On January 16th Börje Ekholm became the new CEO of Swedish telecoms infrastructure giant Ericsson. He took over from Jan Frykhammar, who has been acting as interim CEO since the previous incumbent, Hans Vestberg, stepped down in July 2016. Vestberg’s resignation was the result of persistent dissatisfaction among Ericsson’s shareholders about the company’s share price and about its underlying financial performance, and the new CEO faces a formidable challenge in achieving a turnaround. One major strategic issue that Ericsson faces under its new leadership is the strong, long-term trend towards fixed/mobile convergence among telcos, on the organizational level, on the infrastructure and on the services level.
Having shed its Enterprise business a few years ago, Ericsson’s customer base is now predominantly telcos, so it’s crucial for Ericsson to be aligned with what telcos will need in the next few years. The envelope that shapes telcos’ needs is the fact that in developed economies, revenues from core services (voice, messaging, data transmission) will be essentially flat for the foreseeable future. In Western Europe, for example, IDC expects telcos’ core service revenues to show a CAGR of -0.2% between 2015 and 2020. One consequence of this is that telcos are looking to combine and converge fixed-line and mobile operations, for reasons including:
- Consolidation of common elements in their fixed and mobile operations, such as the packet core network, to reduce cost and increase efficiency
- Being able to service the growing fraction of their addressable market that requires a bundle of fixed services, mobile services and TV (ie, quad-play)
This trend towards convergence of fixed and mobile operations is one of the main issues that Ericsson needs to address. A few years ago Ericsson made a strategic decision to focus exclusively on 3GPP (ie, mobile) products and services. This served the company well for a while, when demand from mobile operators was much stronger than from fixed-line operators. However, now that operators are looking to combine fixed and mobile operations, it means that Ericsson can’t directly provide some of what their customers require. The partnership with Cisco, announced a year ago, is aimed at enabling both parties to go to market with a combined fixed/mobile offering, but Ericsson’s competitors can provide such offerings directly. Nokia, for example, is now in a much stronger position to provide combined/converged offerings, following its acquisition of Alcatel-Lucent, which has an extensive fixed-line portfolio. Huawei has always encompassed both fixed-line and mobile networks in its product offering, as it has grown its market share over the past decade.
Having said that, it’s also worth pointing out that Ericsson’s new CEO will be able to exploit some strengths that play well into telcos’ strategic needs. For example:
- Ericsson’s portfolio and expertise position it well to serve telcos’ need for more performance and capacity in their mobile data networks. Mobile data will be the telcos’ most important growth market over the next few years. In Western Europe, mobile data revenues will grow at 5.8% CAGR between 2015 and 2020, compared to 2.2% CAGR for fixed-line data. (Voice and messaging revenues will decline.)
- Ericsson’s TV business positions it well to serve telcos as their own TV businesses mature, and as they start to behave like “TV companies” rather than “telcos doing TV”. As an example of this transition, Telefonica announced on 19th January 2017 that it plans to invest 70 million euros in the production of original TV content.
- Ericsson’s global reach is arguably the strongest among all providers of infrastructure and services for public networks, and certainly second to none. This enables Ericsson to balance its portfolio as demand waxes and wanes at different times and in different ways, in different parts of the world.
There are certainly some challenging times ahead for Ericsson’s management, but this is not the first time in recent history that company has faced that situation, and dealt with it successfully. The company has some strong assets upon which its new CEO can build the foundations of a new turnaround strategy.55
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