Ericsson making strides with services business

Ovum
In early October, Ovum’s analysts visited Ericsson’s headquarters in Kista for an annual information exchange. Here we look at the progress the services side of the business is making and identify the trends that we see developing in the market.
 
Ericsson is set to become one of the largest operators of telecoms networks
While many of the statistics provided by Ericsson at the event demonstrated the company’s success, they also identified the changes sweeping through the telecoms industry.
 
Ericsson currently operates networks that serve approximately 450 million mobile subscribers.
 
The multi-vendor environment that Ericsson manages demonstrates the amount of bespoke equipment and lack of commercial off-the-shelf equipment currently inside its service provider customers.
 
Service providers are rationalizing and consolidating their networks and creating reusable components on their platforms, but this will be a slow process due to the structure of the service providers and their inflexible business models.
 
Approximately half of the 40,000 service professionals within Ericsson have transferred from service operators, and having this type of skill set will give it a unique understanding of the service provider business.
 
Ericsson has won more contracts than it was able to disclose, but we noted an increase in fixed operators moving to managed services such as the field maintenance for optical fiber contracts that Ericsson has signed with Telefonica Brazil and CableTica in Costa Rica.
 
However, while the number of fixed contracts may be increasing, the contract values tend to be smaller than those from the mobile sector.
 
In 2009, Ericsson signed its largest ever contract in the US with Sprint Nextel. Signed in July 2009, the seven-year deal was worth up to $5 billion, and involved Sprint transferring 6,000 employees to Ericsson.
 
 
Sprint will continue to make decisions on the technology platforms and vendors used, while Ericsson will maintain Sprint’s fixed and mobile networks, optimize its network assets, and work with the company to improve business processes.
 
In July 2010, Ericsson announced a deal with Telefonica and Indra (a Spanish IT company). As a part of the deal, Telefonica will transfer its prepaid billing assets and related operations support system along with 500 employees from its operations in Spain and Brazil to Ericsson.
 
However, Ericsson’s most significant breakthrough came when it signed a deal with China Mobile Hebei in July 2010, its first major contract in China. Under the deal, Ericsson will be responsible for the maintenance of China Mobile Hebei’s 22,000 2G/3G base transceiver stations.
 
During 2010, Ericsson has secured a number of contracts to manage private network infrastructure in adjacent markets such as healthcare, the public sector, transport, and utilities.
 
This is especially the case in the energy sector. The passing of the Energy Performance of Buildings Directive by the European Commission in November 2009 - which requires EU member states to develop national plans to install smart meters so that at least 80% of homes have smart metering by 2020 - has presented network equipment and service providers with significant opportunities in the energy sector.
 
There are also still many opportunities in the telecoms sector, such as 3G network rollouts or LTE deployments. In addition, capacity requirements for mobile broadband, high deployment costs for rural sites, increased coverage requirements, and environmental regulations will continue to persuade fixed and mobile service providers to deploy managed network service solutions.
 
 
The CAGR for Ericsson’s revenues between 2003 and 2009 was 10%, while in the same period the services business grew by 19%, reaching 79.2 billion kronor ($) in 2009.
 
The most rapid increase has occurred in the last two years, with services revenues increasing by SEK20bn since 2007. Services accounted for 38% of Ericsson’s revenues in 2009, and 42% of its revenues in 2Q10.
 
Ericsson has an estimated 12% share of the telecoms infrastructure services market, ahead of Alcatel-Lucent, Huawei, and NSN.
 
Of the SEK79.2bn the company earned from its services business in 2009, SEK23.1bn came from network rollout services, while SEK56.1bn came from the provision of professional services.
 
These include the design, planning, building, and operation of access, transport, core, and service networks, as well as consulting and systems integration and
customer support.
 
Despite its significant growth, Ericsson will have to carefully manage the cost of its services business. The “due diligence” prior to taking on a services contract takes up to one year, and with a lot of its managed service contracts the company has acquired additional employees.
 
While it has 10,000 staff located between its four global delivery centers (China, India, Mexico, and Romania), some of the acquisition of additional staff has taken place in relatively expensive countries, which could inflate its costs.
 
In addition, services contracts are all in local currency, which may leave Ericsson exposed to currency fluctuations.

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