Everyone by now knows that Ericsson has issued a profit warning, and that many analysts and reporters are wondering whether Ericsson can survive in the long term. I think it’s premature to call Ericsson a member of the walking dead, or even seriously wounded, but I also think that it might be helpful to look at the primary causes of Ericsson’s problems. They’re not what you’ve read about.
It’s true that networking is commoditizing, that operators are more and more concerned about keeping costs under control since revenue per bit seems to be stuck in perpetual free-fall. It’s also true that this puts pressure on sales and margins, and that it favors vendors who are known to be price leaders, like Huawei and ZTE. But transformation favors those who can drive it, and there’s plenty of indication that operators are open to fairly radical changes in networking. Commoditization, then, isn’t inevitable.
Ericsson, concerned about the commoditization of networking, made an early move to address the trend by focusing less on selling hardware and more on professional services. In the near term, this focus would compel buyers to pay explicitly for things that other vendors might include with their hardware/software, but if hardware was heading for commoditization and software for open-source, it could be a darn smart move to shift to a service stance. That could also play to the transformation interest among operators.
Which leads us to the first of those causal issues. Ericsson anticipated a shift in the market that hasn’t happened as fast as expected. SDN and NFV should have been poster children for a shift from traditional proprietary networking to commodity boxes and professional services, but both have been much more a media success than a real driver of change. The truth is that Ericsson’s primary customers build networks much the same way now as they did five years ago.
Which tends to favor vendors with more equipment skin in the game. Ericsson’s professional services numbers were decent; the drop came in their Networking unit, and was blamed on underperformance of wireless deals and (in a margin sense) too aggressive bidding for emerging-market deals. The point is that Ericsson isn’t known as a broad equipment vendor, and that hurts you when buyers believe that those who offer more gear will also offer services at a better price.
It was incumbent on Ericsson to demonstrate they brought something to the table, in SDN and NFV and transformation. They have participated insightfully in the standards process for both areas, but transformation is more than standards, it’s using technology to solve profound business problems. That should have been a big opportunity for Ericsson, and it’s not been so.
Because of the oldest, biggest, bugaboo for network vendors—marketing. For most of network operator history, sales have been the ultimate example of “marketinglessness”. Forget ads, web sites, branding. You send your geeks to talk to the buyer’s geeks, you respond to RFPs that you’ve worked hard to wire in your favor, and you don’t expect to have to do a lot of creative singing and dancing. The problem is that operators now recognize their challenges as being systemic rather than point-of-purchase in nature. They don’t need a new box, they need a new approach. That should have been perfect for Ericsson’s professional services slant, but like other Nordic networking giants, they just don’t know how to engage a broad (systemic) constituency. It’s not sales there, it’s marketing.
Systemic positioning is especially critical for companies who don’t have highly visible product families whose names are household words. It unifies what can otherwise be silos, and most important it provides visibility for things that on their own don’t seem all that visible. That positioning can then easily tie in with buyer goals is another bonus, but that kind of success takes some serious effort and major insight.
One of my Ericsson friends told me years ago that to Ericsson, “marketing” meant “education”. You told the buyer what they needed to know, which in this day and age is never going to work. You have to inspire, not educate. I think Ericsson figured that out this year, which is what lead to their partnership with Cisco, the ultimate marketing machine. The problem is that Cisco may be able to sing, but they aren’t necessarily going to sing Ericsson’s song.
Cisco as an incumbent equipment vendor isn’t particularly interested in either systemic revolutions in approach or technologies that obsolete current equipment. Ericsson needs both those things to develop a strong professional services commitment. I don’t think a Cisco deal is going to do either party a whole lot of good.
What should Ericsson have done, or more important what should they do now? The answer, I think, is simple. The operators have a network transformation problem. They need to forget the classic business of selling bits and sell something more directly useful, something that ties to buyer needs more explicitly. Yes, some of that means going up the service stack, but it’s not the simplistic virtual-CPE junk that NFV has generated or the elastic-bandwidth model SDN advocates hype. If you look at the architectures of operators like AT&T and Verizon, you see an attempt to model a new approach to services by framing a new model for infrastructure and service lifecycle management. That’s what Ericsson should have come up with on its own, and should still work to support.
We have, in 5G, a transformation coming down the line in the very area where most capital dollars are going to be spent, and where change will be easier because you’re really adding new stuff and not just tweaking the old. I’d argue that what 5G really represents is a model for mobile infrastructure transformation. We need a similar model for wireline, and then we need technology elements that can support one or both the transformations we’ve defined, elements like those of SDN and NFV. I do not believe that either AT&T or Verizon have fully developed such a vision, much less defined an architecture to support it. Could Ericsson? Sure; they’re smart people.
Will they, though? We spend a lot of time in this industry bemoaning the operators’ adherence to a Bell-Head culture, but what about the vendors? Ossified buyers begat ossified sellers. Can Ericsson recognize that if operators are going to do a different business, they’ll do business differently? Forget education, concentrate on inspiring buyers to believe you have the answer and that you’re prepared to make it work. It’s still not too late, but the signals that time is passing are now clearly visible.