The Cisco-Ericsson partnership that has missed the sales target it set two years ago is still in a solid position to draw strong revenue from technology trends unfolding — albeit slowly — in the service provider and enterprise markets.
The miss, disclosed this week by Ericsson CEO Borje Ekholm, did not surprise analysts, given the financial troubles that have led to a restructuring of Ericsson’s business. Also, the markets that the two companies targeted — carrier migration to 5G and enterprise adoption of the internet of things (IoT) — have not grown as fast as expected.
“The target of $1 billion [each] was always ambitious,” said Lee Doyle, principal analyst at Doyle Research, based in Wellesley, Mass.
Despite failing to deliver on early promises, the partnership is not in danger of collapsing, said Rohit Mehra, an analyst at IDC. That’s because the market dynamics that brought the companies together still exist.
Cisco-Ericsson partnership still relevant
Cisco and Ericsson need each other to present a product portfolio broad enough to compete for service provider business against the largest suppliers, namely Nokia Corp. and Huawei Technologies Co.
“To stay competitive, they [Cisco and Ericsson] have no choice. Neither of them individually has what it takes to compete with some of the other competitors, especially the majors,” Mehra said.
Also, there are signs that Ericsson is progressing in its turnaround effort under Ekholm, who replaced ousted CEO Hans Vestberg a year ago. In October, Ericsson reported that, in the previous quarter, gross margins in its core networking business rose to 31% from 28%, sending its stock up 4%.
The company, however, is still struggling. Revenue for the third quarter fell 6%, and net losses widened to $514 million from $24 million the same period a year ago.
Eckholm will have to return the company to profitability before it can refocus on the Cisco partnership. But analysts said the company has time to get back on track with Cisco, given the slow product adoption within the technology markets the companies plan to attack as a team.
IoT, 5G markets growing slowly
Wireless carriers have yet to make big purchases in network infrastructure upgrades to move from 4G to the fifth generation of broadband, called 5G. IDC predicted spending will increase significantly in the 2019 to 2020 time frame.
“Telco customers take their time to get things right, so they will not jump on new solutions until they have had a chance to validate them,” said Dan Conde, an analyst at Enterprise Strategy Group (ESG), based in Milford, Mass.
Once carriers start architecting networks for 5G, Cisco will become necessary as a provider of high-end switches and routers. Ericsson sells the transport systems for moving traffic over IP networks.
IoT is another market that has stalled, but is expected to ramp up over the next couple of years. Many organizations will eventually look to vendors for IP technology to monitor and control devices in supply chains, on the factory floor and in healthcare centers. Government is interested in IoT to make city services more efficient.
The holdup in IoT adoption is due, in part, to a lack of use cases for vendors’ new technologies and no clear winners in the mishmash of standards that exist today. Nevertheless, interest in IoT is growing among enterprises. An ESG survey found 26% have IoT initiatives underway this year, compared with 19% last year.
So, as market conditions improve, the Cisco-Ericsson partnership is expected to become a player in the targeted markets. “The partnership is still very much on,” Mehra said. “[But] the initial goals might have been too lofty.”