Facing a slowdown in 4G/LTE equipment spend and increased competition from players such as Huawei and Nokia (after its €15.6 billion takeover of Alcatel-Lucent), Ericsson (ERIC) today announced a strategic technology and commercial partnership with Cisco (CSCO) . The alliance encompasses a wide array of both companies' respective business units, ranging from carrier and enterprise equipment and services to intellectual property (IP), infrastructure such as cloud, data center, mobility, networking, and management and control and global services capabilities.
The partnership spans several agreements including network transformation commitments via reference architectures and joint development, network management and control, a broad reseller agreement, and cooperation in key emerging market segments. The initial focus of the relationship will be on service providers, and then shift to opportunities in other sectors such as enterprise and the Internet of Things (IoT).
It is an arrangement that might be short of being a full-blown merger; however, it is of high strategic importance to both companies, as it entails a multi-faceted level of collaboration in everything from research and development to customer service. During today's analyst conference call, it was revealed that Cisco and Ericsson had been working on this partnership for quite some time, as Ericsson's CEO Hans Vestberg originally started his discussions with Cisco's Chairman (and former CEO) John Chambers 13 months ago.
Large partnerships in the telecom industry are often challenging to execute and their success hinges on many factors. The devil is in the details. The highly complementary nature of both companies' portfolios coupled with the fact that they are both very customer-centric organizations suggest that this relationship will yield some positive results. However, that enthusiasm needs to be tempered with risks to the deal. Both vendors are under the same gross margin pressure and the transition towards software defined networks can help them both in this area, which translates into some potential "coopetition" in the future.
From Cisco's perspective, the deal provides the company with an opportunity to combine Ericsson's strength in radio and mobility with Cisco's own IP expertise. Cisco will also be able to expand on opportunities with its routing portfolio and leverage unrivaled, end-to-end capabilities to its carrier customers. The early feedback of the agreement from some Cisco customers has been extremely positive, as attested by its CEO Chuck Robbins.
Ericsson needs to improve in areas like IP Routing and multimedia, and the company did attempt to make some strides in these areas, but the progress might not have been what was expected.
In the routing arena, eight years after buying Redback Networks, Ericsson only has 1% market share in the carrier routing segment. In its last quarterly results call, the vendor's management stated that it prefers to grow the business organically rather than via mergers and acquisitions, but questions arose on how long such a strategy could last considering the fact that the telecom industry is undergoing a profound transformation.ERIC data by YCharts
Clearly, Ericsson needed something else besides offering its own solutions (or those of Ciena in optical), as the company's 1% market share in IP routing and 2% in optical transport showed that the old strategy had yet to take hold from a commercial standpoint.
Recent telecom industry upheaval such as Dell's EMC acquisition, HP's split and the Nokia/ALU merger clearly demonstrates the need to rethink some of the old guard posturing and to either consolidate or partner as stand-alone vendors face increased threats to their positions as newer and leaner competitors disrupt their business.
The Nokia acquisition of Alcatel-Lucent in particular created a new formidable competitor that could challenge both Ericsson (a wireless infrastructure leader) and Cisco, which is the dominant player in the IP/networking industry. The Nokia rationale was to gain access to Alcatel-Lucent's in-demand IP routing and optical transport solutions, as the company was in a difficult position as it did not have such assets and needed to partner with vendors such as Juniper and Coriant in order to provide solutions to customers. Ditto for the emerging software-defined networking (SDN) space, where Nokia also had a relationship with Juniper prior to acquire Alcatel-Lucent, but now can leverage ALU's SDN spin-in Nuage Networks.
Cisco and Ericsson elected to pass up on bigger mergers, which are harder to execute, and instead focus on smaller acquisitions that can address some specific areas. By partnering, the companies can focus on the customer right away, instead of having to go through integration and portfolio rationalization. Each company expects an incremental revenue opportunity of $1 billion by calendar year 2018, via a combination of products, services, and network management systems. One important detail not addressed during the conference call was the fact that after all cross-licensing agreements are put in place, Ericsson is expected to be a net receiver, obtaining license patent revenue from Cisco as part of the partnership deal.
Ericsson also expects synergies of one billion Swedish kronor in 2018 from the pact, but it did not provide much detail as to where most of those savings will come from. There remains a bit of an overlap with Cisco in the edge router segment, and Vestberg stated that Ericsson will continue the development of its edge routers that will stay "close to the radio," the Router 6000 series -- which couples radio and IP transport, something needed in a 5G future. Centerview Partners provided Ericsson with some advice on the partnership.
The two companies will set up a team with 800 employees (400 research and development folks from each side) that will focus on joint development in areas such as software-defined networking (SDN), virtualization (network-function virtualization or NFV) and multi-vendor network management systems. The idea is to have the two industry leaders collaborate in providing innovation and leading edge solutions to their customers.