Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

First China, now Facebook. Things don't get any easier for Ericsson, the biggest maker of telecoms equipment.

It's spent the best part of a decade coping with a competitive onslaught from low-cost Chinese rival Huawei. Now it's dealing with a surprising newcomer: Mark Zuckerberg's social media behemoth.

Poorly Equipped
Ericsson and Nokia shares haven't performed well
Source: Bloomberg

Facebook has teamed up with companies including Intel, Nokia (an Ericsson competitor) and operators Deutsche Telekom and SK Telecom. They're collaborating on open-source designs for the next generation of equipment linking our smartphones to mobile towers and transmitting text messages and YouTube videos. Zuckerberg wants the project to connect the billions of people who don't have Internet access, especially in areas where building networks is hard because of climate or lack of reliable electricity.

Today's mobile networks are complicated and expensive to build. A typical 4G base station in a city costs about 100,000 euros ($113,000), not counting the fibre line connecting it to the network. Things will get even more complicated when the next generation of mobile tech, 5G, links everything from fridges to electricity meters to the Web.

Facebook's goal is to simplify all this by creating blueprints for cheap base stations and other network gear. It won't make the kit, but the designs will be open to use to anyone -- so lowering the industry's barriers to entry. If its vision pans out (still a big if), it would mean an uncomfortable shift in the status quo for Ericsson, Nokia and Huawei.

And Facebook has form in hardware disruption. It used a similar approach to rework the guts of the world's data centers, the computing hubs used by Web services and corporate networks. In 2011, it backed the Open Compute Project, encouraging participants to share designs for servers and other data center equipment. Along with cloud computing, the shift has reshaped the industry.

The proliferation of simpler kit helped make hardware a low-margin commodity. Lots of servers are still sold each year, but market share and pricing power have been transformed. IBM decided to get out of the business. Asian companies such as Quanta and Inspur sold 18.3 percent of the most common type of server last year, up from 3 percent in 2008, according to research firm IDC.

Even big names now shun pricey servers for cheaper Facebook-inspired equipment. Goldman Sachs says more than 80 percent of its new server purchases are Open Compute-style gear.

Nokia has decided on the "keep your enemy close" approach and has worked with Facebook, first on Open Compute and now on the telecoms project. Ericsson and Huawei have largely steered clear so far. Nokia says the project will expand the market, and there is hope among the established manufacturers that they'll be protected by phone companies' heavy reliance on secure and reliable networks.

But given the telecoms gear market has been limp for a while, any slight competitive change must be taken seriously. 

Slow Burn
Telecoms equipment spending has risen only slightly despite smartphones
Source: IDC

With most 4G networks already built in the U.S. and China, carriers’ investment will slump 7 percent this year and 5 percent next, according to Deutsche Bank. Ericsson's operating margin was in the 20 percent range before Huawei's arrival, and will be about 10 percent this year, according to Bloomberg data. The 10 percent drop in its share price on Thursday because of falling sales shows its vulnerability in a difficult market.

While Facebook won't kill the telecom equipment business overnight, it's never wise to under-estimate Zuckerberg.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Leila Abboud in Paris at labboud@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net