Competing against your own customers is rarely a winning move. That explains why Ericsson CEO Börje Ekholm has always preferred to go through operators when catering to other types of business. But what if these organizations want to bypass the telcos? Some of the world's big industrial groups are now spectrum licensees. And not all of them want operators involved.
"We believe integrating private networks with the macro network will be critical to realize the value of many use cases, which will require close cooperation with the operator. However, if somebody has spectrum, that is somebody we are going to work very closely with, that is for sure," Ekholm tells Light Reading. "We are building up that capability to go and serve them properly."
It is another subtle but significant shift by the Swedish equipment maker, which redefined its enterprise ambitions when Ekholm took charge in 2017. The decision then to serve enterprises only via service providers contrasted with Nokia's riskier strategy of maintaining both direct and indirect sales channels.
Ekholm still regards service providers as the "key channel" in this market. But a refusal to serve enterprises directly would be self-defeating if some have bought spectrum licenses so they can avoid working with telcos.
The hand that rocks the Cradlepoint
Signs of a change in Ericsson's approach to the enterprise sector were seen when it spent $1.1 billion on Cradlepoint last year. That takeover, the biggest under Ekholm so far, brought Ericsson a US business that already sold edge routers and related services to enterprise clients, including parts of the public sector. At the time of the deal, just ten of Cradlepoint's 1,500 channel partners were telcos.
Before the acquisition, Ericsson had been sensitive about protecting its relationships with operators by not treading on their toes, said David Mulholland, an analyst with UBS. The Cradlepoint takeover made him wonder if there would be a return to serving the enterprise market directly, as Ericsson did before the Ekholm era.
Then, in June this year, Ericsson launched a new "private 5G" offer that seemed to position it for direct sales to enterprise customers.
"Ericsson's preference is still to work through operators and they are taking as many steps as they can to empower operators to embrace the enterprise opportunity," GlobalData analyst John Byrne told Light Reading.
"However, they are also moving closer to the Nokia position of reserving the right to proceed directly if operators are not taking the ball and running with it."
Covering all the bases may be important if Ericsson is to challenge Nokia and grow enterprise sales more quickly. The "emerging business and other" segment to which Cradlepoint belongs accounted for just 4% of the 54.9 billion Swedish kronor ($6.3 billion) that Ericsson made in revenues for the recent second quarter.
Yet while the main telco market is still where Ericsson does most of its business, the enterprise sector is growing faster.
Cradlepoint's market alone was growing by 25% to 30% annually at the time of the acquisition, according to Ericsson's estimates. In his introduction to Ericsson's latest earnings report, Ekholm reckoned the entire enterprise market he is targeting would continue to grow by 20% to 30% each year.
The rate expected for the overall radio access network market this year is 10%, says Dell'Oro, a market-research firm.
Unsurprisingly, then, enterprise is shaping up to be a major battleground between Ericsson and Nokia.
The Finnish vendor's fast-growing enterprise unit made about €357 million ($419 million) in the second quarter, roughly 7% of total company sales. Analysts have been impressed by its activities in the nascent market for private 5G networks.
Enterprise takeovers on the horizon
With a revival of Ericsson's networks business complete, Ekholm says he is now determined to build a much stronger enterprise presence, partly through takeovers.
"It is hard to speculate, but our ambition is to make that a very sizeable part of Ericsson in a few years' time," he says. "It will probably require some more acquisitions, so you will see that coming as well."
His expectation is that an enterprise push will be a "drag on earnings" until about 2023. The emerging business and other unit saw its operating loss widen to about SEK1.7 billion ($200 million) for the second quarter, from SEK1 billion ($120 million) a year earlier, although that was largely because of an SEK800 million ($92 million) settlement with Nokia relating to a previous damages claim.
The enterprise market will not just be contested between Ericsson and Nokia, though. Dozens of specialists are active in this sector, some of which could become takeover targets for Ericsson.
A more significant challenge may come from the big US tech companies like Google and Microsoft. Last year, the latter's acquisitions of Metaswitch and Affirmed Networks – two suppliers of software for use in telecom networks – were a sign of its intent to sell communications products.
Cozier relationships between operators and US Internet companies are another potential threat to Ericsson. A system Google has developed for Vodafone, branded Neuron, uses artificial intelligence to provide insight into network performance. That is a market Ericsson has also been targeting with a product called Ericsson Operations Engine, unveiled in early 2019.
"I think we have to assume that we will cooperate with some of the US tech companies but we will compete with them as well," says Ekholm. "With our capabilities and the knowledge we have of the network, I don't think we are in an impossible situation at all."
- Ericsson refines private wireless sales pitch
- Ericsson spends $1.1B on Cradlepoint in strategic shift
- Ericsson Denies Ditching the Enterprise Market
- Telcos & Enterprises: 5G Friends or Foes?
- Ericsson not a fan of German spectrum plan
— Iain Morris, International Editor, Light Reading