Ericsson focused on ‘specific investment cases’ for telcos

• Ericsson has published its third-quarter 2024 earnings report
• There are some signs of improvement, with healthier sales in North America and improved margins, but the overall picture is still not pretty
• CEO Börje Ekholm is keen to focus on new business developments related to the enterprise sector and programmable networks
• Ericsson is aiming to develop new investment models for network operators that offer a clearer capital return

Ericsson CEO Börje Ekholm is walking a tightrope right now. He is running one of the most important and influential companies in one of the world’s most critical industrial sectors. But market forces are making it hard for him to maximise profitability, please investors, meet customers’ needs and transform the Swedish vendor into a provider of next-generation digital network technology and associated professional services – that much is clear from the vendor’s third-quarter 2024 earnings report and Ekholm’s commentary on the state of the telecom sector. 

First, the numbers. Ericsson reported third-quarter revenues of 61.8bn Swedish krona (SEK) ($6bn), down by 1% year on year on a like-for-like basis. But tighter control over the company’s supply chain, inventories and overall costs helped Ericsson to report an improved gross margin rate of 46.3% (compared with 39.2% a year ago) and earnings before interest and tax (EBIT – the equivalent of operating income) of SEK7.3bn ($704m). The improved sales were helped by increased spending by telcos in North America, where Ericsson is starting to reap the benefits of the five-year, $14bn contract it signed almost a year ago with AT&T, though Ekholm was keen to stress that the 55% year-on year-increase in revenues from North America to SEK20.4bn ($2bn) was not due to just that one deal.   

Signs of an improving North American market and better margins cheered investors, as Ericsson’s share price jumped by almost 8.5% to SEK84.94 on the Stockholm exchange: The company’s share price is now up 33% since the start of the calendar year.   

But Ekholm isn’t jumping for joy, stating up front during the vendor’s webcast earnings presentation that “we continue to see a very challenged market development” and making it clear that Ericsson’s fortunes are decided by the spending habits of network operators: “The market is ultimately decided by our customers,” he stressed.

He is also honest about how Ericsson is evolving to deal with the changing market and the greater focus on the enterprise sector that has underpinned the company’s strategy for the past two years or so: “We don't know how the world is going to shape up,” he admitted at one point, though Ericsson is hedging its bets in a number of ways, which all lead back to the same main focal point – providing a clearer path for network operators to capitalise and develop new business opportunities as a result of their investments. 

That might sound familiar because that was the big promise of 5G: “Invest in 5G networks and all sorts of new revenue-generating opportunities will emerge” was the pitch from all parties, including Ericsson of course. And while at least one major operator(Deutsche Telekom) believes it has managed to get a great return on its 5G investments, most telcos feel let down (making them increasingly wary of 6G hype) – see DT CEO – “We are changing the narrative on 5G”

Now Ericsson is taking a slightly different approach, though Ekholm and his team are still relying on the network operator community buying into the belief that there really are new business opportunities to be exploited and that Ericsson can help them pinpoint the specific models that make sense for them. 

The AT&T deal is the starting point for one of Ericsson’s new big pitches – what Ekholm calls “the programmable network”. Largely with technology from Ericsson – but also (importantly) from server giant Dell Technologies and Intel – AT&T is deploying Open RAN-enabled, virtualised radio access network infrastructure that is underpinned by an IT platform rather than being powered by traditional mobile network systems and Ekholm believes the giant US operator will set the tone for how telcos will develop their networks as the 5G era progresses. 

“The networks of the future will deliver differentiated performance through programmable networks [that] will enable applications that can be monetised in new ways, where differentiated performance matters. This means creating new use cases for mobile technology, expanding beyond the best effort consumer mobile broadband” and focusing instead on mission-critical and broader enterprise services.” This will also enable our operator customers to add new revenue streams beyond the current best effort consumer broadband offerings. I think this is crucial for the industry’s long-term growth. Many analysts predict a slow market over the next few years, but this is largely only taking the consumer mobile broadband business into consideration. However, we see an significant untapped market opportunity in new use cases that are often overlooked as they today require differentiated performance and have largely not generated revenues today. So our strategy is focused on leveraging these opportunities to drive growth in the mobile networks market, and we're increasingly seeing momentum with many customers around the world on high performance programmable networks… The contract we signed last year with AT&T was the first proof point, but it also created the initial groundwork for the accelerating interest that we're seeing now,” added the CEO. 

But what exactly can operators do to generate new business once their networks are programmable? One option is to open up their network capabilities to application developers via network APIs, something we’ve been hearing a lot about over the past couple of years and a sector that Ericsson has been heavily involved with, and focused on, with its Vonage subsidiary.

It’s not only Ericsson that thinks this, of course: Network operators are keen to expose their network APIs to developers as quickly and efficiently as possible, which is why 12 of the world’s largest telcos are forming a new joint venture with Ericsson to make the process of integrating telco network APIs into applications quicker, easier and more scalable. We reported on this development in September and have just published a video interview with Deutsche Telekom’s Peter Arbitter that focuses on the potential of that new venture – see  DT’s Peter Arbitter on the telco sector’s new network API venture.

“The most important announcement for the creation of our enterprise [business] was the joint venture… to aggregate and sell network APIs – here Vonage will play a key role. We see network APIs as one of the best opportunities to enable additional network monetization, as it will basically open up the network and its unique features to innovation in a completely new way. For example, think about increased security in financial transactions, or 3D positioning in a logistics chain. These are just two examples, but there are going to be a number of new potential use cases for network APIs. We're going to see some early [examples] followed by many more over time. But in order to scale the network APIs [sector] it is really critical to solve the supply side, or the availability of network API. [Currently] each developer in the world has to integrate and contract with hundreds of individual CSPs around the world, and that's not practical and it's not economical…. So it won’t happen. With the JV, we actually remove a key hurdle in order to speed up the pace of digitalisation and to accelerate the growth of network APIs globally, because this will allow the global developer community access to network features similar to the way they access communication APIs today.  From a strategic point of view, this is a critical step for us to take.” 

Ekholm added: “We think this is a massive opportunity. External estimates say the API market could be a $10bn to $30bn opportunity a few years out. I think it's still too early to properly size the opportunity, but it's encouraging to see the growing momentum and the growing interest.”

For Ekholm, programmable networks and the advent of network APIs enables Ericsson and its network operator customers to more clearly identify specific business opportunities. 

“When we look at enterprise, it's a fundamental shift in the industry, away from consumer mobile broadband sold on monthly subscriptions… it’s a business model issue,” stated the CEO. “We are [trying to] create specific investment cases for the customers where they can generate new revenues. So if I invest in a more capable network, I can actually start to sell those capabilities and get new revenues. So you get a much more normal investment calculation” than just increasing capex and hoping to get a return on that investment. “We're seeing a lot of traction” as a result of the AT&T deal and the announcement of the network API joint venture, he claimed. “We see much more interest coming from customers saying, ‘Can I now monetize the network? I need these capabilities…’”

Is this the answer to the current revenue growth stalemate that is hurting telcos? Ericsson and Ekholm hope so. 

- Ray Le Maistre, Editorial Director, TelecomTV