One of Ericsson’s biggest problems in the past couple of years has been one its smaller rivals would love to have – too many modernization and coverage roll-out projects. While Alcatel-Lucent and Nokia Siemens have been battling to reverse market share declines, and have been, in different ways, reducing their reliance on actual base station sales, Ericsson has appeared to be sticking to a strategy still heavily geared to the RAN – gaining share and waiting for every-one but Huawei to fall by the wayside.
The penalty has been that, in an increasingly commoditized sector, and one where the Chinese vendors have pushed down prices, margins have be-come increasingly squeezed. Earlier this year the firm blamed this pattern for pressure on its profits, notably for driving its gross margins down to their lowest level, 30%, in fiscal 2011.
Now the strategy may start to bear fruit, as the vendor says it is seeing a gradual but encouraging shift towards higher margin LTE capacity projects, even in recession-struck Europe. Expanding coverage with 3G or even LTE, and modernizing existing networks rather than installing new ones, are tasks with high labor costs and low profits. These have been the core of Ericsson’s business recently, especially in its European heartland, as pressurized operators have tried to eke more out of existing spectrum bands and platforms rather than embarking on new architectures.
However, that is starting to change, and at the point where they need to support massive LTE capacity, they will also have to pursue radical rethinking of their networks, with far richer pickings for a broad-based firm like Ericsson. They may adopt new RAN approaches like Cloud-RAN and metro zones, all requiring brand new kit at the back end as well as the cell site; they will need to upgrade transport and core networks with new routers to support all-IP (in the past couple of quarters, routers were a highlight for Ericsson, as they are at ALU); and that will throw up additional revenues for the services and software activities too.
There are some small signs, in Ericsson’s second quarter results, that its patient wait for that tip-ping point, from coverage to capacity, is near, and chief financial officer Jan Frykhammar said the firm has started to benefit from initial upsell opportunities, notably LTE and core contracts, which could justify taking on the modernization schemes which others might have spurned.