Ericsson suffers analysts' wrath

OH, DEAR. Ericsson really does seem to have upset the analyst community over the cosy chat it provided in London back in September. Which it then followed up with a steep profit warning on October 15^th.

And, guess what? A bunch of irate American shareholders have launched a class action in the States to regain monies lost when the share price dropped by about a quarter.

While former CFO, Karl-Henrick Sunderstrom, fell on his sword and resigned over the issue - who got the real blame? The 3G infrastructure business.

To an outside observer, this might look like the bottom has dropped out of 3G when it actually hasn't. In a sense, Ericsson was a victim of its own success.

A bit like Motorola in the handset business, Ericsson had been aiming to increase its infrastructure market share – in this case to enjoy economies of scale - and did.

The strategy worked because Ericsson sold shed loads of new 3G networks. But that ain't where the money is. The really big bucks are in upgrades to existing 3G networks – stuff such as HSDPA.

Such upgrades are largely down to new software – so the margins are higher. New networks require more hardware sales and thus aren't so profitable.

In effect, Ericsson was bowling along expecting its existing customers to upgrade in North America and Europe and some expected sales in China didn't appear.

Somebody must have assumed the Chinese would at last issue 3G licenses but, of course, the government still can't make up its mind how much of a helping hand it will give TD-SCDMA as opposed to W-CDMA.

As Ericsson explained in another briefing to analysts, "We underestimated the possible consequences of market dynamics."
So it isn't that Ericsson isn't making money out of 3G – it is. It's just that the golden days are now over.

Look at Sony Ericsson, for example. As a handset vendor its doing very well with margins of nine per cent which its rivals would kill for. The rest of the group enjoys margins of 13 per cent.

What Ericsson needs is an HSDPA evangelist. And there's half of your problem. Forget the acronym – tell folks what it can actually do and then the operators will be keener to upgrade to meet consumer demand.

Luckily nobody's blamed the INQ, yet. We were at that September briefing, too. µ

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