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Beginning of the End for Ericsson?

At some point in the not-too-distant future, will 2016 be remembered as the year when it all started to go wrong for Ericsson, a former giant of the telecom equipment market that ultimately lost its way?

Even posing that question will inevitably prompt guffaws and heckles from some corners of the industry. For all of its current problems, Ericsson AB (Nasdaq: ERIC) remains one of the world's biggest suppliers of network gear. Sales are falling, but they are not plummeting like a stone. At least some initiatives that form part of Ericsson's "targeted growth areas" -- which include the cloud, media and virtualization -- have been reasonably well received.

But the thought is clearly on a few minds, today prompting Jan Frykhammar, Ericsson's chief financial officer and acting CEO, to rebut any notion that Ericsson is in terminal decline. "This is absolutely not the beginning of the end for Ericsson," Bloomberg quotes him as saying, after the Swedish vendor issued a profit warning for its third-quarter results. (See Ericsson Profit Warning Sends Shares Tumbling.)

Right now, Ericsson certainly appears to be in a downward spiral from which it cannot escape. Having only recently announced plans for major redundancies, and lost Hans Vestberg as CEO, the company has now warned investors that operating income was nearly wiped out for the July-to-September quarter. This all comes after major restructuring efforts in the first half of the year. Frykhammar does not appear to have any fresh answers. (See Ericsson Ejects CEO Vestberg.)

What's more, we are constantly being told -- at industry conferences and during discussions with key executives -- that technology and market upheavals currently in motion will claim some big victims over the next few years. Tier 1 players, that is. If you had to pick candidates in the network equipment market, Ericsson would surely make the list.

The problems the Swedish vendor faces aren't just related to belt-tightening by customers, triggered by a cyclical or economic slump. China's Huawei Technologies Co. Ltd. is becoming all-powerful, sucking countries and companies into its vast embrace. Recent sales development shows that Ericsson cannot compete. Its only consolation is that Huawei still remains locked out of opportunities in the US, where policymakers say it represents a security risk. (See Is There No Stopping Huawei?)

At the other end of the spectrum, startups and IT boffins are pioneering software technologies that could blast apart the modus operandi of the traditional vendor. Operators like France's Orange (NYSE: FTE) are experimenting with containers and white box technology -- breaking down network functions into their component parts, and then stitching these together as software programs that can run on cheap servers.

"Cisco [Ericsson's key partner on IP technology] and others are not looking at this very nicely because it is a way of changing their business model and separating the hardware from the software, meaning the replacement of the solution can be much easier," said Pierre-Louis Biaggi, the vice president of sales development and partnerships for Orange Business Services, Orange's enterprise division, during a meeting with reporters in July. (See Orange Plots Mass Network-as-a-Service Rollout.)

Ericsson's tie-up with Cisco Systems Inc. (Nasdaq: CSCO), and the moves it is making in software and virtualization, show it is trying to adapt to this brave new world. But it is weighed down by legacy. In the April-to-June quarter, sales from "targeted growth areas" rose by about 520 million Swedish kronor ($59 million) compared with the year-earlier period, to SEK10.82 billion ($1.2 billion), according to Light Reading's calculations. Overall sales (adjusted for comparable units and currency) dropped by nearly SEK4.1 billion ($460 million), to SEK54.1 billion ($6.1 billion), over the same period.

Analysts have also expressed concern about the execution of the growth areas strategy, including some of the M&A moves that Ericsson has made. Built around the acquisition of Redback Networks Inc. in 2007, Ericsson's IP strategy has been "uninspiring," according to Gabriel Brown, a senior analyst with the Heavy Reading market research business. Bengt Nordström, the CEO of the Northstream consultancy, also questions some of the investments Ericsson has made in video technology. "What have the acquisitions delivered?" he said during a recent conversation with Light Reading. (See Vestberg's Seeds May Yet Bear Fruit for Next Ericsson CEO – Analyst and Ericsson Board Has Been Asleep at the Wheel – Consultant.)

Next page: Eric the Dead?

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kq4ym 10/22/2016 | 12:28:04 PM
Re: How Ericsson Will end If the prognosticators are right and "market upheavals currently in motion will claim some big victims over the next few years," it may well not bode well for Ericsson as many think. A lot of shakeouts appear to be looming and the lack of profits for a quarter seem to be a sign of some not so good things happening there.
rahulvatsa 10/14/2016 | 3:42:17 PM
A New Start for Ericsson ? Ericsson is going the way Alcatel, Lucent, Aricent, NSN has gone through.

All these were once mighty players in the telecom industry and have lost the battle to the Chinese companies namely Huawei, ZTE who are offering
products and services at incomparable low cost.

Neither these companies could offer a value good enough to even retain their old customers.



To retain its position in the market Ericsson either has to offer a comparable price or must offer irresistable value to its customers.

Whatever strategy Ericsson adopts  will decide whether it's 'Beginning of the End for Ericsson' or will it retain its market share, or  WILL IT GET BACK ITS PAST GLORY!
Gabriel Brown 10/14/2016 | 7:36:27 AM
Re: Shift of paradigm Having covered Ericsson for several years this warning is not entirely a surprise. The major problem, in my view, was not managing for cyclical global demand.

The same thing happened a few years ago. The CFO resigned for the same kinds of reasons shortly after an investor presentation in London I attended. The mobile networks business is global and has always been subject to economic shocks.

If you look over the recent history of Ericsson (say the last 20 years or so) there have been a few episodes like this. A period of over-reach, followed by a period on contraction. The closest the company has come to extinction was just after the .com crash. 

I don't think this episode is the end of Ericsson, or anything like it. That question was raised in the investor call, according to the Bloomberg report, but amplified in the report by journalists who don't really know the market or company (Iain excluded, natch).

It may signal the end of Ericsson trying to be an uber vendor (the Cisco tie-up effectively confirmed this) and that may not be bad thing. Focusing on doing what it does well and doing it really, really well might be the way forward.

My guess now is the CFO will oversee a rationalization of the business before handing over to a new CEO. This is the pattern of Ericsson. In many ways Vestberg led charmed life as he did not have to go through a major restructuring of the business, as is traditional for Ericsson CEOs.

You also have to ask serious questions of the board and lead shareholders. They seem to be complain vocally in the press, but given they are so dominant, they have a responsibility to guide the company towards realistic growth targets, in my opinion. The acquisition strategy in particular has been puzzling. Acquiring headcount in relatively pedestrian businesses, does not generally make for a stock market darling. It can work in a private equity sense obviously, but you need to be ruthless on costs.

There's lots more to say -- the Huawei and ZTE factor, for example -- but I'll leave at that for now. Good luck to Ericsson and its employees. 
freak0815 10/13/2016 | 5:01:15 AM
Shift of paradigm It's neither the whole industry which is dying nor agressive pricing.
What I can see at the moment is a dramatic shift of paradigm in optical LH transport.

Time for huge and sophisticated OTN switches is over. Of course some basic functions of OTN will still be used internally but most greenfield is modular 100 GbE muxponders only. Some vendors were not prepared to that and start to experience a bad awakening because revenue for existing hardware is about to implode while new products still needs to ramp up and will probably result in less revenue compared to the numbers of 100 GbE (and higher) services provided. These new transport platforms will be much more cost efficient - seen from a customer perspective.

So lucky those vendors which added gridless ROADMs and a modular 100 GbE solution on time. They should be able to maintain their market share, but however I expect revenue still to decline.
PartnerS72684 10/13/2016 | 4:10:04 AM
The death of telco industry Huawei is finally achieving its long term goal of erasing the competition with unfair tactics and with the complicity of telecom carriers. Great companies who formed a vibrant ecosystem of telecom suppliers which drove so much innovation in the industry in the past like Nortel, Lucent, Alcatel, Nokia, Siemens, Motorola, Ericsson, etc are all gone or almost. It was not possible to compete with the dumping practices of Huawei and ZTE. Operators have been happy buying cheaper copycat products and solutions from them but turns out that these vendors are not innovators but followers. The result of this is that the telco industry is declining due to lack of innovation and talent moving away to other more dynamic industries like Internet, IT, etc. The death of Ericsson would signify leaving Huawei as the only player in the industry and will most likely accelerate the decline of the telco industry as a whole.
sarcher60555 10/13/2016 | 2:11:45 AM
Re: sure eric is dead man You cant get rid of a Huawei Sales team.  As a CSP/MNO they are just everywhere inside, outside the organization.   Would love to have the old days back when the Ericsson, Nortel sales rep who only came by the office during his start of the year chit chat mention his target, get our commitment to a certain spend and tottle off to the golf course.  Not to be seen again until renewal time the next year.  These Huawei players are every day hounding me about this gadget or this workshop.  I cant get any work done with them at the foot of my desk all the time.
brooks7 10/12/2016 | 4:01:50 PM
Re: Ultimate ultimatum Dennis,

 

Can we not make Ericsson great again?

 

seven

PS - CEO of Big E...you can steal that line if you want!
Managing23770 10/12/2016 | 3:26:29 PM
sure eric is dead man eric guys is a bunch of bureaucrat with very high paycheck but minor fighting spirit. if they compare with huawei guys, they really ignorance what happening around them and their ego is frustrating. gud luck for them and hope they give a good fight since dun like huawei being too big alone.
mendyk 10/12/2016 | 2:23:58 PM
Ultimate ultimatum Technology suppliers have been yelling "Change or die!" at CSPs for years now. And it's not like Ericsson hasn't made the effort to transform its own business. It's just a lot more difficult to do than a simple slogan suggests.
Mitch Wagner 10/12/2016 | 12:42:56 PM
Backfire There's nothing like the CEO saying "this is not the beginning of the end" to get people thinking it might be the beginning of the end. 

Will Ericsson drag Cisco down? Or is Cisco poised to sweep in and pick up the pieces?
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