'This Industry Will Be Won & Lost In the Next Three Years' – John Chambers
Cisco and Ericsson decided to engineer a strategic global partnership, rather than make acquisitions or create joint ventures, because a partnership is the quickest relationship to execute and speed is the key to future success in the communications networking sector, according to Cisco's executive chairman and former CEO, John Chambers. (See Cisco & Ericsson Forge Killer Partnership and Cisco + Ericsson: Friends With Benefits.)
Sharing a presentation stage with Ericsson AB (Nasdaq: ERIC) CEO Hans Vestberg at the Swedish vendor's capital markets day in Stockholm early Tuesday, and just one day after the two companies announced their game-changing relationship, Chambers emphasized that there is a relatively short window for any company to establish itself as a supplier of technology and supporting services to the communications service providers and enterprises of the future. (See What's the Deal Behind 'Ciscosson'?)
"This industry is about growth, innovation and speed," he said. If Cisco Systems Inc. (Nasdaq: CSCO) and Ericsson had decided to expand and grow via acquisitions, then that would have taken too long. "If it takes six months to get through a regulatory board and then another year to combine … this industry will be won and lost in the next three years, so it is all about speed about how you go about it. While we are a huge believer in big-to-small and big-to-medium acquisitions, partnerships, if you can do them, are the way to go large-to-large. Joint ventures add an extra level of complexity, you have an over-riding group, a board, and that slows you down," added Chambers.
Acquisitions were an option, of course. Vestberg "could have selected any partner he wanted, he could have acquired other companies, joint ventured with others, he could have selected others and Cisco could have done the same -- we usually get the opportunity to acquire just about anybody that's on the market. We have done 180 acquisitions and we are pretty good at it. But we do not believe in mergers among equals. They do not work in this industry. If you are going to do that, tell me -- how are you going to do that differently?" he asked, clearly directing the question to Nokia Corp. (NYSE: NOK) and Alcatel-Lucent (NYSE: ALU). (See AlcaLu Deal Makes Us 'More Complete' Than Ericsson, Says Nokia CTO and Nokia Makes €15.6B Bid for Alcatel-Lucent.)
Vestberg added: "We could have bought IP companies, we could have done mergers as well, but we didn't think that would be right for the customers or the investors. This was a much better solution and much quicker," noted the Ericsson CEO, without mentioning Juniper Networks Inc. (NYSE: JNPR). (See Juniper Takes Haircut On 'Ciscosson' Team Up.)
Industry rivals were never namechecked by either speaker, but the references were quite clear, especially when Chambers was setting out why he thinks a partnership between Cisco and Ericsson can deliver the best options to the communications market. "To do these partnerships you need a common vision, strategy, goals and culture. You can't partner on next-generation networking without the same vision … customers understood that and asked us to go faster. Our companies are aligned and we have the opportunity to change the industry. It took more than a year to get to the agreement because you have to build trust -- you can't do that in 90 days. That's why other partnerships have failed."
Customers 'get it'
The role and opinion of customers is vital, noted Chambers. "There are two sets of people who need to 'get' an idea like this -- the customers and the sales teams. If you have to explain it to customers, then it's not going to work. And the sales teams, they really get this -- they are really excited. If we get this right we will leave our competitors behind," added Chambers, without mentioning Huawei Technologies Co. Ltd. , NokAlu or any of the major enterprise IT companies that are hoping to wrestle business away from the traditional communications networking vendors.
With speed of action so important, the companies are aiming to get on with the job of working together to target the communications service provider market, starting with the resale of each other's products, joint professional services engagements (including systems integration and managed services), joint cloud and 5G architecture engagements and cross-licensing deals.
"This is a multi-phased approach -- this is just phase 1," noted Chambers. "You can see us already working on phase 2 and we are dreaming about what phase 3 is. That gives the staying power -- it won't be a year or two transaction. We will be so deeply intertwined it will be like a marriage except we can make it happen faster," he added.
Phase 2 includes IoT platforms, integrated network management solutions, cloud and data center capabilities, optimized backhaul, professional services for enterprises and the development of systems that can deliver "seamless indoor/outdoor access."
Trust and corporate governance
Now there will be close scrutiny on how the dynamics and details of the partnership will manifest themselves, how the companies will jointly engage in R&D process and in customer engagements and how the partnership will impact their top and bottom lines.
Key to the "trust" mentioned by Chambers as being vital to the relationship will be the ability to agree on which of the partners owns any resulting product developments. Vestberg noted that "we are going to decide who owns the joint solutions -- they will be jointly developed but one party will own it. We will agree on that … it will be defined very clearly in the partnership agreement," said the Ericsson CEO, adding that it would make sense for Cisco to take the lead on enterprise-focused products and Ericsson on service provider developments (though that seems like wishful thinking on Vestberg's part).
Vestberg also said that the relationship has been set up so that one company does not benefit at the expense of the other. "It will not result in $5 billion in sales for Cisco and $100,000 for Ericsson -- the partnership will be balanced," and both companies will be shooting higher than the $1 billion in incremental revenues that both are targeting from the partnership by 2018.
To keep things on track, the CEOs of the two companies will meet each quarter to review progress. "We will have very rigorous oversight. This is a model built for the long term," said Vestberg.
But what if things go wrong? What is the partnership unravels?
Chambers said that the partnership has already established focus areas and goals for the next three-to-five years and that many of the details about what will be done and how have already been decided. "Most partnerships and acquisitions don't work because that sort of thing isn't done in advance. Something else might trip us up but it won't be that. Watch closely how this next generation strategic partnership works and what it is like -- it is a game-changer," and will be the model for future industry relationships, he proclaimed.
— Ray Le Maistre, , Editor-in-Chief, Light Reading