Ericsson/Cisco alliance will reshape the carrier industry November 09 2015

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Ever since the mobile access network started its migration to IP, the narrative has centered on whether Ericsson, the mobile king, or IP giant Cisco, would be the winner in the new market. That made the news that the two companies are entering into a deep partnership seem shocking at first - but then completely logical.

The two companies announced on Monday that they will cooperate from development to delivery of systems for carriers and enterprise customers, and predicted a full $1bn each in additional revenue by the end of 2018, as a direct result of the alliance. They will focus their efforts heavily on cloud computing the the IoT (internet of things), and Ericsson will receive patent licence fees from its new friend. The Swedish firm also expects to save SEK1bn ($115m) a year from the deal.

There are huge challenges in achieving workable cooperation between two companies with such different approaches - Ericsson still R&D-heavy and increasingly services-driven; Cisco a sales machine focused on hardware and software, and tending to buy the new technologies it needs.

But the deal has fewer risks than a merger (even supposing that got past antitrust) and is a decisive move to preserve both partners' markets in the face of the rise of Huawei and the merger of Nokia and Alcatel-Lucent. Both companies are traditionally wary of major mergers and Ericsson resisted all pressure to follow Nokia's lead and acquire a router company like Juniper. "I don't believe in big mergers - this is by far the best solution you can get," Ericsson CEO Hans Vestberg told Bloomberg. "This is much faster and more efficient."

The wireless infrastructure business is consolidating as traditional hardware becomes a game of scale and the value shifts to virtualization and SDN, services and cloud platforms. In these areas of future growth, Cisco and Ericsson are far more complementary than they are in their traditional markets. While Cisco had little chance of penetrating Ericsson's mobile RAN fortress, nor Ericsson Cisco's enterprise IP heartland - despite strong attempts by both around the edges - they can target one another's customers with their software-oriented platforms.

Ericsson has a far more developed services offering - Cisco's structure and roadmap is still mainly product-focused, though the cloud, IoT and SDN markets will inevitably bring elements of managed services into the mix. Their strengths and weaknesses in virtualization, orchestration and SDN are different, and while Cisco has a more end-to-end approach to the IoT, Ericsson has been developing the links between a hosted cloud service and billions of endpoints.

And of course, they both have a core customer base of large service providers, though they usually sell different products to different departments. Even that is changing - as seen in AT&T's Domain 2.0 and many other operators' bids to shake up their supply chains, the providers of base stations, routers and other kit are being brought together around SDN.

Better then, to play nicely in those playgrounds than try to muscle each other to the sidelines, and in doing so, wrongfoot the other competitors, without the disruption of a huge merger or joint venture, Nokia/ALU-style. Indeed, as those two vendors spend much of 2016 working out the details of their marriage, with the aim of offering a full scale IP/mobile platform plus software, Ericsson and Cisco could leapfrog them and provide a similar combination in a simpler way.

Both partners will have the chance to squeeze rivals - Huawei for both of them, Nokia/ALU for Ericsson, Juniper, ALU and agile SDN specialists for Cisco. Even Huawei will have to look nervously at an axis which boasts $75.4bn in combined revenues in the last fiscal year and has 76,000 professional services staff.

They proclaimed their new alliance as one which would create the "networks of the future", and offer customers "the best of both companies: routing, data center, networking, cloud, mobility, management and control, and global services capabilities."

As well as offering an end-to-end portfolio, they outlined two other key goals - to create a new mobile enterprise platform based on a "highly secure technology architecture for seamless indoor/outdoor networks", which would presumably tap into Cisco's WiFi and Ericsson's LTE and 5G work; and the acceleration of platforms for the IoT.

Among the details of the deal are commitments to create reference architectures and products;

systems-based management and control; a broad reseller agreement; and collaboration in key emerging market segments. Also, a combined team will start work on a joint initiative focused on SDN and virtualization.

They will cross-licence each other's patent portfolios - they have a combined 56,000 patents, though clearly the weight is towards Ericsson, which will receive the revenues from the agreement. They will also discuss Frand (fair reasonable and non-discriminatory) policies.

Vestberg said in a statement: "Foremost, we share the same vision of the network's strategic role at the center of every company's and every industry's digital transformation. Initially the partnership will focus on service providers, then on opportunities for the enterprise segment and accelerating the scale and adoption of IoT services across industries. For Ericsson, this partnership also fortifies the IP strategy we have developed over the past several years, and it is a key move forward in our own transformation."

His counterpart at Cisco, Chuck Robbins, said: "With the pace the market is moving, the successful companies will be those who build the right strategic partnerships to accelerate innovation, growth, and customer value … We have worked with Ericsson during the last year on developing a strategy for future industry leadership, and can start executing together today."

The firms secured public support from the CEOs of key customers including Vodafone and AT&T, welcoming the potential to accelerate innovation in the integration of wireless and IP, and the move to the IoT.

And Roger Gurnani, chief information and technology architect at Verizon, summed it all up, saying: "This global partnership has the potential to reshape the industry."