Ericsson, Cisco think they can generate more than $1B each in new sales through partnership

Ericsson (NASDAQ: ERIC) and Cisco's partnership to resell each other's products and services and jointly develop new ones could generate well more than the $1 billion each in revenue by 2018 that the vendors have projected, according to senior executives at the firms. Meanwhile, John Chambers, Cisco's executive chairman and former CEO, indicated that he thinks Nokia's (NYSE:NOK) deal to acquire Alcatel-Lucent (NYSE: ALU) is likely to fail, something Nokia dismissed.

Cisco and Ericsson plan to first attack the carrier market, where Ericsson is stronger and where Cisco hopes the partnership will give it a leg up. Speaking together at the Morgan Stanley European Technology, Media & Telecom Conference, Chambers and Ericsson CEO Hans Vestberg said they expect "at least" $1 billion each in new revenue from the first phase of the deal, but have larger ambitions beyond that, according to Reuters.

"We have much higher ambitions," Vestberg said, referring to the revenue targets, according to Reuters. "If we do this right, there are other opportunities as well," he said about more sales growth.

The vendors have struck multiple agreements that include commitments to network transformation through reference architectures and joint development, systems-based management and control, a broad reseller agreement, and collaboration in key emerging markets, including 5G, cloud, IP and the Internet of Things.

At first, the companies will target operators looking to upgrade their networks and add software-defined networking. After that, in a second stage the companies aim to attack the enterprise market, where Cisco has traditionally been stronger than Ericsson. Finally, the companies hope to get new opportunities in IoT, with sales to vertical industries like automotive retail and agriculture.

"If you are asking if we do Phase 1 right, is there incremental upside? The answer is yes," Chambers said, responding to a question, adding that the vendors were being cautious in their predictions. Vestberg agreed that there is more upside for both parties.

"Partnership will be as important over the next two decades as acquisitions were over the past two decades for us," Chambers said. "If we do it right, our peers won't be able to keep up."

Some analysts see the Ericsson/Cisco deal as a defensive reaction to Nokia and Alcatel-Lucent's merger, which will combine two strong wireless networking players while also giving Nokia advantages in routing, transport and IP networks, challenging Cisco and Huawei and giving it an edge in some markets over Ericsson.

Bernstein analyst Pierre Ferragu told the Financial Times near-term benefits of the Ericsson/Cisco deal would be "merely about reselling and are likely to benefit Cisco."

"Longer term both partners could benefit on a wider scale, but this would require collaboration to be successful in product development, which is far from guaranteed," he said.

Chambers said the partnership will be better than a merger since the companies can start reselling each other's products immediately and won't have to wait for regulatory approvals, in contrast to the Nokia/Alcatel-Lucent transaction.

"The odds are good that [the Alcatel and Nokia merger] will fail," he said, pointing to previous examples of large technology mergers that have faced challenges, according to the FT. "By the time you shake out the efficiencies and get regulatory approval, it's a two- to three-year process. This industry, the winners and losers, will be decided in three years. I'd love to see a lot of our peers tied up with large acquisitions."

Nokia dismissed Chambers' comments, saying in a statement to the FT: "The integrated sales team of the new Nokia will look forward to pitching against a Cisco salesperson selling Ericsson products."

For more:
- see this Reuters article
- see this FT article
- see this MarketWatch article
- see this WSJ article (sub. req.)

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