with Hans Vestberg, CEO of Ericsson
STOCKHOLM--On a snowy day in Stockholm during Ericsson's Business Innovation Forum conference, Ericsson CEO Hans Vestberg talked with FierceWireless Editor-in-Chief Sue Marek about the company's transformation from a hardware to a software company, its sudden exit from the modem business and why he thinks 5G will be a reality in 2020. The following is an excerpt of their conversation.
FierceWireless: North America was a weak spot for you in your third quarter. Tell me what do you see happening here?
Vestberg: It's three-fold. One, the market has expanded. Two, operators have invested more. And three, we have increased our market share and we have also increased our portfolio. For example, we are doing OSS/BSS with T-Mobile and managed services with Sprint. Those factors have contributed to this. North America has been a growth engine for a long time. And now in the third quarter the market declined 2 percent. I am not sure I should make a big thing of it.
We also saw in that quarter that there were some operators that were doing cash flow optimization. Sometimes that happens. Those customers are so big for us and the market is so big for us that it impacts Ericsson. That's what happened.
FierceWireless: So basically small changes on their part ended up having a big impact on Ericsson because they are such big customers.
Vestberg: Our market share has not changed in North America and my long-term view on the market has not changed. The innovation and the usage of mobile broadband has not changed. It's still the strongest telecom market in the world. It has the most mobile broadband customers. It has innovation. And it had some interesting handsets that came out in the third quarter that will help fuel the market.
FierceWireless: But we are seeing consolidation continue to occur among the operators. In North America, the smaller operators, in particular, are getting acquired and disappearing. Is that a worrisome trend for Ericsson? Doesn't it mean fewer customers for you?
Vestberg: It doesn't concern me. Remember, in [the] third quarter, Ericsson grew 9 percent in that quarter. Even though North America was not contributing to it, we had seven other regions that were growing. That's the strength of the company.
Am I worried about consolidation? I think it's logical that you will see consolidation. But it seems as if the strong are just getting stronger. I usually say that there are three phases of consolidation. Short-term it can have negative impact on Ericsson because of the two companies come together and they need to review what they should invest in and that takes time. The second phase is usually positive for us because they need to collapse the networks and that's a big opportunity for us because that means transformation of the network and opportunity for service work.
The third phase is also positive. They don't need less capacity unless they have under-utilized networks. And few operators with today's financial discipline that are sitting with under-utilized capacity. Usually the new operator that is created is stronger and wants to invest in more capacity.
Short-term it can impact us. But I'm a long-term guy. And the world needs more capacity. Look at the smartphone penetration--it's growing. Will HD come to the smartphone? If so that means more capacity. These types of things are far more important than how many operators there are.
FierceWireless: Ericsson now considers itself more of a software and services company than a hardware company. In fact, Ericsson has said that 65 percent of its business is now software. How does that change impact your business?
Vestberg: It has a huge impact on us. First of all, it impacts the type of people that we have in the company. That is No. 1. We used to have 20 factories making hardware. Today we have 65,000 people working in services. And nearly all our people in R&D are doing software development. We're changing.
Software by definition has high gross margins. But it also has high R&D. Hardware has more variable costs. But you need people to deliver services, so you are going to increase your head count. If you look over the last five years, 60 percent of the head count in Ericsson is coming from services. And a lot of that is from acquired companies.
Our professional services business is generating the highest profitability today and has been doing so for some time.
It also impacts where we have people dispersed throughout the company. If you go back 10 years, about 50 percent of all Ericsson employees were in this fantastic country [Sweden]. Now it's less than 20 percent.
Now we have more employees in India than we have in Sweden. In North America, we have about 15,000 employees. If you are a hardware company you can have the majority of your employees in Sweden but if you are software and services, you need to be close to the customer.
FierceWireless: You recently exited the modem business. With wireless connectivity going into all these vertical markets like healthcare, automotive and more, it seems like the modem business would be a growth area. Why did you get out of it?
Vestberg: Remember we were addressing a small segment of that market. We were only addressing the high-end smartphones. The ones that have multiple different frequency bands. Where the frequency or cadence of the radios are different from the processors, the manufacturers buy the processor separate from the modem.
Now if you were buying the modem for the car, you would buy the processor and the modem together because the cadence of the modems is similar to the radio. But in a high-end, like the latest iPhone, they buy the modem separate from the processor and they switch out the modem every six months because the cadence in the modem is much quicker and the processor they only switch out every two years.
As the market became much more competitive, our competitors started combining the processors and that shrank the market. And we decided that that with the money we were spending, we were wrong to do that in an area where we were not No. 1. Instead we wanted to spend money in an area where we can succeed.
It was both a market change and a resource allocation change. It is a bold decision and it impacts a lot of people that must leave the company. And you can always look back and say we were wrong. But that is life.
We are today spending money on 5G but my revenues won't come until 2020. But that is how we work.
FierceWireless: You mentioned 5G. Are you still sticking to the 2020 timeframe?
Vestberg: Yes. 5G is going to be higher speeds and lower latency. The requirements from the industry are bold and we are working on them.
I'm working from the view of what will you do with the network. I am thinking of what the network will have to provide in the 2020 time frame. My view is the network has to be so much smarter. We will have so many more devices and so many applications that will require data that the network needs to be able to orchestrate those requirements quickly and efficiently.