As announced yesterday and covered in this No Jitter post, Cisco and Ericsson are forging an alliance to better address the affect wireless is having on the rapidly shifting global technology market. While no one seems entirely sure what the partnership (or whatever they choose to call it) constitutes, I can think of two reasons Cisco has more to gain from it than Ericsson. One, it has been a nonstarter in the fastest-growing element in technology markets, and two, this is a way to respond to strategic maneuvers competitors have already made in this area.
While the Cisco-Ericsson deal does not involve any equity stakes, it is clearly a response to the proposed merger between Nokia and Alcatel-Lucent announced in April. While Ericsson's $30.5 billion market cap is close to Nokia's $26.2 billion market cap, there's no comparing Cisco and Alcatel-Lucent. Cisco has a market cap of $143 billion and revenues of $46 billion, while Alcatel-Lucent's numbers are $11 billion and $15 billion. And don't forget Huawei, whose product lines overlap those of both Cisco and Ericsson and that has moved past Ericsson to claim the largest share of the mobile infrastructure market. That Huawei is based in China, the world's single largest mobile market, probably helps.
While Cisco is clearly the behemoth in this transaction, it desperately needs Ericsson to get a bigger piece of the most important technology in play today -- after having largely ignored it for so many years. Cisco's primary play in wireless has been in the wireless LAN business, for which it acquired stand-alone access point vendor Aironet in 1999; controller-based vendor Airespace in 2005; and Meraki, with its cloud-based controller architecture, in 2012. However, wireless LAN revenues are chump change compared to the $172 billion in revenues raked in by the top four U.S. mobile carriers. Without a foothold in the cellular market, Cisco's wired network business could leave it on the same track as Western Electric or Nortel.
Cisco needs Ericsson because the wireless business is a tough nut to crack. The equipment is expensive, the standards bizarre, and it is essentially a closed ecosystem driven largely by the manufacturers. In the cellular industry, the operators depend heavily on the manufacturers, and, as the joint Cisco-Ericsson press release notes, the companies have a total of 76,000 service employees between them. More than 85% of these are Ericsson employees.
As with its recently announced alliance with Apple, Cisco is being annoyingly vague about what, exactly, this alliance entails. Fortune's assessment reads in part, "The history of the technology industry is littered with 'strategic partnerships' that seemed like a big deal when announced but that didn't amount to much. If Ericsson and Cisco follow up their press release with details, including how this deal affects their respective businesses, then and only then will we know how interesting the tie-up is."
Clearly with the move from 2G circuit-switched voice services to IP Multimedia Subsystem (IMS) and LTE's Evolved Packet Core, IP is becoming a bigger element in the mobile network. Reading between the lines, it would appear that the two companies are looking at a closer integration of Cisco's traditional IP technology with the highly specialized packet technologies and protocols that drive the cellular network, but what cost and technical advantages that would afford remain to be seen.
We will have to wait until the dust settles to see what this alliance produces, but it is one of the first serious initiatives we've seen from Cisco's new CEO Chuck Robbins. While no one can deny the accomplishments of John Chambers, Robbins' predecessor and Cisco executive chairman, he seemed to have a blind spot when it came to mobility. It's nice to see the new boss is taking steps to get Cisco more into the mobile game.
Join me at Enterprise Connect 2016, March 7 to 10 in Orlando, Fla., where I'll be chairing the Mobility track. Register now using the code NJPOST and receive $200 off the current conference price.
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