The news that Ericsson was buying Vonage took a lot of people by surprise, me included. The general view of media and analysts was negative, and many people took this as a signal that Ericsson was planning to get into the VoIP service business, something Vonage started with and is still known for. I think the reality of the deal is a lot more complicated, and a lot more interesting, so let’s take a look and see why that is.
Ericsson hasn’t been shy in saying that their purpose in the deal is the Vonage Communications Platform software, which has a good set of APIs for advanced unified communications and collaboration services and a strong developer program with broad membership. This is important to Ericsson because it ties into their ongoing effort to make 5G into something more than just an evolution to traditional mobile services.
Nobody, including me, has ever doubted that 5G would deploy. The question has always been whether it deployed into nothing more than evolved resource to support traditional mobile services. If that’s the case, then it won’t generate any real incremental revenue to operators, and there will be continued price pressure on the infrastructure needed to support it. That hurts vendors like Ericsson in two ways.
The first, and most obvious, way is that operators will be slow-rolling full 5G features and putting discount pressure on vendors to hold down costs. We’re already seeing this effect in the fact that the so-called 5G we have to date is what one operator wryly called “half-5G”, meaning 5G Non-Stand-Alone, where 5G New Radio is combined with LTE core facilities. 5G core is an extreme rarity these days, and vendors who support it are concerned that the slow uptake will not only cut their near-term revenue, but maybe even limit the scope of their opportunity for 5G-specific gear in the long term.
The second reason, which is less obvious, may be more important in understanding the deal. Operator fears about lock-in and high costs has turned many to the open-model 5G, to O-RAN in particular. An open-model network for 5G is certain to put price pressure on proprietary elements, which is bad. It is also likely to spawn an open framework of service innovation, services built above the 5G specifications and outside the normal scope of influence and knowledge of vendors like Ericsson. That focuses operators on things Ericsson doesn’t even offer…till recently.
There is a value in Vonage’s communications platform; it’s a good framework for offering collaborative services to enterprises. The problem is that it competes with giants like Microsoft Teams, Zoom, and Cisco’s Webex. Ericsson may hope to bring a full collaborative application framework to its product inventory, from which it could offer the APIs and development program as a means for operators to build their own toolkit and compete with the web giants. Realistic? Not likely, at least in my view, and Ericsson’s stock took a hit on the announcement, which suggests Wall Street doesn’t see the obvious story as a good one.
I can’t think of a single incident where a telco successfully competed with a web incumbent for a higher-layer service. I can’t think of many recent ones where they even tried. But could Ericsson be less interested in Vonage’s communications platform for UC/UCC applications than as a means of creating advanced 5G communications services? This could be the voice counterpart to Ericsson’s previous Cradlepoint acquisition, a play on the wireless edge for branch office networking. Ericsson might see operators offering an enterprise-specific service suite via 5G and network slicing. The goal could be to validate both private enterprise 5G, and enterprise-specific 5G services, more than to advance generalized collaborative services.
This would be a credible goal for Ericsson, but it still raises questions. First, could Ericsson make it work? Second, would it address the two “hurts” that Ericsson is suffering in 5G. Third, did Ericsson pay more for Vonage, and even Cradlepoint, than they should have?
Ericsson says they intend to keep Vonage as a separate unit, but that doesn’t mean that Ericsson wouldn’t influence the way Vonage did business. If they didn’t, in fact, they’d really be buying Vonage revenue at a premium over its share price. If they do meddle, we’d have a telco equipment vendor trying to tell a web company what to do, which is another of the things that have historically never ended well. However, Ericsson really doesn’t have to push either Vonage or Cradlepoint in a new direction, just position their current direction in a 5G flavor.
That direction, enterprise private 5G or operator-provided, enterprise-specific, 5G services, is one that all telcos and telco vendors have come to love, not so much because of its proven potential to pull 5G through in full, countering the first of my two Ericsson hurts, but because it hasn’t yet proved incapable of doing that. In our hype-driven industry, every operator and vendor jumps on the most credible story and stays with it until it’s been demonstrated to be over-hyped. Then they move on to the next one. The alternative is to admit to the Street that they have no strategy.
There is some enterprise private LTE in one form or another, but I don’t see a clamor for the 5G successor. At least not in the volume needed to justify a couple of acquisitions with a combined price tag in the billions. There is an opportunity for specific 5G services targeting enterprises rather than consumers, and surely there’d be less price pressure on this sort of service, but is the opportunity big enough to really matter, and can Ericsson exploit it?
The big problem for Ericsson, though, is the second hurt. Open-model 5G could introduce web-scale innovation to the same market that Ericsson hopes to take over using proprietary technology. Yes, Vonage has UC/UCC-compatible APIs, and yes, those could be valuable to enterprises and to firms who want to sell enterprises private infrastructure or specialized services. What might a web-like innovation war do, though? First and foremost, it could validate a set of APIs of its own, and open-source software that makes use of them. Second, it could then quickly create a community of developers bigger than Vonage’s. Third, it could extend the notion of “higher layer” services way beyond either Vonage’s or Cradlepoint’s vision.
Nokia may be the embodiment of the open-model 5G risk to Ericsson. They’re a highly credible mobile infrastructure vendor with decades of engagement with operators, and they’ve jumped out to be a leader in the whole open-model space, including O-RAN. In fact, there are some in the O-RAN space who are concerned that Nokia poses a threat to the “openness” of the movement because they’re a kind of establishment choice in the open-model space, and there have been stories that have worked to put Nokia in a bad light. If Nokia poses a threat to open-model 5G, they pose a bigger threat to Ericsson if they can gain ascendancy there.
I’m not saying that Ericsson is doomed to fail with this deal, only that I think it’s a doubling down on the enterprise-specific 5G services notion that’s been problematic from the first. Maybe they don’t think they have any choice. Ericsson is more dependent on maintaining a proprietary model of 5G than any other 5G vendor, and that vision can’t survive a big success with open-model 5G, period. That there’s no choice but to do something doesn’t make the “something” easy to do. This is going to be hard, very hard, and the consequences of getting it wrong just got a lot more dire. If Ericsson knows that and has a strong strategy to mitigate the risk, reduce those consequences, this might turn out to be a good idea.
I’m waiting to see.
