The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Prakash Bansal, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
First China, now Facebook. Things don’t get any easier for Ericsson, the biggest maker of telecoms equipment.It’s spent the best part of a decade coping with a competitive onslaught from low-cost Chinese rival Huawei. Now it’s dealing with a surprising newcomer: Mark Zuckerberg’s social media behemoth.
Facebook has teamed up with companies including Intel, Nokia (an Ericsson competitor) and operators Deutsche Telekom and SK Telecom. They’re collaborating on open-source designs for the next generation of equipment linking our smartphones to mobile towers and transmitting text messages and YouTube videos. Zuckerberg wants the project to connect the billions of people who don’t have Internet access, especially in areas where building networks is hard because of climate or lack of reliable electricity.
Even big names now shun pricey servers for cheaper Facebook-inspired equipment. Goldman Sachs says more than 80% of its new server purchases are Open Compute-style gear. Nokia has decided on the “keep your enemy close” approach and has worked with Facebook, first on Open Compute and now on the telecoms project. Ericsson and Huawei have largely steered clear so far. Nokia says the project will expand the market, and there is hope among the established manufacturers that they’ll be protected by phone companies’ heavy reliance on secure and reliable networks. But given the telecoms gear market has been limp for a while, any slight competitive change must be taken seriously.
With most 4G networks already built in the US and China, carriers’ investment will slump 7% this year and 5% next, according to Deutsche Bank. Ericsson’s operating margin was in the 20% range before Huawei’s arrival, and will be about 10% this year, according to Bloomberg data. The 10% drop in its share price on Thursday because of falling sales shows its vulnerability in a difficult market. While Facebook won’t kill the telecom equipment business overnight, it’s never wise to under-estimate Zuckerberg.