Ericsson's New 'String of Pearls'
Unlike most sequels, "String of Pearls II" – or "Full Service Broadband Network," to use its proper name – looks a lot more compelling than the original. First of all, the Entrisphere Inc. , Marconi, Redback Networks Inc. , and Tandberg Television acquisitions have been executed by a more focused company than Ericsson circa 1998. Today's Ericsson has divested many non-core businesses. Nearly all of its mobile infrastructure competitors have been beaten into some combination of submission, merger, or focus on Mobile WiMax. Today the company dares to focus on only one wireless air interface – W-CDMA – to the exclusion of all others.
Whereas its 1990s acquisitions were promising startups, Ericsson's recent acquisitions already have productized and widely deployed portfolios, significant reputations for execution, and significant revenue streams – $350 million last year, in the case of Tandberg. Redback will likely present the greatest portfolio integration challenge: The intention here is not just to evolve the Redback platform into a converged access gateway for fixed and mobile networks per the 3rd Generation Partnership Project (3GPP) 's R6 and R7 specifications, but rather to leverage the scaleability of the Redback IP stacks across the wider Ericsson product portfolio.
If nothing else, this time around Ericsson at least has a body of experience to draw upon in integrating these acquisitions. Moreover, a significant part of the messaging in Stockholm centered on enhanced R&D efficiency. Focused on reducing lead times, the company claims to have markedly improved its execution against its roadmap – and this is borne out by independent market feedback Heavy Reading has received.
The rationale behind the new Full Service Broadband lineup is difficult to contest. The addition of Gigabit passive optical networking, edge aggregation, and video head-end capabilities are logical portfolio-fillers for a company whose revenues come primarily from GSM and W-CDMA today. And while Ericsson will undoubtedly revisit earlier challenges in integrating its disparate new acquisitions, these are positive challenges, such as the difficulties of assimilating quality people and products.
It's also difficult to argue with the company's efforts to extend its leadership in the telecom services space, in particular by productizing its services into templates that can be more easily replicated from one customer to the next. Positioning energy efficiency as a differentiator in radio access networks is smart: Base station transceivers that literally power down when traffic volumes drop resonate well with mobile operators that are focused on reducing opex. Base stations that run on biofuels also resonate with operators, as well as investors.
Ericsson's strategic positioning isn't flawless. The Marconi portfolio doesn't inspire much excitement among mobile operators today. As operators increase their backhaul spending to support greater data traffic, some in Ericsson must long for a backhaul portfolio like the one possessed by Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). (For more on both companies' mobile backhaul offers, see Heavy Reading's Ethernet Backhaul: Mobile Operator Strategies & Market Opportunities). Investing little or nothing in WiMax or Digital Video Broadcasting – Handheld (DVB-H) is justified in terms of the relentless focus on scale in W-CDMA. But while neither are likely to challenge W-CDMA's hegemony in mobile broadband, both markets may grow to be significantly larger than Ericsson's current dire predictions. If they do, Ericsson's one-dimensional confidence in W-CDMA may one day come to look more like negligence.
While clearly compelling, Ericsson's strong positioning in services will become more challenging as time goes by, as the ascent of smaller, wall- and pole-mountable base stations in mobile network topologies reduces the scope of the smaller "network roll out" component of its services business. This will leave Ericsson more exposed to competition, as the larger "professional services" component becomes still larger as a proportion of its total services business.
Ericsson continues to talk about having 35 IP Multimedia Subsystem (IMS) "contracts," of which eight have "launched" – though it's a pretty safe bet that few of these will support a 3GPP-compliant IMS Call State Control Function (CSCF) any time soon. The "4G" marketing hype generated by WiMax proponents has even goaded CEO Carl Henric Svanberg into slapping the "4G" label on UMTS Terrestrial Radio Access Network Long-Term Evolution (UTRAN LTE). This despite the fact that the International Telecommunication Union (ITU) defines "4G" as combining wide-area mobile broadband performance with short-range wireless throughput of 1 Gbit/s, expected in the 2015 timeframe. That said, Ericsson remains no worse than most of its competitors, and a lot more temperate than some, when it comes to hyping its positioning in emerging technologies.
There's no guarantee that Ericsson has learned all the lessons from its "String of Pearls" initiative in evolving to its "Full Service Broadband Network," but the indications do appear positive. And whatever the challenges Ericsson faces today, be sure of one thing: Most of its competitors would gladly swap them for their own.
— Patrick Donegan, Senior Analyst, Heavy Reading