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Ericsson sets up dedicated network software unit

Splits Networks division in two, one for Cloud & IP, as hardware falls below one-third of revenues


Published: 25 April, 2014


Ericsson has been battling to strike the perfect balance between profit and revenue growth in its recent quarters, but it is going through a deeper change too, with a shift towards software that is likely to transform the make-up of its revenues, and its key quarterly concerns, over the coming years.

As the software content of mobile networks rises, and carriers toy with full SDN (software defined networking), Ericsson has reorganized its infrastructure division to create a dedicated unit for virtualization. This reflects a change in focus that has been building for some time - at the annual general meeting recently, CEO Hans Vestberg said hardware accounted for only one-third of Ericsson's revenues in 2013, down from 73% in 1999, while software contributed 23% and services 43%, up from a combined 27% at the earlier date.

One aspect of this change has been the development of networks which rely on software to support flexible design, agile reconfiguration and swift upgrades with limited hardware swapping required. The next step is the move to virtualize network functions entirely in software on standard servers, reducing the need for specialized hardware. This represents a threat to the remains of Ericsson's once-fat equipment margins, but the Swedish giant, sensing the inevitable, has been a driver of the NFV (Network Functions Virtualization) specifications, and has recently embraced the OpenStack and OpenDaylight SDN platforms warmly.

Now its new interests are made explicit in its organizational structure, with the splitting of the Networks division into two parts - Radio, and Cloud & IP. Cloud & IP will drive work on virtualization, SDN and other cloud-based network platforms, while Radio will take care of the traditional products. Both units will still report to Networks chief Johan Wibergh but will get their own separate heads too.

Vestberg said in a statement: "The business logic and Ericsson's relative position is different in the two areas. Radio is the foundation of Ericsson's technology leadership and we are the undisputed market leader, same size as number two and three together. We are committed to maintain our leadership as the market evolves with 5G. In the cloud and IP space, which are vital for the evolution to 5G, we have made significant progress but are still a challenger. In a transforming market we will now intensify our work to capture opportunities in virtualization and cloud, building on our leading position in core networks."

The restructuring will be completed by July, and so its impact on financial performance and reporting will not be felt for a while. But an ever-deeper focus on software should help the company in its quest to keep profit margins high, even if the hefty revenues of proprietary hardware are behind it.

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