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?