Ericsson Expands on IBM’s Turf With Services Push
As phone carriers curb spending on network equipment, the world’s largest maker of such hardware is accelerating a push to get more revenue from services.
Sweden’s Ericsson AB (ERICB) says it is trying to be more than just a supplier of base stations and antennas. It wants to be a partner who runs and maintains everything from phone networks to computer systems, while providing consulting and software.
Chief Executive Officer Hans Vestberg, who is courting phone-carrier executives at the annual Mobile World Congress in Barcelona this week, is seeking to revive revenue growth after network sales fell for two straight quarters. Success is far from guaranteed, as the almost $300 billion phone carriers spend each year on services also attracts network rivals Nokia Oyj (NOK1V) and Alcatel-Lucent (ALU) SA, as well as information-technology services leaders International Business Machines Corp. (IBM) and Accenture Plc. (ACN)
“It’s a crowded market,” said Janardan Menon, an analyst at Liberum Capital Ltd. in London. As Ericsson has expanded into IT services, IT companies have made inroads in Ericsson’s stronghold of services related to phone networks, he said.
Nokia’s networks chief Rajeev Suri, IBM CEO Ginni Rometty and Alcatel-Lucent CEO Michel Combes are also attending the Barcelona trade show, as are customers including AT&T Inc. CEO Randall Stephenson and Vodafone Group Plc CEO Vittorio Colao.
The telecommunications-services market will grow by as much as 7 percent annually over the next three years, Stockholm-based Ericsson forecasts. It was worth up to $273 billion in 2012, almost half of which was made up of carriers doing the tasks themselves, Ericsson says.
The services 138-year-old Ericsson has focused on include planning and managing phone networks, although its expansion to other services, such as combining a company’s communications systems, has now put it in direct competition with large computer-services providers, Menon said.
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“For us to stay competitive, we’re transforming our services business to be reliable and flexible,” Vestberg said at a press conference in Barcelona today. “I’m confident -- our model is hard to replicate in a short time.”
IBM, which made its first desktop personal computer in 1981, developed into the world’s biggest computer-services provider after competition in PCs and other hardware forced it to switch its focus.
Joe Hanley, an IBM spokesman in Europe, declined to comment on the services rivalry with network makers such as Ericsson.
Ericsson, Finland’s Nokia and Alcatel-Lucent of France have felt similar pressures on their hardware businesses from Chinese rivals such as Huawei Technologies Co. Helping carriers to run their networks and IT systems is the next logical step.
“In the future, everything will be as a service,” said Eva Elmstedt, head of services at Nokia’s networks unit, Nokia Solutions and Networks, or NSN. “Operators want to be into subscriber additions, not handling all operations internally.”
Recent results signal Ericsson has a steep hill to climb. Its global services revenue fell 3 percent last quarter to 27.2 billion kronor ($4.2 billion). IBM services sales fell 2 percent to about $14.7 billion, which includes sales to many industries.
Ericsson’s network-equipment sales, accounting for more than half of its revenue, have fallen as wireless carriers in developed markets curb spending after upgrading to faster, so-called fourth-generation systems.
Phone companies are also seeking to cut costs as saturated markets and competition weigh on prices for calls and data. At the same time, they need to deal with higher volume of data traffic, which gives companies like Ericsson and NSN an opening to sell their services.
“There has opened up an enormous amount of opportunity in this world,” Vestberg said in an interview this month. “We’ve chosen a couple of them that we believe we can succeed with and are big markets.”
The stock was unchanged at 82.90 kronor at 10:25 a.m. in Stockholm, giving Ericsson a market value of 273 billion kronor.
With mobile-data traffic set to expand tenfold by 2019, Vestberg has made acquisitions to ensure Ericsson can help operators cope with the increase. It bought Piscataway, New Jersey-based Telcordia for $1.15 billion two years ago to strengthen its capability in the operations and business support systems market, after acquiring IP-router maker Redback Networks in 2007 for $1.66 billion.
Ericsson is also pushing beyond phone carriers, winning services deals from utility EON SE and shipping company A.P. Moeller-Maersk A/S.
Ericsson’s advantages in the services effort include its long-standing relationships with phone carriers, which may help it persuade the companies to award it more work. Large IT services companies have also been around for decades, though, which makes them difficult to displace.
Newer rivals are also making a push. Huawei bought Sydney-based software company Fastwire this month to improve its services offering. In October, Denmark’s TDC A/S awarded Huawei a six-year contract to modernize and manage its network.
“The software and services side of the business is much more fragmented than the hardware side,” said Fredrik Thoresen, an analyst at DNB ASA in Oslo. “There are a lot of names out there competing.”
To contact the reporter on this story: Adam Ewing in Barcelona via firstname.lastname@example.org