Ericsson's future path paved with challenges

We recently met with Ericsson CEO Hans Vestberg to hear his vision for the company’s future. His message for the company is clear: breadth and depth of expertise will see it maintain its leadership. Yet this breadth of scope is our key concern for its long-term future. Maintaining a leadership position in mobile, while developing new services and growing its position in the integrated network space, is a big task. Ericsson is certainly well positioned to achieve its goals, but it faces some major challenges – not least the potential alienation of its current customer base.

 

Hans Vestberg made much of Ericsson’s number one position in mobile infrastructure and reiterated Ericsson’s recent announcement that it is twice the size of its nearest rival. It is doing particularly well in LTE infrastructure and managed services. However, Huawei is also growing rapidly and at its recent analyst event in London made it clear that it was determined to continue its rapid growth. Additionally, the mobile infrastructure market is becoming increasingly standardized and differentiation more difficult.

 

Ericsson must therefore guard against arrogance and complacency. Undoubtedly, it has much to be confident about. However, no lead is unassailable. Ericsson used to be the world’s largest handset manufacturer, yet it recently exited the sector completely. Nokia is another Nordic vendor that will vouch for the need to adapt to new conditions or risk an ‘unassailable lead’ becoming exactly the opposite. Arrogance and complacency can not be allowed to set in. Internal culture will need to be managed, as well as the core strengths that Vestberg emphasized: global presence and scale; technology leadership; and service leadership.

 

The same slide on which Vestberg proclaimed Ericsson’s leadership in mobile also emphasized that it still has a long way to go in the converged fixed and mobile space. By Ericsson’s own estimates it is only number four or five in the converged network space. Our Future of Broadband reports concluded that most people in developed markets will have both a fixed and mobile broadband connection and it is therefore prudent for networks to become more integrated.

 

Therefore, it is clear that much work awaits if Ericsson is to improve its current standing in the fixed arena. Without this element its desire to be an end-to-end solution provider is under question moving forward despite its undoubted advantage in using its strength in wireless infrastructure as a “Trojan horse” to enter operators’ fixed networks.

 

 

Vestberg conceded that Ericsson is heavily investing in fixed, and a new Smart Service Router (SSR) will be launched in 2012. This is Ericsson’s third SSR but the approach is still a major strategic departure for Ericsson, which has previously used Juniper routers. The move will also be met with fierce resistance from the likes of fixed specialists such as Cisco and Juniper, and wireless competitors Huawei and Alcatel Lucent. It will be interesting to assess operators’ response and, most importantly, the new SSR’s sales. Unfortunately Vestberg refused to give any guidance on targets, but the SSR’s reception will give a far clearer indication as to how far Ericsson still needs to go to dominate a converged world.

 

 

Ovum’s 2020 vision sees continued operator consolidation, so fewer addressable customers for Ericsson in its traditional markets. In addition, network sharing will further reduce the number of addressable customers, risking infrastructure and managed services revenues. The rise of the neutral host and national networks takes these challenges even further still.

 

In response Vestberg naturally opined that fewer operators would also increase their scale and spending power. It could therefore be of benefit to the largest vendors. However, his main thrust was the importance of breadth of expertise in such a world in order to support operators in more ways. This is a logical proposition extension, but Ericsson is not guaranteed success, particularly in light of the challenges of maintaining focus on its core products while developing new services, which require new skills and bring new competition and new risks. Of particular note is the rising importance of services to its portfolio. It now dominates this sector among telecoms vendors, but as it broadens its offerings it will increasingly rub shoulders with systems integrators (SIs) such as IBM and Accenture. Clear differentiation from these incumbent suppliers will be critical for Ericsson’s success in the broader SI arena.

 

 

Ericsson’s approach to M2M flags up another example of how Ericsson’s traditional customer base could undermine its position in the long term. Vestberg stressed that it is developing a white-label offering to enable operators to provide M2M services. Operators may be essential to provide M2M connectivity, but they are in general unlikely to be the go-to solution providers. This honor will most likely rest with the aforementioned SIs. Ericsson’s investment in an operator focus would therefore be an undue risk when faced with the most likely scenario for M2M.

 

 

When challenged on this point Vestberg emphasized that Ericsson’s strategic roadmap also includes targeting ‘select industry verticals’. Why bother doing that if operators are key players in the ecosystem? Certainly there will be some verticals for which specific solutions need to be developed and in which operators would not feel threatened, for example Ericsson’s partnership with Motorola Solutions in the security industry.

 

However, Ericsson’s deep cross-operator relationships place it in a strong position to deliver future services to end users – more so than operators that are tied to individual markets. There are therefore ample opportunities for it to breach its operator-centric view of the world. Yet to outwardly proclaim an end-user approach would undermine the very foundation on which its competitive advantage is built, which in turn could threaten the core infrastructure and managed services businesses.

 

The targeting of ‘select industry verticals’ is the clearest indication yet that Ericsson believes it has something more to offer. However, it is still certainly a very, very long way from an open declaration of intent and, to be perfectly clear, Ericsson has stated publicly time and again that it is working with and for operators. Nonetheless, its vertical strategy is an indication that Ericsson will face some interesting strategic decisions in the years ahead. Ericsson may therefore be leading the pack today, but like everyone in the telecoms sector, the road to 2020 is paved with challenges.