With operations in more than 140 countries, the $21.4 billion telecom giant Ericsson has ambitious plans for India, its seventh largest market.Responsible for the bulk of GSM networks in the country, the Swedish vendor, which accounts for about 40 per cent of the Indian market, continues to deepen its exposure in the world’s fastest growing and most competitive telecom market.
While the company has been associated with the Indian telecom industry for more than a century, it has only become aggressive in the last decade as the Indian wireless space has grown exponentially, with as many as seven telecom operators looking to expand their networks across the country.The upshot of these developments is an increased demand for equipment.
A number of other telecom vendors including Nokia, Alcatel-Lucent and Motorola have also made a beeline for India over the last few years and have announced significant investments in the country.According to Department of Telecommunications estimates, investments worth $2 billion are expected in the next few years.
A strategic partner for Bharti, Ericsson has also worked with other key operators including Hutch, MTNL and BSNL. Recently, with the litigation between Motorola and BSNL finally coming to an end, the company is all set to clinch yet another deal, this time with BSNL for its mega tender. The lowest bidder for BSNL’s 45.5 million GSM line tender, Ericsson will supply 60 per cent of the contract while Nokia will account for the remaining 40 per cent.
Ericsson’s bid was priced at approximately $107 per GSM line, which values its part of the tender at $2.92 billion, while Nokia’s bid was priced at $177 per line, pegging the value of its contract at $1.95 billion. According to BSNL officials, the 60:40 ratio between Ericsson and Nokia will be maintained in case BSNL plans to scale up the tender by 50 to 100 per cent.
However, according to analysts, Ericsson’s bid price at $107 per line is very low and they are sceptical about the company’s ability to maintain it, particularly if there is any upward revision in the tender, which is highly probable as BSNL is likely to place advance orders.
Romal Shetty, director, Telecom Risk Advisory Services, KPMG India, disagrees: “The margins may be low but the high volumes will justify the bid price.Moreover, Ericsson knows how the Indian market operates and has worked with several operators including BSNL. I am confident that the company will be able to complete the contract without a hitch.”
Early this year, the company signed a three-year contract with Idea Cellular for GSM expansion in the Maharashtra, Gujarat, Rajasthan, Madhya Pradesh and Himachal Pradesh telecom circles.
Under the contract, Ericsson will build an EDGE-enabled network and provide radio access, microwave transmission and next-generation mobile softswitch network architecture till November 2009.
This will enable Idea Cellular to make a smooth transition to a 3G-ready network. According to Mats Granryd, managing director, Ericsson India, Idea’s expansion in the five circles will present unique challenges because it includes remote rural areas.
With over 50 GSM and CDMA networks, Ericsson competes with other global majors like Nokia-Siemens, Alcatel-Lucent and Motorola, but continues to maintain its leadership position. It is dominant in UMTS and leads the market in commercialising the latest versions of high speed data packet access (HSDPA).
“While Ericsson is technically sound, its operations are not streamlined, as the company is very large. The company has focused more on the technology part and less on managing operations. However, this focus is now changing and the vendor is taking a closer look at its cost structures and is in the process of streamlining its operations,” says Shetty.
With Indian operators entering the UMTS/3G market, the company has further reiterated its commitment to India and intends to play a major role in upgrading the existing cellular networks.
Ericsson has also been actively focusing on managed services during the last few years and is a key player in this field today.This aggressive move has been driven primarily by the growing interest among carriers to work with fewer vendors overall, while handing those vendors more responsibilities to develop, acquire, integrate and manage the technologies and solutions they need. However, the extent of managed services that operators require varies hugely ?? some carriers want the vendors to host new applications to get them out to the market more quickly, but are averse to have them run their networks.
Ericsson has so far excelled at winning managed services contracts. “We have garnered over 120 million subscribers worldwide under managed services since 2002 through our Global Services Business unit, by far the largest in the industry,” says P. Balaji, vice-president, marketing and strategy, Ericsson India. Some of these contracts call for the company to completely manage network operations or capacity processes, while others require the company to host specific applications.
“We leverage both skill and scale. And marry global processes and tools to local presence and competence,” says Granryd.
The company provides three different kinds of managed services. These are hosting and operation of the core network, access network, service network or enterprise network, including multivendor environments, and transfer of Ericsson staff to the customer site if needed; capacity services, including building, operating and directing network capacity where needed; and content and application hosting services, including enterprise services, messaging, prepaid, device configuration and other services.
Ericsson makes a powerful argument for managed services by focusing on the overall cost saving that can accrue from outsourcing network management. When it takes over a network, it can collapse a number of overlapping functions into a support structure that is better overall and reduces costs by 10 to 15 per cent for the carrier. “Managed services also enables telecom players to focus on their core competencies,” says Balaji.
While globally, the company provides managed services to operators like Hutchison 3G, 3 Italy and Vodafone, in India the company’s key managed services client is Bharti Airtel. In August 2006, the company signed a managed services deal worth $1 billion with the carrier, which further reinforced its relationship with the carrier. Under the terms of the agreement, Ericsson will facilitate expansion and upgradation of Bharti’s GSM/GPRS network and provide managed services for a period of three years in 15 telecom circles.
The deal will help the operator to expand its reach across India, especially in the rural areas and further penetrate all 15 telecom circles. The circles are Jammu & Kashmir, Delhi, Haryana, Punjab, Himachal Pradesh, Uttar Pradesh (East and West), Rajasthan, Andhra Pradesh, Tamil Nadu, Chennai, Karnataka, Kerala, Assam and the Northeast.
“Managed services is definitely the way forward. Operators like Bharti Airtel and Hutch have already signed managed services contracts. Clearly, Ericsson is heading in the right direction. But with the low average revenue per user currently prevailing in the Indian market, the company needs to structure its contracts with the operators very carefully as these are based on a revenue-share model,” says Shetty.
While Ericsson is not the only vendor in the managed services game, it clearly has experience in all parts of the network that other vendors will find hard to match.Globally, the company has reported a 24 per cent rise in its first-quarter earnings and continues to take market share from its rivals. It has restructured its business to have an increased focus on multimedia and services because the next five years will see a host of multimedia applications such as internet protocol television (IP-TV), gaming and radio.
“We see that the market is evolving towards multimedia, services and networks. Ericsson intends to cater to each of these segments. Focusing on any one division will pay off in the other areas as well,” says Balaji.
At present, networks are the biggest part of the business. In the near future, multimedia will account for 15 per cent of its revenues while services will account for 30 per cent. However, 55 per cent of its revenues will still be from networks. The new focus on multimedia means that a subscriber can have any service (gaming, music, sports) on any device (mobile, multimedia PC, gaming console, HDTV) virtually anywhere in the world.
By 2011, while networks will still be big, telecom services and multimedia will also constitute large chunks of the Ericsson portfolio. The new services in multimedia will definitely drive revenues.
However, despite its massive market share and its ability to set the agenda in its key markets, analysts say that Ericsson’s rejection of the upcoming WiMax technology and its firm attachment to its own technologies (WCDMA/ HSDPA) may go against it.
The company is adjusting to an all-IP world and is likely to have less leadership than in 3G. It may even have to fight to retain its position, a battle for which it has begun building up its managed services business and acquiring technologies in fixed networks and IP-TV.
Given that other key vendors like Motorola and its biggest competitor Nokia are developing Wi-Max and LTE in parallel, Wi-Max would have been another weapon in Ericsson’s arsenal. A Wi-Max strategy would have allowed Ericsson to cover as many network bases as possible in its multi-technology world.Therefore, the exclusion of 802.16 may result in the company excluding itself from a pole position in the multinetwork, converged 4G world that will inevitably evolve over the coming decade.
Nevertheless, in emerging markets (which play an important role in Ericsson’s strategy), it continues to chart large-scale growth plans. “Recognising the potential of the Indian market, Ericsson has committed an investment of $100 million annually in the country,” says Granryd. “And we can scale this up as required.” Clearly, Ericsson is here for the long haul.
