Ericsson acquires Vonage – diversification or strategic hedge?
Ericsson has announced its acquisition of Vonage, best known for its Communication Platform as a Service (CPaaS) offerings to the enterprise sector, for US$6.2 billion. This represents a significant premium for Vonage and is also Ericsson’s largest M&A deal in its corporate history. Vonage will operate as a subsidiary of Ericsson and its CEO, Rory Read, will join the Ericsson Leadership Team and report to the CEO, Borje Ekholm. The deal is all-cash and is expected to close in the first half of 2022. Vonage will bring significant enterprise exposure to Ericsson with its large customer base of over 120,000 enterprises and boasts a developer community of over one billion.
Vonage can be viewed as evidence of Ericsson’s diversification strategy
The deal is significant for several reasons. The first reason is that the deal seemed to come out of nowhere. Ericsson has previously announced its intent to focus on the enterprise as a strategic growth segment and has already closed the acquisition of Cradlepoint in 2020. At the time, we had written that “Cradlepoint can become the tip of the proverbial spear for Ericsson’s attempts to make inroads into enterprise spending on the extended, “wireless WAN” and “wireless edge”, with pull-through for Ericsson’s IoT, small cell and enterprise private network products.” This made perfect sense for Ericsson as a logical extension of its portfolio into the enterprise. But the Vonage acquisition, despite being billed as complementary, is not quite so clear cut.
In an investor call that immediately followed the announcement, Borje Ekholm spoke of Vonage creating an “impetus for the second leg of our strategy, developing an open, global innovation platform.” Unpacking this lofty ambition would imply that Ericsson envisions a future where enterprise application developers can access a platform that gives them a host of network capabilities through APIs to enable new use cases and applications. Today, these developers can access voice, SMS and even video capabilities through the Vonage Communications Platform (VCP) in a simple and seamless manner. The vision is compelling in as much as it has always been a problem area for communications service providers (CSPs) who spend billions to build the infrastructure but have always struggled to monetize these investments by catering to enterprise requirements beyond voice and data plans. Ekholm also spoke repeatedly about 5G APIs and hinted at a future where 5G network APIs would be both available and easy to use for the developer community that will work on building new applications for enterprises. If this future vision can be achieved, it will effectively broaden or increase the total addressable market (TAM) for Ericsson and validate its diversification strategy.
Vonage can also be viewed as a strategic hedge for Ericsson
The other way to view the Vonage acquisition is that Ericsson is investing in a strategic hedge against an increasingly challenging business environment for its core business. On the one hand, with its leading position in 5G, Ericsson should be at the start of a long growth cycle as CSPs make investments in new 5G networks. However, the CSP upgrade cycle to 5G is not uniform and tends to be happen in bursts. Traditionally, each “burst” in CAPEX spending would coincide with the advent of a new generation of cellular technology. However, 5G is much more capital-intensive than previous generations and has had an impact on commercial deployment plans in several markets around the world. This uneven rollout has also been impacted by geopolitical considerations, with certain vendors either banned or excluded from investment cycles. A recent example of this was Ericsson, an early 5G supplier to China’s CSPs, missing out in subsequent rounds.
Ericsson’s investments in catering to the Enterprise should be seen in this light. Cradlepoint was the first big enterprise focused acquisition for Ericsson and there were several benefits and synergies touted as part of the deal. Beyond the synergies in product portfolio and sales organizations, one of the biggest benefits was that Cradlepoint’s pivot to a subscription-based business model generated recurring revenue streams. These recurring revenue streams are attractive to CSPs, but also to Ericsson, whose core customers’ CAPEX spending tend to happen in bursts. If Cradlepoint revenues would effectively smooth out the revenue trend line to some extent, then Vonage can also be viewed in this light. Not only do both acquisitions provide revenue upside, they also have provide a “hedge” for Ericsson against any vagaries in the core telecommunications business.
Ericsson is entering uncharted waters
Ericsson has traditionally focused almost exclusively on the CSPs as its core customer group. CSPs will continue to dominate Ericsson’s customer mix for the foreseeable future but there are several challenges to increasing top line revenues. Beyond the cyclical nature of CSP spending, there is rising evidence that the CSP’s channels to the enterprise are not mature enough to tap into potential enterprise spending on connectivity and communications services. CSPs simply do not have the requisite domain knowledge for industry verticals, neither do they have the products that enterprises need today.
The need of the hour is an “abstraction layer” which simplifies all the ever-increasing network complexity and make it consumable for enterprise IT departments. In many ways, this is the holy grail for the CSPs and something they have not been able to offer in a meaningful way. The success of this acquisition is predicated on Ericsson’s ability to execute, build, and offer this abstraction layer as a bridge from the CSP to the enterprise. If they can’t, then this would represent an expensive beachhead within the enterprise’s IT spending budgets. Moreover, Ericsson would effectively end up as a quasi-competitor to the very same CSPs that form their core customer base. As always, time will tell but Ericsson is entering uncharted waters in its quest for the enterprise as a new growth segment.