Tough times

10 Feb 2009

The early quarterly results show the recession's toll on telecom and tech. Intel's profit fall 90% and it promptly cut capacity, removing some 6,000 jobs. Ericsson is letting go 5,000 and Motorola 4,000 on top of previously-announced layoffs. Nortel has sought bankruptcy protection.

Yet tough times often suit market leaders. If customers are spending they'd prefer to do so where risk is at a minimum. Or, looking to cut costs, they seek disruptive choices, which has a bigger impact on the smaller players in the market.

We see this among the vendors right now. The recession will accelerate if not actually complete the restructure of the vendor segment.

Ericsson CEO Carl-Henric Svanberg made a telling if brutal point when he dissed his competitors at a results briefing last month. 'Nortel has disappeared, Motorola is on its way out, Siemens didn't make it, Lucent didn't make it. Ericsson is the one that stayed strong,' he said.

Last standing

Neither Nortel in its current state nor Motorola could be considered tier 1 suppliers these days. Apart from routing leader Cisco, Ericsson's biggest challengers are Alcatel-Lucent and Nokia Siemens - and both of them have struggled since completing their respective mergers two years ago.

But a recession can also work for disruptive players, offering more for less. Cue Huawei and ZTE. Huawei is expecting to sign contracts worth $30 billion this year, most of them abroad, a third more than 2008.

Ericsson's result was fairly steady, despite annual earnings falling 49% over the full year. Sales grew 11% for the year, with network sales up 22% for the quarter and 10% for the full year.

But once more the standout performance came from its professional services group. Sales increased 34% in the quarter with operating margin up three points to 18%.

In that it treads in the lucrative footsteps of IBM, the pioneer in the IT and professional services business. IBM actually lifted earnings 17% in the last quarter, despite a fall in sales, and expects to increase its profit in 2009.

IBM's software and services business now accounts for 80% of net income, and some 60% of that in turn comes from products and services sold on subscriptions and renewed every year or so.

Subscriptions and services work for big vendors. In the devices space it's about being smarter and sexier. Apple has moved effortlessly past Nokia and PC-makers. It recorded its best quarter ever as consumers maintained their enthusiasm for its music players, smartphones and notebooks.

It sold 4.4 million 3G iPhones for the quarter - down from the 6.3 million sold in Q3, but almost double the 2.3 million sold a year previously.

At a time when PC sales are contracting, it also raised sales of Macs and Macbooks by nearly 9% to 2.5 million. Apple maintained its margin of 35%, helped by falling component prices.

The outlook for the service provider side of the business is even more opaque.

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