Ericsson and the changed market
Ericsson's development has always been technically and financially complex and characterized by major technology shifts. The company has gone from mechanical to electrical switchboards, to electronics solutions, to mobile systems. The shifts have often been dramatic with breakthrough contracts (such as the contract for AXE in Saudi Arabia in 1977) or with very rapidly growing sales as with mobile systems during the 1990s.
Nonetheless, the change that Ericsson's market is now undergoing may be the most complex of them all. Sales appear to be shifting towards significantly larger percentages of services and customized software, at the same time as Ericsson has encountered major new aggressive competitors.
This is due to the breakthrough of mobile broadband. The transmission of data takes much more space in mobile networks than the transmission of speech. A smartphone takes five times more space than a conventional telephone; a tablet computer 25 times more.
Mobile data communications also entails that there are a variety of new services in the form of apps (applications), as they have come to be called. The exponential development of memory circuit capacity enables companies to constantly offer customers increasingly efficient network equipment without raising prices.
The consumer market is already well-known and the level of ingenuity is impressive with apps for everything from games, weather forecasts and recipes to banking services. Development is moving fast. YouTube and all the new traffic that the phenomenon has led to is less than seven years old, and the iPhone barely four.
Perhaps less known is that there is also a large producer market, with apps for businesses, public authorities and governments for facilitating logistics, accounting, health care, security and the like. Ericsson envisions 50 billion connected wireless devices in nine years.
For telecom providers, this means that the demand for systems is rapidly growing. This benefits Ericsson, largest in the world in mobile systems.
The problem is that it has become harder than before to earn money through these operations. In just a few years, Chinese Huawei has climbed to the number two position, just behind Ericsson. New competitors, such as Chinese ZTE, have grown quickly. Since the end of the 1990s, even router manufacturers such as Cisco and Juniper are counted among the important competitors.
Telecom providers must consequently join with their larger customers to push development in order to sell more. And they must also find new ways to share in the new profits – the added value that occurs with development of all of the new services (the apps).
This is a major change for an industry that not all that long ago mainly worked with selling systems for landline telephony to larger, often state-owned customers, and that only consisted of a handful of European and American suppliers.
The past ten years' expansion of services for customers, along with the operation of entire systems, is a step in the new direction. These kinds of assignments already occupy half of Ericsson's employees. Ericsson is also competing against new kinds of competitors, such as Indian IT consultants.
Ericsson's multimedia initiative is yet another step in this direction with for example, revenue administration and solutions for mobile TV.
This is reminiscent of developments when Ericsson attempted to adjust to the new conditions in the 1980s by selling computers, and during the 1990s, when the company was briefly the global leader in the mobile phone market. Benefiting most were computer-related companies such as IBM and Microsoft, and in the next phase, those that were skilled in consumer goods such as Nokia.
The difference is that change this time is moving even faster and is even more multifaceted.
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