Weaker forecast sets the stage for a challenging 2019
Ericsson slims down and doubles down on mobile
On March 28, Ericsson's CEO Börje Ekholm announced the company's new structure and strategy. A strategic change at the vendor has been expected since Ekholm took on the role of Ericsson president and CEO in October 2016. He was brought in to return the company to profitability and revenue growth. The new strategy has the company doubling down on its mobile infrastructure networks, creating a software and network transformation group called Digital Services, shifting its IoT focus from system integrations to more modular platform approach, refocusing its managed services division, and de-emphasizing its media and IT cloud infrastructure divisions.
Ericsson hopes that less equals more
It has been obvious for some time that Ericsson needed change. The company, which was once the undisputed dominant vendor in radio access networks, has seen its position eaten away at over the last five years by Huawei and, more recently, by a reinvigorated Nokia. As the first step toward reasserting its market position and returning to profitability and revenue growth, Nokia decided that its best way forward is to take a leaner, more focused approach.
Nokia and Alcatel-Lucent (prior to its acquisition) did something similar when they reorganized a few years ago. Both companies shed nonessential assets. For Ericsson, this possibly means divesting at least part of its media and IT cloud infrastructure businesses. Both the media and IT cloud infrastructure businesses had negative operating income for the last two years. Contrastingly, the networks division had positive operating income for those two years. That alone helps to justify Ericsson's decision to de-emphasize the two business lines. Separating them will keep the other groups focused.
The focus for Ericsson going forward starts with its network group, specifically mobile infrastructure focused on 4G and 5G. This part of the business has historically accounted for around 30% to 40% of Ericsson's revenues. The company said that it would increase its investments in this area. Network transformation, which fits nicely with the long-range vision of 4G and 5G as well as its provider customer base, remains with select NFV investments, along with BSS and OSS. Ericsson's bet on IoT remains, but the company appears to be moving to a more modular, solution-based platform focus that should be easier to scale and more profitable than its previous systems integration approach in this area. This also keeps IoT focused on major solutions and applications that can be marketed more clearly. Managed services are also under review, Ericsson is looking to automate more of its processes while examining some existing operator contracts in its pursuit for greater profitability. Along with these portfolio changes, the vendor also made changes to its corporate management structure. This included lowering senior management positions and overhead, which was needed.
In Ovum's view, Ericsson's new, more narrow strategic focus including fewer management layers is the right first step. Flattening the organization should improve its speed in making this transition and adjustments along the way. It redirects company resources to the areas of Ericsson's greatest strengths. While not directly addressed in its press release, we can assume Ericsson can use its relationship with Cisco to fill some of the gaps that the new strategy will create but also evaluate where the value and benefits are in this partnership. Execution of this new strategy, of course, is another big part in making this successful. It is one thing to invest more in 4G and 5G; it is another thing to make the right technology bets in those areas and deliver on them in a timely manner. Execution will determine how well this new stratagey works for Ericsson. And hopefully, this transition will help, and not slow down, Ericsson's improvement path.