers, addressing industries based on use cases. We will continue to address clients outside of the telecom industry through our service provider customers.”

However, the risk is that, if it sticks too rigidly to that mantra, it will be confined within the same limitations as its main clients. In the edge, a platform like Edge Gravity has the potential to support broad new revenues based on a whole new position in the value chain. But just as telcos’ approach and assets leave them stuck with video delivery as their main edge compute service, rather than higher growth applications in industrial spaces, so Ericsson could clip its own wings in the same way with tactics that are too narrowly focused on telcos.

That is why, for now, Ericsson’s hopes of financial turnaround remain heavily – probably too heavily – reliant on 5G contracts. So far, it remains confident of its strategy, as do the markets – Ericsson’s shares have gained 50% in value this year. Ahead of the Capital Markets Day in New York, the firm raised its sales target for 2020, citing a 5G-driven increase in telco capex from 2019, gains in market share, as well as new revenues from the “adjacent” sectors. It maintained its target of a 10% operating margin across the entire business but raised its sales goal to SEK210-220bn ($23.4bn to $24.5bn), up from SEK190-200bn ($21.2 to $22.3bn).

Ericsson now expects its overall addressable market to grow at a compound annual growth rate (CAGR) of between 1% and 3% between 2018 and 2022.

The company said about SEK5bn ($560m) of its projected sales increase in 2020 would come from anticipated favorable currency movements; and another SEK2bn ($220m) from Red Bee Media, a broadcasting and media services company. The rest would come from higher than expected network sales. Ericsson is now guiding for revenues of SEK141-145bn ($15.7 to $16.2bn), up from an earlier forecast of SEK128-134bn ($14.3 to $4.9bn). The midpoint of that range would represent an increase of nearly 12% on 2017’s network sales.

Ericsson also said it would target sales of SEK41-43bn ($4.6 to $4.8bn) from digital services and SEK23-25bn ($2.6 to $2.8bn) from managed services for the 2020 fiscal year. In fiscal 2017, those units delivered SEK41bn ($4.6bn) and SEK24.5bn ($2.7bn) respectively.