Living the Dream

How Ericsson Acquired a Plum Position in North America

We all know the myth of the phoenix — a magical creature that bursts into flame, only to be reborn from the ashes. If there were a telecom version of this fantastical creature, Ericsson likely would be it, having gone from near-bankruptcy in 2003 to $3.74 billion in profit last year. But what really makes Ericsson a rare bird is its recently hatched plan to become an IPTV powerhouse, as well as a respected provider of both wireline and wireless broadband IP network solutions globally. That has enabled the company to capture key opportunities in North America, the central battleground for big-name communications gear vendors including Alcatel-Lucent and Nokia Siemens Networks, as well as Cisco Systems Inc., Motorola Inc. and Nortel Networks Ltd.

How, one might wonder, has the Swedish vendor gone so far beyond its roots of selling wireless base stations and Class 4/5 central office switches almost exclusively outside the United States to being mentioned as one of the key end-to-end solution providers for North America and beyond? Just common sense and a good acquisition strategy, says President and CEO Carl-Henric Svanberg.

“Wireline operators are expanding by embracing wireless,” he notes. “Broadband is opening up for multimedia services, both fixed and wireless. Today, there is a big demand for faster speeds and more bandwidth to accommodate these services. This is here now and growing very quickly, with a growing focus on all-IP. And all-IP opens up a lot of opportunities, which we are now in the position to capture.”

To position itself to capture such opportunities, Ericsson feathered its nest with nearly $5 billion of acquisitions and asset buyouts in just two years.

News that AT&T Inc. had named Entrisphere, now an Ericsson company, the second supplier (after rival Alcatel-Lucent) of GPON for the U-verse network had the NXTcomm show earlier this summer buzzing. Some considered it a surprising victory for a company that until recently was seen primarily as a wireless supplier. But Ericsson’s purchase of Entrisphere for just under $300 million in cash earlier this year allowed the company to score this victory.

“We’re going beyond our strength in wireless to capitalize on the growth in broadband access,” explains Angel Ruiz, president of Ericsson’s North American operations. “We believe we have the technologies and products to deepen relationships with customers such as AT&T.”

The importance of this AT&T GPON win for Ericsson cannot be overstated, given AT&T is the world’s largest telecom equipment buyer and is expected to continue its expansion globally now that it has tied up the top spot in North America.

Indeed, Per Lindberg, analyst with Dresdner Kleinwort, says the win may turn viral. “That Ericsson, in the space of two years, is beginning to establish itself as a top provider of state-of-the-art broadband access solutions should make waves across the industry,” he says. “We expect several more IPTV/triple-play breakthroughs.”

The AT&T deal also gives Ericsson an IP broadband footprint in North America for the first time, a market which it sees as critical to continue its momentum.

Svanberg says that while North America only represents 10 percent of Ericsson’s business at the moment, he expects that to change. “North America is critical for a number of reasons,” says Svanberg. “First of all, it is the largest telecom market in the world. It’s also an exciting market, because a lot of the development is led from here, such as the triple play and IPTV and so on. There are many reasons to be here and be active.”

The AT&T GPON deal is far from Ericsson’s sole, high-profile and big-ticket wireline customer win. Many in the United States took notice when Ericsson was named one of eight preferred suppliers for the five-year, $17.4 billion BT IP network, joining the likes of Alcatel, Cisco, Lucent, Ciena Corp., Fujitsu Network Communications, Huawei Technologies Co. Ltd. and Siemens. The vendor was tapped to provide the intelligence that controls the network services — a critical component.

In addition to AT&T and BT, Verizon Communications Inc. is another top target for Ericsson. The nation’s second-largest service provider already uses edge router equipment from Redback Networks Inc., which Ericsson acquired late last year, to support its FiOS multiservice residential package. Ericsson hopes to build on that relationship to get a bigger piece of the pie at Verizon. “AT&T was a beginning for us,” says Svanberg. “We couldn’t have done it without acquisitions. We will continue to fight hard to see what we can do with Verizon, where we are not a big supplier.”

The future looks bright. “We’re looking at them a lot differently today than even a year ago, as they’ve been very aggressive both in their acquisitions and in addressing the video space,” says Mark Wegleitner, CTO and senior vice president of technology at Verizon. “They’ve obviously grown strategically and have greatly expanded their focus.”

That expanded focus is important, given service providers are doing big package deals around a single concept such as IPTV or FMC, says Tom Nolle, founder and president of CIMI Corp. “In order to play in these deals [Ericsson] had to get a full spectrum of products,” Nolle adds. “Over the last few years, they’ve been buying up companies that can round out their product portfolio.”

The company’s string of acquisitions has helped build a potent video service product portfolio and given it an entrée into new and fertile ground, including the cableco industry. “It is really the TANDBERG TV and the Redback acquisitions that are bearing fruit for the video services market,” says Teresa Mastrangelo, principal analyst at BroadbandTrends.com. “Both companies have provided Ericsson with entry into new market segments, opening up potential opportunities for other product solutions such as IMS, as well as being able to leverage its strong professional services organization.”

Ericsson also inherited strong ties with content owners — including CNN, NBC, CBS and HBO — through its buyout of TANDBERG TV. Those relationships could help Ericsson better understand how to match its wireline and wireless opportunities with the multiplatform distribution plans of TV networks and movie channels, among others. “They can move up the value chain past IPTV and mobile, to content providers,” says TANDBERG TV President Eric Cooney, noting the company also is working with Intel Corp. to create an innovative publishing system to help deliver content using different distribution platforms.

These acquisitions, the fact that Ericsson already is known as a longtime wireless infrastructure leader, and the company’s wireless handset joint venture with Sony also position the company well to play in the hot seamless mobility and FMC space.

“Unlike Alcatel-Lucent and Nokia Siemens, which still seem to be finding the right balance as combined companies, Ericsson has been able to quickly integrate their acquisitions into the overall portfolio and see immediate payback,” says Mastrangelo. “The combination of wireless, wireline and handsets places them in a unique position to truly offer converged services, anywhere, anytime, and over any device.”

Svanberg notes that demand for mobile broadband is creating an immense amount of activity — traffic has quadrupled in the last six months on the HSPA-enabled networks for which it is a supplier.

A heavyweight in HSPA, with 100 commercial launches around the world, Ericsson also has leadership in the development of the 4G LTE standard. “It’s clear that mobility is becoming key to everything that we do,” notes Svanberg, adding that the killer application is the mobilization of existing applications on the television and the PC fronts. That puts wireless firmly in the middle of any vendor’s value proposition. “The idea is to provide full-service broadband,” he says. “This is a focal point for every major operator, and therefore, for us.”

Svanberg says the post-acquisition Ericsson now plays in 150 markets around the world, has a 40 percent share of the global IPTV market and is investing $4 billion “to keep us in the forefront.” That’s a far cry from the Ericsson that Svanberg took over in 2003, when he became the company’s fourth CEO in five years.

After cutting 60 percent of the company’s workforce in the last of a long line of desperate restructurings, Svanberg got Ericsson out of the CDMA business, moved it into managed services for mobile carriers, focused in on HSPA and decided to bet against WiMAX while expanding a focus on wireline expertise.

But despite its successes, Ericsson, like any company, still has areas in which it could use improvement.

For example, TELUS CTO Ibrahim Gedeon says Ericsson needs to focus on bringing the pieces of its IPTV solution together. “That includes network management, billing and OSS,” he says.

Meanwhile, CIMI’s Nolle believes Ericsson needs improvement in the critical area of marketing. “The big challenge they face is a lack of strong marketing and PR,” he says. “Today, success in selling networking gear at any level is increasingly based on account ownership, meaning the ability to control the engagement both at the marketing/strategy and sales/tactical level. They’ve done well at the latter, but less so with the former.”

Ericsson relies on getting business through RFPs, as opposed to by “owning” accounts, says Nolle. “That will have to change against the big players like Alcatel-Lucent and Nokia Siemens Networks,” he says. “I think Nortel is also some worry for them, but I don’t think Motorola has enough service provider gear. They’re kind of a TV play in the way Ericsson was a mobile play.”

Buying a Video Story
By Bob Wallace

Service providers looking to move into new markets frequently talk about the build vs. buy decision. Their suppliers clearly have these same strategic options. So, when it came to IPTV, the answer for Ericsson clearly was “buy” — which has turned into a winning strategy for this supplier.

Ericsson’s two-year acquisition drive, analysts concur, has made it a top-shelf player in helping telcos provide IP services packages, driven by IP video.

The company’s cash-and-carry approach has cost nearly $5 billion. That included the purchase of the optical assets of Marconi Systems Inc. in late 2005; edge router giant Redback Networks Inc. a year later; and, in February, GPON power Entrisphere and video processing giant TANDBERG TV.

This foursome goes a long way toward allowing Ericsson to provide telcos in North America and beyond with a multi-component solution needed to deliver residential IPTV services.

“Ericsson has positioned [itself] well in the video services [industry] with its recent rash of acquisitions, and the progress that has been made in just 12 months has been astounding,” explains Teresa Mastrangelo, principal analyst with BroadbandTrends.com. “They have talked about full-service broadband for over a year now, and finally they are delivering on that vision.”

While most of its rivals already had strong IPTV holdings in North America, Ericsson, until recently, has been best known for its video services efforts outside the continent. Of course, that all changed when it bought three established U.S.-based companies — Entrisphere, Redback and TANDBERG TV, the last two of which brought with them a formidable list of U.S.- and Canada-based service providers, in addition to global, accounts.

“We bought the Marconi assets to add Ethernet to our portfolio and add to our transmission holdings,” says Ericsson President and CEO Carl-Henric Svanberg. “We then bought Redback for their intelligent routers, and Entrisphere, a young company with leading technology for fiber-to-the-home.”

Svanberg does not rule out additional acquisitions.

Still, Ericsson doesn’t own a set-top box vendor or a middleware maker. But at least one industry expert downplays that gap in Ericsson’s video portfolio. “It’s about having critical mass, not a complete ecosystem,” stresses Tom Nolle, founder and president and of CIMI Corp., referring to landing business from telcos.

Unlike the longtime acquisition strategy of global rivals such as Cisco Systems Inc., which has assimilated countless companies through acquisitions since the early 1990s, Ericsson’s tack has been to let its buy-ups operate largely as is, with only the assets of Marconi fully integrated into the parent company.

“Synergies are more important to us than the cost of the market value of the companies,” said one Ericsson executive.

Another benefit of Ericsson’s spree is that the acquired companies have no visible product overlap, but do have common customers in related market segments that require interoperability, integration and a common plan when it comes to the delivery of residential video services.

“They didn’t have video encoding before they bought us,” says Craig Knudsen, director of product marketing and business development for TANDBERG TV, “but they have an IMS core architecture that pulls together all the discrete silos for broadband services.”

Why North America Is Key

For telecom infrastructure in general, stakes are high when it comes to the North American market because it is the most lucrative in the world.

“Increasing broadband adoption, service provider rollouts of triple-play offerings, including IPTV, the deployment of next-generation wireless networks and the ongoing migration of voice networks from TDM to packet architecture will drive growth in network equipment sales to service providers from $88.9 billion in 2006 to $109.8 billion in 2011,” says David Emberley, research manager for telecom equipment at IDC. And with the North American market doing much of the spending — to the tune of $69 billion last year — it is becoming the linchpin to maintaining market share overall.

In fact, RBOCs, Canadian ILECs, and cable MSOs will continue to increase capex through 2009 to sustain their major projects, spending a cumulative $369.6 billion by 2010. That’s led by AT&T Inc. and Verizon Communications Inc.’s FTTx initiatives. AT&T, Sprint and Verizon together will make up 61 percent of North American capex in 2007, while incumbent cable MSOs plan to spend more than $15 billion on capital expenditures in 2007 as they continue investing in all-IP network migration, according to Infonetics Research.

“The service provider landscape that has emerged in North America is dominated by two giant telcos — AT&T and Verizon — and a cluster of powerful cable MSOs such as Cox, Time Warner and Comcast,” says Stéphane Téral, principal analyst at Infonetics. “As everyone is entering everyone else’s turf, the convergence between information technology, media, Internet and telecommunications is adding new competitive pressures that are driving this new investment cycle.”

For more on the key vendors in North America and how they’re positioned, see the “Clash of the Titans” sidebar below.

Clash Titans of the Titans
Ericsson, Nokia Siemens Offer North American Service Providers More Big Choices
By Tara Seals

The battle for North American infrastructure domination is poised to take on mythical proportions. The top three networking and telecom equipment vendors in North America last year were Cisco Systems Inc., Motorola Inc. and Nortel Networks Ltd., according to Synergy Research Group. Out of the top three global suppliers — Alcatel-Lucent, Ericsson and Nokia Siemens Networks (NSN) — only one giant, Alcatel-Lucent, has gained early market share stateside, coming in fourth overall. The other two now are striving hard to become a counterbalance to the French-American juggernaut, but also must fight for business with the more entrenched vendors.

Jim Hansen, senior vice president of network services for service provider EMBARQ Inc., says the North American market needs another player that can offer the “same scale, integration, and research and development resources” as Alcatel-Lucent. He soon may get what he wishes for.

According to Synergy, the merger of Alcatel and Lucent places that combined company at No. 4 in North America, with Ericsson in fifth place for the first quarter of 2007, and Nokia Siemens right behind. But the numbers can be misleading when it comes to how the top global players are doing. To put things into perspective, Jeremy Duke, president and CEO at Synergy, says that despite its presence in the top five, Ericsson’s North American market share in total networking and telecom equipment is far behind the other four, coming in at just 3.6 percent market share in 2006, compared with its No. 2 global position.

Even so, Ericsson and NSN are pushing hard to bring their overall footing in North America into step with their global positions. NSN is “No. 1 or No. 2 in all markets except North America, where we’re sixth,” said NSN CEO Simon Beresford-Wylie at a recent Canadian conference. “We are determined to have a position in North America that’s representative of our global position generally.”

Meanwhile, Alcatel-Lucent concedes that the stage is being set for a battle of the giants. In fact, at NXTcomm, Cindy Christy, president of Alcatel-Lucent North America, named Ericsson as “the most formidable competitor I have” in addition to Cisco Systems Inc.

To get a full picture of the battlefield, one needs to examine specific product segments, since the portfolios among the titans at play vary widely. Take home networking, for instance. Cisco and Motorola are major players, while NSN plays in the market only with the middleware it gained through its Myrio Corp. acquisition, according to Michelle Abraham, principal analyst at In-Stat. Alcatel-Lucent, Ericsson and Nortel Networks, meanwhile, have no products in that segment. And looking at video processing for IPTV, she says that Cisco, Ericsson and Motorola are well-positioned thanks to nearly $10 billion in acquisitions in the past two years: Broadbus, Scientific Atlanta and TANDBERG TV, respectively. Meanwhile, Alcatel-Lucent, Nortel Networks and NSN have little to offer in video processing for IPTV. For its part, Alcatel-Lucent only provides systems integration services for Tier 1 telcos deploying the services.

When it comes to optical, it’s a different story. According to Infonetics Research, Alcatel-Lucent was No. 1 for overall optical network hardware revenue market share in North America in 2006 and the first quarter of 2007, beating out former market leader Nortel Networks, which fell to fourth place. Tellabs and Fujitsu Network Communications took the second and third spots, respectively, with Cisco and Ciena Corp. jockeying for the fifth place spot. According to Infonetics, Ericsson, which ranks No. 3 worldwide for all SDH transport and switch categories combined, including metro and long-haul, doesn’t show up in the overall optical market share for North America at all (largely because there is no SDH on this side of the pond). Meanwhile, Infonetics’ tracking of the Siemens optical division up to the first quarter (which now is part of the NSN IP transport business unit) places it at No. 7.

Nokia Siemens does have the distinction of being the sole DWDM supplier for AT&T, however. And Verizon Business has split its optics business in half between Nokia Siemens and Ciena, says Harald Braun, head of the convergence business team for North America at Nokia Siemens. “There’s one wild card in the [deck for Verizon Business’ optics selection] — Alcatel-Lucent,” he notes.

On the optical access front, Verizon has chosen Alcatel-Lucent, Motorola and Tellabs as its GPON suppliers, while AT&T has selected Alcatel-Lucent and Ericsson. A shrinking service provider pool means Nokia Siemens, which still is working to create a GPON portfolio, will have to dig deep for a position in GPON in North America. But Braun says he’s hopeful the company still may have a shot at some business with AT&T on this front.

When it comes to edge routing, Cisco is the market leader with greater than 50 percent market share both worldwide and within North America, according to Current Analysis Inc. analyst Ron Westfall. But looking at the numbers for the first quarter of 2007 and the fourth quarter of 2006, Alcatel-Lucent holds its own in North America, coming in at No. 3 for BRAS and services edge gear, and No. 2 for the services edge router segment, which includes Ethernet and multiservices gear. Ericsson, via the Redback Networks Inc. acquisition, commands the No. 4 spot in both. And while “NSN lacks in-house carrier routing gear, it partners heavily with Juniper to address that need,” Westfall says. Juniper Networks Inc. is No. 2 for BRAS and services edge gear, and No. 3 for services edge routing.

In the Ethernet switch segment (Layers 2-7), none of the three global leaders have cracked the top 5 in North America or even worldwide (and Ericsson doesn’t manufacture Ethernet switches at all). According to the Dell’Oro Group, Cisco is the market leader by port shipments in North America, followed by HP Procurve, Netgear, Cisco company Linksys and Nortel Networks.

The take-away from all this? The global heavyweights slowly are gaining traction in certain segments, but it still is a challenge to upset the North American leaders in most areas. However, that may change as Alcatel-Lucent, Ericsson and NSN continue to bring their full marketing and product development organizations to bear on this market — the most lucrative market in the world.

According to TIA, the winners of the vendor showdown will be those that can provide end-to-end services, portfolios and scale. That is exactly how the top three global suppliers have positioned themselves.

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