by Chris DePuy, Stefan Pongratz and Shin Umeda
Ericsson and Cisco announced a strategic partnership on November 9 to better position themselves for the rapidly changing business and technology requirements for next generation networks and information technology (IT) infrastructures. The announcement noted agreements between the two companies across several areas, including joint development, reseller agreements, key emerging market segments, patent licensing, and license fees.
The two companies say this partnership was in discussion over the past thirteen months and provides a means of offering the best of both companies to service provider and enterprise customers. The announcement pointed out the strengths of the two companies in the areas of routing, data center, networking, cloud, mobility, management and control, and global services. Emphasis was also placed on addressing emerging network architectures for 5G, cloud, IP, and the Internet of Things (IoT).
From a financial perspective, the companies stated that they each see the potential for incremental revenue of $1 billion or more expected for each company by calendar year 2018. They did not specify specific products, services, or solutions that would drive the incremental revenue.
Ericsson and Cisco have significant resources, and the partnership offers potential for sharing and combining these resources. Table 1 shows each of the company’s telecom infrastructure market shares, revenue, and headcounts. For the first half of 2015, Ericsson had strong market shares in mobile and voice technologies, while Cisco was the leader in IP technologies. In these markets, the two companies have a relatively small number overlapping products. A hypothetical combination of telecom infrastructure revenue for the two companies would result in a number one ranking, surpassing Huawei’s leading position for the first half of 2015.
The telecommunications industry is undergoing significant vendor consolidation. With Nokia nearing completion of the acquisition of Alcatel-Lucent, there will be three very significant traditional telecom equipment vendors: Ericsson, Huawei, and Nokia.
About three years ago, telecom operators collectively began adopting the network architectures using network functions virtualization (NFV) and software defined networking (SDN) technologies. These new network architectures have caused upheaval in the vendor landscape, with vendors such as Hewlett-Packard Enterprise, Oracle, Cisco, plus many others, bringing IT expertise and technologies into the telecom infrastructure world. In addition to changing technologies, capabilities for professional and integration services to design, build, and operate the new networks has become increasingly important.
The traditional telecom vendors have been challenged to address requirements for the new network architectures. The choices have been to build the expertise in-house, merge or acquire businesses, or form partnerships. These choices are not mutually exclusive, and Ericsson and Cisco have used all three approaches in recent years. However, the partnership announcement represents the largest of its kind, and has the potential to change the vendor landscape considerably. We will be following the progress closely—stay tuned for more analysis of this partnership.