Are Cisco & Ericsson Preparing for the Endgame?

Shocking as it may be, lots of Cisco news emerged from the Cisco Live trade show in Las Vegas this week. I'm only going to cover a little of it. Well, one thing: What's up with all the spin control on the Cisco-Ericsson relationship?

For those of you who haven't followed, Cisco and Ericsson in November 2015 announced a broad partnership to "Create the Networks of the Future." Whew, I'm glad they weren't planning to create the network of the past. The partnership involves sales and marketing partnership, joint product development, and even new patent cross-licensing (Ericsson was a net gainer on the licensing revenue).

So what's all the chatter at Cisco Live? Craig Matsumoto over at Light Reading reports the two companies are "fine tuning" their partnership. That sounds euphemistic to me, like something couples say before they go into therapy.

According to Matsumoto, Martin Zander, vice president of partnering for Ericsson AB, said the original partnership was possibly too open-ended and "putting the expectations all over the place."

That sounds like carefully placed positioning to set you up for change.

Confession: I once predicted this deal would lead to a merger, since it's all the fashion in the networking equipment business, with slow growth, shrinking profit margins, and the onslaught of competitively priced goods from China-based Huawei. Ericsson and Cisco did this deal because they were finding it harder to defend their market share against a company (Huawei) that had grown larger than them combined, so they teamed up, believing they were stronger together.

It also looks as if things aren't quite panning out. The companies boldly predicted $1 billion in revenue gains (each) from the partnership. Ericsson actually shrunk -- its trailing twelve-month revenue has gone from $28 billion to about $25 billion since the deal was announced. And there have been cuts, layoffs, and major losses. Cisco? Not much better. Revenues have been flat the past two years. So much for the growth.

I now reserve the right to change my prediction, completely. I predict this deal will be broken up. Possibly by year end. I'm not sure exactly what the legal terms are, but they could find a way to say it's over.

Yes, I know. That's quite a change. But that's the point -- everything has changed. Two years ago was a different era, during Ericsson's former CEO Hans Vestberg's reign. For example, back then, people expected that carrier network functions virtualization (NFV) would take over the world. According to Ericsson, 2015 was the era of the "Smart Purse" and the "Future of Streaming."

Times change. NFV has become as sexy as laser discs. The smart purse was, well, never a thing. Time to rethink the deal.

There have always been a number of questions about the Cisco-Ericsson deal, such as: How are the sales commissions shared? Who speaks Swedish at Cisco? And how long exactly is the flight from San Jose to Stockholm? I really can't answer any of these questions with certitude, except that you can get from San Jose to Stockholm in 14 hours, 45 minutes flying Lufthansa via Frankfurt.

Managing this deal seems as if it would be a hassle for an incoming CEO when you are actively considering carving up the entire company. I bet new Ericsson CEO Börje Ekholm has different ideas. It's like when a new NBA coach comes in and immediately wants to trade your All-Star for a few draft picks to free up salary space and show he has a plan to "rebuild." How could the baggage of this two-year-old Cisco deal help Ekholm remake the company? It's just no fun when you have to check with a Cisco GM before you hack off a huge part of the business for some hedgefund guys.

I have not had the pleasure of meeting Mr. Ekholm, or even going to Stockholm -- but what I have heard is this: Ekholm is a very methodical guy, with a background at some of Europe's largest corporations. He is very well respected in private equity. If you are the status quo, there is no scarier phrase than "respected in private equity." It usually means cutting, slicing and dicing, selling of pieces, and rebuilding... like a new NBA coach.

Meanwhile, Cisco CEO Chuck Robbins says he's giving Ekholm "some space" to think about things. Not only does that sound new-agey, it also sounds like the path to a more open marriage.

Another observation from the PR playbook: Why would you suddenly start talking so much about something that hasn't officially changed? The answer is that in PR, you want to take control of the story ahead of time. So, if you think the story is going to change -- start crafting the new narrative. Ericsson and Cisco may already be paving the way for major changes in their relationship.

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