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Ericsson's financial troubles have lowered some analysts' expectations for the telecom equipment-maker's partnership with Cisco, which had hoped the deal would generate $1 billion in annual sales by 2018.
Last week, Ericsson warned investors it would make deep cost cuts to counter an expected $600 million drop in operating income over the next 12 months, Bloomberg reported. Ericsson posted a loss in its second quarter of $121 million, compared with a profit of $192.5 million a year ago.
Ericsson's problems stem from a buying slowdown among wireless carriers. Most service providers have bought the network infrastructure needed for the 4G networks connecting mobile devices today. Analysts expect the next wave of spending to begin around 2020, when carriers rearchitect their networks to deliver the fifth-generation of wireless broadband, called 5G.
During the market lull, analysts expect Ericsson to focus on turning itself around, not on the Ericsson-Cisco partnership.
"Companies in troubled waters first look towards saving themselves before they cooperate with others," said Roger Entner, a telecom analyst and founder of Recon Analytics, based in Dedham, Mass. "I'd be surprised if the partnership is more than in spirit right now."
The original vision for Ericsson-Cisco deal
Roger Entnerfounder, Recon Analytics
In 2015, Cisco and Ericsson envisioned a partnership that would cover a broad set of technologies for service providers and enterprises. The companies planned to collaborate on global services and network infrastructure for data centers, cloud providers and mobile carriers.
The Ericsson-Cisco partnership has led to development of some combined technologies and services for wireless carriers. By the end of the year, the companies plan to release a joint product called the Collaboration Mobile Convergence service. The technology lets carriers deliver several of Cisco's collaboration products as a service, including Spark and Jabber team messaging and WebEx video conferencing.
Nevertheless, turmoil within Ericsson, which led to the appointment in January of a new CEO, Borje Ekholm, has taken a toll on the partnership. Last month, at the Cisco Live customer conference, Cisco CEO Chuck Robbins said the partnership would be on hold for three to six months to give Ekholm "some space for him to work through what he's been working on for the company."
Weak sales expected from Ericsson-Cisco partnership
Analysts do not expect many joint sales or technology from Cisco and Ericsson for roughly three years. That's how long they predict it will take for the 5G infrastructure market to take off.
"When the market is a little constrained, your first objective as a vendor is to sell your gear, not a partner's equipment," said Rajesh Ghai, an analyst at IDC. "That's the reason why it's been a little challenging to see any uplift from this alliance between the two giants."
Until the market picks up, Ericsson will sell gear mostly to customers upgrading or adding to existing equipment, Ghai said. "There's probably not much opportunity to get Cisco involved in those environments."
Once service providers start gearing up for 5G, Ericsson might open the door for Cisco to sell high-end switches and routers. However, analysts expect networking software to make up a much larger portion of sales than in the past. That's because, over the last several years, service providers have been developing systems to deliver network services from less expensive commodity computers.
"The secret sauce in all these solutions is the software," Ghai said. If Cisco and Ericsson can develop together the software carriers need, then they'll be able to "command a premium."
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