Reorganizing itself into three new divisions, including one to concentrate on multimedia apps

September 15, 2006

5 Min Read
Ericsson Revamps

Ericsson AB (Nasdaq: ERIC) is reorganizing itself into three new divisions to more closely align itself with the way its carrier customers do business, the vendor's president and CEO Carl-Henric Svanberg announced this morning.

"It's time to build leadership in converging IP networks and in multimedia" and "establish a market defining role in the integration of communications and media," proclaimed Svanberg.

After a significant restructuring and the acquisition of Marconi, Svanberg said it's time to go into growth mode, which will mean an investment in new technologies. "It is important to see where growth is going to come from, and how we can drive this growth," he said.

Svanberg says he expects this new approach to result in market share gains -- and he'll be "disappointed" if it doesn't. Ericsson is the market leader in GSM and UMTS infrastructure, and has been benefiting recently from demand for mobile network kit from emerging markets. (See Emerging Markets Boost Ericsson.)

The company is facing serious compeition in the mobile infrastructure sector from the combined assets of Nokia Corp. (NYSE: NOK) and Siemens Communications Group , and from a merged Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU). Alcatel recently announced it is to buy Nortel Networks Ltd. 's UMTS access business. (See Alcatel Snags Nortel 3G Unit, Nokia, Siemens Create Networks Giant, Alcatel, Lucent Seal Deal, and Investors Say Oui to Alcatel/Lucent.)

Svanberg said the overall aim of the move is "to create a focused, simple, and clear organization" that can "balance long-term growth and short-term profitability... We will also continue to look for bolt-on acquisitions, mostly in the areas of next-generation IP networks and multimedia."

Video and other advanced applications are a big part of the new focus, as Svanberg said the telecom industry is set to change dramatically in the coming years with global mobile subscriptions heading for 4 billion by the end of the decade. The introduction of IPTV onto fixed networks, and bandwidth-hungry services and applications, such as entertainment and the mobile office, onto wireless networks will dramatically boost the required capacity of carrier networks.

Ericsson currently reports its business in terms of two divisions: Systems, which generates nearly all the company's revenues, comprising mobile networks, fixed networks, and professional services, each of which has a subset of smaller business units; and Other, which accounts for just 6 percent of Ericsson's revenues. But from the beginning of January 2007 the company will be organized into three main Business Units:

Networks
Yes, fixed and mobile are being combined to support carriers' convergence plans. It includes mobile and fixed access, core and transmission products, and IP equipment. Current business units -- Systems, Access, Broadband, Power Modules, and Cables -- will be integrated into this division. The head of Access, Kurt Jofs, will run Networks, which will have 21,500 on staff.

Growth potential in this unit, where the main point of customer contact is the carrier's CTO, is "moderate," said the CEO. Global Services
No big change here, said Svanberg. The unit will continue to provide network rollout services, consulting, managed services, outsourcing (running carriers' networks for them), and systems integration. It will have 23,000 employees in more than 140 countries and be headed by Hans Vestberg. (See Ericsson to Run 3's Network.) Growth potential in this unit, where the main point of customer contact is the carrier's COO (chief operating officer), is "good," said the CEO.

To Page 2

Multimedia
This unit, which will develop applications and services for carriers and enterprises, will comprise a number of current units, including Multimedia Systems, Enterprise, Mobile Platforms, and the Consumer and Enterprise Lab units, and have about 4,000 on staff. Ericsson has yet to name the head of the new unit.

"Multimedia is the foundation for all the services the operators want to produce," such as IPTV, interactive gaming, and mobile entertainment, said the CEO. "We and the operators have a lot to learn [about] the services people want to use."

The focus on multimedia service development is also self-serving, noted Svanberg, as the uptake of such services is "a powerful driver for increasing network capacity and investments by operators."

The new unit will also "will better leverage our relationships with [mobile handset manufacturer] Sony Ericsson Mobile Communications and Sony Corp. (NYSE: SNE)."

Growth potential in this unit, where the main point of customer contact is the carrier's CMO (chief marketing officer), is "strong," said the CEO. He cited market projections from research firm Analysys that revenues from networked content (music, gaming, TV, radio, etc.) would grow from less than €20 billion (US$25.4 billion) in 2005 to more than €100 billion ($127 billion) in 2011.

The vendor is also hiring 500 new engineers to accelerate development of IP equipment and multimedia applications. That news will stick in the craw of the 1,600 Marconi staff that Ericsson axed, and is still in the process of discarding, following the acquisition of the British vendor late last year. (See Ericsson Buys Bulk of Marconi and Ericsson/Marconi: The Fallout.)

Analysts at Lehman Brothers regard the move as modestly positive for Ericsson. In a research note issued today they wrote: "We believe Ericsson is trying to take advantage of its rivals' M&A activities to boost its customer focus and thus take share and perhaps obtain a pricing premium." They added that "today's announcement perhaps helps highlight Ericsson's client focus to current and prospective customers," but that it "does not really constitute a fundamental change in divisional structure."

News of the reorganization gave Ericsson's share price a lift on the Stockholm exchange today, as it crept up by 0.30 Swedish Kroner, more than 1 percent, to SEK24.90. On the Nasdaq this morning the vendor's stock was up 35 cents to $34.34.

— Ray Le Maistre, International News Editor, Light Reading

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