Ericsson (NASDAQ:ERIC) said there are now more than 1 billion subscribers on networks for which it provides managed services, a milestone it crossed sometime in the first quarter. The company said the milestone represents not only a significant achievement for itself but also for the wider industry as vendors change the nature of how they work with carriers.
In an interview with FierceBroadbandWireless, Bradley Mead, the global head of network managed services for Ericsson, said that the threshold represents an acceleration of Ericsson's managed services business, which really started to take off in 2007 with the advent of the iPhone and mobile data services. "We have been quite unwavering into our approach of how we make this business work," he said.
Indeed, at the at the end of 2010 Ericsson reported 750 million subscribers in networks where it provided managed services. Ericsson said 26 percent of the 1 billion subscribers are in Europe, 21 percent are in India and the Americas each, 19 percent are in Africa and the Middle East and 13 percent are in Asia.
For network vendors in general--from Ericsson to Huawei, Nokia Siemens Networks, Alcatel-Lucent (NASDAQ: ALU), ZTE and others--managed services deals represent not just another source of revenue but a way to demonstrate to carriers that they can do more than just sell them network equipment. The agreements represent a level of trust the carriers place in vendors to manage and maintain their network infrastructure, which is often a key source of differentiation from competitors.
Carriers see benefits in the deals because they allow them to cut costs by offloading and outsourcing network management to vendors. Although managed services deals are fairly common in Europe, they are more of a rarity in the United States. Ericsson has won the two most well-known deals, with Sprint Nextel (NYSE:S) and Clearwire (NASDAQ:CLWR).
Ericsson was one of the first players in the managed services market and has successfully evolved its approach over time. "Early on, Ericsson established itself as a market leader and maintains that position," said Curtis Price, program vice president of infrastructures services at IDC.
"They've been able to read the market, stay close to the customer to understand what their challenges are and make sure that they have a strategy and a process in place that allows them to meet those changing requirements," he said.
Ericsson has secured its staying power by gaining a lot of trust from operators and has successfully renewed numerous contracts, which Price said is a "watershed moment" that shows how satisfied a carrier is with the services it has received.
Competitors, particularly Nokia Siemens Networks and Alcatel-Lucent, have been recalibrating their plays in the managed services market and are becoming more selective regarding the deals they pursue. "Trying to drive profitability in some parts of this business is really difficult," said Price. By maintaining its leadership role, Ericsson "has shown it has stringent processes in place, allowing it to compete effectively," he added.
Infrastructure vendors gain significant upside from managed services contracts because the intimate relationship they build with operators allows the vendors to expand their sphere of influence and become partners that can make recommendations for the future. "Those recommendations can pull in other parts" of a vendor's business, said Price.
Mead said Ericsson's focus is on "creating true global skill and scale to first of all be able to deliver the financial benefits that customers expect to come from these relationships." However, he said they also need to be profitable, and follow what he called "industrial logic." Alcatel-Lucent has been reviewing its managed services deals and exiting from some unprofitable ones in certain markets.
"If it gets to a point where industrial logic doesn't stand up we are very quick to say this is far as it can go," Mead said. He also said the key is to be vendor agnostic and not use the deals as a Trojan horse to sell Ericsson network gear to operators.
Even though Ericsson's managed services business is growing it still only represents a fraction of the company's overall sales. Ericsson reported $14.6 billion in "global services" revenue for 2012, of which managed services were around $3.76 billion. Ericsson reported total net sales of $34.2 billion last year.
NSN boasts it has 350 managed service contracts to 148 operators for networks of more than 650 million subscribers. Huawei said in its 2012 annual report it was awarded more than 330 managed service contracts and that the networks managed by Huawei serve more than 310 million subscribers. Alcatel-Lucent reported "managed Services deals in 40+ networks covering 200 million subscribers."
What's next for managed services? Mead said the focus for Ericsson is on the end consumer experience. "We believe that in the future we need to shift away from how we run and operate networks," he said, noting that most networks are moving to all-IP architectures where consumers have access to a more diverse array of services. "What is important is the services that work across all that infrastructure and the experience consumers have when they use those services."
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