Analysis: Cisco & Ericsson Partnership To Combat Threat Posed by Alcatel-Lucent & Nokia Merger

This morning, Cisco and Ericsson announced a major partnership combining Cisco’s product line with Ericsson’s massive service organization to aim for over $1B in new revenue for each company by 2018. Putting on my analyst hat from my Frost & Sullivan gig, and discussing the deal with my co-worker Avni Rambhia in our Digital Media group at Frost, here’s our take on the news.

The announced partnership aims at capturing the immense revenue potential offered by service providers aggressively – even desperately – modernizing their broadband, TV and cellular networks to accommodate soaring OTT video consumption and combat new services like Google Fiber and Netflix. It also positions them well in the long run to serve demand for 5G wireless networks and infrastructure investments around the Internet of Things (IoT). The three key goals as stated by the companies, in the short term, are:

• Offering service provider customers an end-to-end product and services portfolio, and joint innovation that accelerates new business models
• Creating the mobile enterprise experience of the future through a highly secure technology architecture for seamless indoor/outdoor networks
• Channeling the combined scale and innovation of both companies to accelerate the platforms and services needed to digitize countries and create the Internet of Things

On the one hand, this is a decisive countermeasure to the significant threat posed by the merger of services giant Alcatel-Lucent with equipment vendor Nokia. According to CEOs Hans Vestberg and Chuck Robbins, each company had the choice to build, buy or partner in order to retain competitive strength and growth potential. For Ericsson, clearly the partnership option won out against other options such as acquiring Juniper Networks. For Cisco Systems, the benefits of a robust new distribution partner with presence in over 180 coutnries and a 65,000 strong services force provides formidable competitive advantage in a crowded and price-challenged market.

The partnership also has the potential to help Cisco and Ericsson alike combat speciality vendors such as ARRIS who holds a significant presence in the cable IP-fication segment, and Chinese juggernauts Huawei and ZTE. Managed services and end-to-end offerings are a crucial and unmet need in the service provider segment, as we discussed in our talk on best practices in winning business in the OTT industry.

On the other hand, there is the likelihood of perceived risk in the longevity of the partnership and the length of reliable support for newly built networks. As one journalist pointed out during the teleconference, the half life of telco networks is measured in decades. Ambitious partnerships can yield rich dividends for partners and customers alike when they work, but leave chaos when they fail. It also remains to be seen if the partnership can catapult both companies to competitive strength in an arena that is not only in the throes of disruption but also where business is being fiercely fought for.

Cisco has a strong, competitive line of products ranging from the cBR-8 converged router for CCAP networks to their newly announced Infinity line of cloud-based solutions for digital media security, workflow and rendering needs, with a strong presence in satellite-based backhaul and broadcast networks. Ericsson is the largest vendor of video professional services as measured in our recent study of the market, the largest vendor by revenue of broadcast video systems, and a leading vendor in mobile network infrastructure services. Both companies have been aggressively restructuring in the past two years, with Cisco shedding low-margin CPE businesses and acquiring cloud-centric 1 Mainstream and Ericsson snapping up Fabrix Systems and more recently Envivio. The partnership between these two formidable industry stakeholders has reportedly been over a year in the making, and is expected to show growth in revenues as soon as 2016.

While it’s uncertain whether the ambitious $1B in new revenue goal can be met by 2018, it’s clear that this partnership has key elements needed to generate a perfect storm of growth. Who should be worried? Equipment vendors such as Juniper Networks, Aruba Networks, and Allot Communications; technology companies such as Amazon, HP, IBM, ARRIS and Gainspeed; and system integrators/value-added resellers such as Alcatel-Lucent, ARRIS, and Rackspace. The ante has also been upped for video encoder vendors seeking to themselves play a stronger role in network modernization, such as Imagine Communications and Grass Valley.

Specifically in the digital media space, another set of companies who should be worried are equipment vendors who are struggling to redefine themselves away from point product vendors to holistic solution vendors. For this already threatened group, the window of opportunity for carving out relevance and continued scope for revenue generation just got a whole lot smaller.

If you’re interested in talking me or Avni about the deal, or interested in any of our market research on the topic, feel free to reach out to us at any time. You can email me or email Avni.