Growth Gambles (Moving Up the Stack) are Dangerous, Difficult but Also Necessary

Not to pick on Ericsson at all, but the last several decades have not been kind to legacy providers in the telecom business, as growth has ended in some geographies (developed markets, mostly) , and is nearing the end even in emerging markets that are stronger now (Asia) , or poised to be stronger (Africa).

Many now are too young to remember it, but in the monopoly era  (pre-1980), both the United States and Canada were home to a couple of the biggest telecom infrastructure providers in the world (Northern Telecom and Lucent, formerly Western Electric). But some of that era’s leading firms also now have been absorbed, including Alcatel (to Nokia Networks), while the biggest growth has happened among the ranks of Chinese firms (Huawei and others).

At the same time, as activity and investment have flowed to all things internet, other suppliers traditionally more viewed as “computing” suppliers have surged, as virtually all networks now are “internet protocol” networks. To a large extent, that also means all “telecom” networks are “computer networks,” while the telecom industry is part of the larger internet ecosystem.

Some might fault Ericsson for betting it could create an important new business in media services. What else it might have done is the question, and there are no easy answers. In virtually every part of the legacy telecom business, questions about how to ignite growth have few easy answers, beyond horizontal acquisitions to add bulk.

Value has moved inexorably towards the separated application layer, as all apps now have become “over the top” apps, by design. In principle, and by design, IP networks are dumb pipes.

So “moving up the stack” essentially means transport service providers literally must create roles on the applications side of the business. That is never easy. The best template is provided by cable operators, who have in some instances “vertically integrated” (in a new way) by acquiring content assets.

Instead of trying to capture value by restricting content availability, the new pattern is to seek the widest possible distribution of those content assets. Though it remains to be seen how much that strategy might apply to enterprise apps and services in the internet of things realm, it seems clear enough that the really-big wins would come if and when access providers own highly-popular apps and services that are not restricted to customers of just one network.

In other words, it makes no sense to restrict HBO sales only to AT&T customers, or Netflix only to Verizon customers. Nor would it make sense for any access provider owning other assets (Netflix or any other popular app) to restrict access to its own customers.

It isn’t clear what else Ericsson might have tried, since it was going to have to step out of its comfort zone, no matter what it attempted. It will not be the last firm to struggle with a growth strategy. Growth now has to come in new areas outside the core competence. That is risky and hard.