Ericsson and Cisco: Playing for keeps

Camille Mendler/Ovum
12 Nov 2015

Fast breaks are common in handball, a sport that Ericsson CEO Hans Vestberg once considered for an alternative career. Making a swift attack from a defensive position exploits the gaps a competitor has made in a rapid advance.

For Ericsson and Cisco, which announced a major strategic alliance on November 9, the main competitors are aggressive vendor Huawei, and resurgent Nokia, whose recent merger with Alcatel-Lucent has created a dangerous entity.

The competitor gaps are arguably IP and managed services expertise, delivered as a comprehensive end-to-end service proposition.

Yet after an avowed 13-month gestation period, Ericsson and Cisco can’t be said to have acted swiftly. Unpicked, the alliance reveals modest (although achievable) ambitions: Ericsson and Cisco’s new partnership is expected to produce $1 billion for each in net new revenues by 2018 – and achieve about $115 million (SEK 1 billion) in savings.

This will be done by:

  • Ericsson reselling Cisco networking equipment
  • Cisco promoting and taking advantage of Ericsson’s managed services expertise
  • Implementing cross-patent licensing
  • Mining each others’ customer bases in service provider and enterprise
  • Leveraging respective channel partners

The biggest message both firms want to push is the alliance’s end-to-end benefits for service providers. In the longer term, the two companies aim to create a unified network management system able to control equipment from both companies. Further aims are to explore joint capabilities and development in 5G, IoT, cloud, enterprise mobility and managed services.

But can a primary message of a one-stop-shop offering quality and convenience be enough to woo a customer base itself under heavy attack?

Ericsson’s core customer base is shrinking. According to Ovum’s World Telecoms Financial Benchmarks, the world’s top 45 operator groups have delivered average revenue growth of less than 2% for the past 8 quarters. Telco capex has peaked – capital intensity reached a six-year high of 19.1% mid year, but Ovum predicts it won’t last as LTE rollouts complete. Although hyped, 5G is still some way off.

So what else will service providers spend on? One target for the Ericsson-Cisco alliance is the march of virtualization – the ongoing investment in software-defined networking and network functions virtualization that is transforming IT and telecom infrastructure. Coupled with Ericsson’s top-class managed services skills and Cisco’s IP expertise, they hope to have a winning proposition.

However, virtualization will shift, rather than grow expenditure: Ovum’s NFV forecasts indicate that total NFV vendor revenues will reach $750 million during 2018, of which Cisco and Ericsson will claim some, but not all of the market. In fact, telco NFV spend is likely to be a very small percentage of capex, close to 2% during 2019 according to Ovum’s capex and NFV forecasts. The following figure illustrates a comparison of total capex spend and NFV vendor revenues.

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