Ericsson Completes Vonage Acquisition that is Puzzling in Some Ways

Ericsson says it has gotten final approval to complete its acquisition of Vonage. The stated goal of the transaction intent has been to allow Ericsson “to expand globally in wireless enterprise,” Ericsson has said. But the deal has seemed puzzling in some ways. 

Does Ericsson really need Vonage’s cloud-based platform for enabling enterprise voice, messaging and video? If not, what does it see as the acquisition’s value? Some of those questions might remain even if one agrees with Ericsson about the intended target use case.

“Vonage’s presence in the Communication Platform as a Service (CPaaS) segment will provide Ericsson with an opportunity to access…a market (this) is expected to reach USD 22 billion by 2025, growing at 30 percent annually,” Ericsson has said. Some believe the market is a bit smaller, while others believe it is bigger. Some believe the market is substantially bigger.  

But it is a niche market; the successor of the older “private branch exchange” or “business telephone system” market. The market also is highly fragmented and arguably more fragmented than the “phone system” market CPaaS replaced. 

One reason the market is fragmented is that it is inherently hard to obtain scale in a market based on application program interfaces rather than computer hardware. Also, the market includes smaller organizations, not only enterprises. As always, that limits the ability to control unit costs. 

And, as was true of the business phone system market, enterprises often find it costs them less to “do it yourself” using owned software and hardware solutions, rather than “rent” capabilities as a service. Can Ericsson succeed in transforming a significant portion of a “recurring services” business model into a “owned platform” product model? And is that even desirable?

Right now, the Vonage Communications Platform delivers about 80 percent of Vonage’s total revenues. 

In a broad sense, the acquisition might be viewed as part of the move by public network infrastructure providers to directly supply enterprises with mobile platforms intended for use as local area and private networks. 

Some might be a bit confused about the move, though. It is not so clear that Ericsson actually needs Vonage for core technology (unified communications platform), including the ability to “voice enable” or “messaging enable” any application.

Ericsson notes the community of developers who support the platform. Ericsson might see the 120,000 or so enterprise customers as valuable references and also a way to gain insight on how to serve the market. 

Historically, though, the hardware-based forerunner of CPaaS was the business phone system. And that market has tended to move towards decentralization rather than centralization over time, as limited scale and high distribution costs force larger suppliers out of the market, with specialists of smaller scale taking their place. 

To be sure, Ericsson has had a history of exploring “as a service” models. But those efforts tended to center on new use cases beyond core public network communications, such as entertainment services. 

Ericsson might see something others do not. Ericsson might have the resources to leverage Vonage assets to support what it already plans for private networks. But it might also be chasing a niche market with limited upside. 

Or so it has seemed to at least some an odd fit.

There is a reason the business phone market, and its successor CPaaS market, has not been easy for larger firms to lead. Fragmented markets tend to lead to fragmented supplier structure. That is something Ericsson almost certainly will have to overcome.