Close
Close

Published

Ericsson needs to leverage Cisco deal, or its telco-only route will be disastrous

Ericsson and Nokia are on divergent paths when it comes to restoring sustainable growth to their hard-pressed infrastructure businesses. Nokia set out a plan last year to pursue “adjacencies” to its core telco customer base, pushing equipment, software and services to enterprises and industrial sectors to support private networks and the Internet of Things.

But Ericsson, which had also been diversifying into new platforms and vertical markets – targeting 25% of revenues from non-telcos by 2020 – has been retrenching since its new CEO Borje Ekholm took over earlier this year, and pulling back to its telco heartland.

Ulf Ewaldsson, in his new role as head of digital services, confirmed that strategy in an interview with Reuters last week. “We will focus on telco clients and networks exclusively for now,” he said.

But while this policy may have been over-simplified for the purposes of a short interview, it still makes little sense. Telco spending growth has been falling for several years and in some markets there are falls in absolute terms in some years. Operators are looking to reduce capex by turning to software-driven architectures and even open source hardware. Ericsson itself believes the mobile infrastructure market will contract by between 2% and 6% this year.

Other verticals, by contrast, are becoming fully connected for the first time – not just relying on wireless networks for mobile voice and data, but looking to transform their processes by linking every object in their business chain to the internet and each other. That will drive investment. Nokia estimates its addressable market in adjacent sectors is worth about €18bn ($20.3bn) and will grow at a CAGR of 13% over the next five years. By contrast, the telco networks market is is worth €113bn ($127bn) but will grow at a CAGR of just 1% in the five-year period.

Until recently, Ericsson had seemed aggressive in pursuing that new opportunity. For instance, deals with carmakers like Volvo for connected vehicle services represented new business – even while they threatened to sideline the MNO, which would also aim to be the main connectivity and services provider.

Nokia pays lip service to the MNO remaining the premier player in the private network and IoT value chains, but its virtualized core platforms – which support services for all kinds of enterprises and even licence-exempt connectivity – could clearly give Nokia the primary relationship with the vertical market, reducing the MNO to a bitpipe at best. That approach is essential – if operators like Orange are going to boast that the start-ups they are backing through Facebook’s Telecom Infra Project will one day replace Nokia and Ericsson (see Wireless Watch June 19 2017), then those vendors need to find new friends quickly.

But Ericsson appears to want to back away from new sources of business and throw in its lot with its traditional clients, Ewaldsson said the company remained interested in the enterprise segment but would work entirely through its telco customers to support them in providing IoT, corporate and cloud services. He said the new strategy was twofold – to “use our technology leadership to make sure that we become the most competitive and cost efficient provider of infrastructure to service providers” and then to “make sure our customers can monetize on these networks.”

This, the thinking goes, will kickstart telco spending because the operators will have to invest to go after new markets themselves, and it will save vendors from the risks of competing with their own core customers. However, many IoT services can be delivered, in the first wave at least, using existing networks, or with fairly low cost upgrades like NB-IoT.

For significant new investment, vendors will have to wait for 5G to start generating meaningful revenues. Despite the flurry of early deployment plans, however, that date will be after 2020. Before then, the majority of roll-outs will be small-scale and vendor-financed, and no doubt Ericsson will face the same issue as in the early days of LTE, when most of its customers opted for the low financial impact of a modernization deal rather than full network replacements or big-bang upgrades.

The challenge is worsened by the fact that Ericsson is not well placed to sell big ticket platforms to the one category of service provider which does have massive capex potential – the webscale giants. Analyst Richard Kramer from Arete Research said: “Ericsson simply lacks the products to sell to the likes of Google, Facebook, or Amazon, which are the biggest incremental spenders on infrastructure.” Those companies, with initiatives like Facebook’s Open Compute Project and Telco Infra Project, are not only leaving traditional vendors in the cold – developing platforms inhouse and turning to open source suppliers – but are even helping to lure MNOs away from Ericsson, Nokia and Huawei and towards commoditized, white box systems.

Of course, Ericsson has a potential advantage that Nokia does not – its strategic alliance with Cisco. If it feels the need to pull back from enterprise expansion, and “spreading ourselves too thinly”, as Ewaldsson put it, surely Cisco could fill the gaps? However, the visible results of that deal have been very limited.

Martin Zander, VP of partnering at Ericsson, told LightReading that this, too, was under review. The companies are “fine tuning” their collaboration, he said, and trying to be more focused. The original alliance was too open-ended, “putting the expectations all over the place … that’s why we are more focused on solving technology use cases,” he said. In particular, the companies will work together to demonstrate real world solutions based on combinations of their respective products and services, to address enterprises and public sector as well as telcos, and adding new technology areas such as
security, WiFi and data center switching.

Cisco CEO Chuck Robbins told the recent Cisco Live event that Ericsson needed time to work through its restructuring and senior management changes, but in talks with Ekholm about the original reasons for the deal, “he and I have agreed completely that all of those reasons still exist. Over the next three to six months, we’ll see how we end up accelerating it.”

The new conservative strategy at Ericsson has led to some of its businesses being put up for sale, notably its media unit, but this has not been enough to satisfy some investors. An activist investor, Cevian Capital, bought a $1bn stake in the Swedish firm recently and is now calling for more radical change to boost revenues and profits, following a cut in Ericsson’s credit rating by Moody’s last month. Moody’s expressed concern that the deep cost-cutting program of Ekholm, and his predecessor, would reduce Ericsson’s ability to innovate and to be in the forefront of new technologies such as 5G.

Meanwhile, Nokia is following through on its adjacencies promises with a new Chinese unit, set up to support internet providers in areas such as data centres, cloud, IP routing, transport and services. Nokia said the creation of the unit fits with the strategy of expanding its business “beyond its core communication service provider market”.

Close