Happy New Year to you all!  My new year started with a brief American flu and I have not been fully operational last week. Therefore I decided to kick off the millenium by inviting a guest writer to contribute to the first issue of the year.  The first normal IOW issue is already under preparation and will hit your mailboxes in the next few days.

The article gives perspective to value creation within Ericsson, particularly in the light of eMode, our proposed service portal offering to the operator market.  The author, Scott Lipsitz from Rainmaker Capital (http://www.rainmakercap.com) in San Francisco has worked as a consultant for Ericsson in our Internet business model project where we have looked into ways wealth is created in the new economy. This article is not commissioned or paid by Ericsson and not part of any consulting project. However, I think it serves beautifully as fuel for discussion as we enter the new millenium and as we are increasingly facing the need to respond to the challenge the New Economy is posing us. It is also a good example on how a Silicon Valley based Internet company or an investment bank would perceive Ericsson and its opportunities.

Your feedback would be most appreciated - I am sure you in the market can give valuable advice based on your relationship with the customers. Again, I will also post this on the web board on our intranet: http://webboard.ericsson.se/~webacademy under ‘IOW Forum’.

UNLOCKING THE VALUE OF ERICSSON

“Dear Tapio:

As promised, I wanted to briefly provide you with my general perception of Ericsson at this point in time based on my present understanding of the company and the culture.

It appears to me that Ericsson, like many legacy businesses in this new economy, is at a major inflection point.  The world has changed and all players are attempting to redefine their roles.  Ericsson can not help but recognize that, with its network infrastructure, technology, hardware lines of business, R&D capability and brand, it is better than well positioned to fully exploit the convergence of internet and wireless currently underway. In spite of this, Ericsson struggles desperately to avoid channel conflict with its operators, the primary source of its revenues.

It was my initial  impression that the network infrastructure business lines and the mobile internet solutions lines of business were diametrically opposed – that they simply could not co-exist –  and that in order to truly “unlock the value of Ericsson” the wireless internet side of the business should be either 1) separated and distinguished using a tracking stock vehicle or 2) should be completely spun-out creating large scale capital formation (currency) and freeing it for a multitude of opportunities.

The drivers of this thought process were 1) that the telecommunications industry is mature and as a result is valued at very low multiples relative to internet or wireless internet portals and pure technology companies,  2) the terminal business is a commodity business and is also valued at low multiples, 3) Spinning out or creating a tracking stock for the wireless business units would be the most rapid approach to participating in the capital formation process and limiting the inherent channel conflict.

Business Model for the Newco/Spin-out:

As you know, my initial recommendation for the mobile internet division was to operate much like Docomo — giving away the device/terminal as a customer acquisition tool, segmenting your market, and building an ongoing source compelling content and commerce opportunities for your users.   Given Ericsson’s core assets, it is well positioned to participate in every part of the value chain.  The major premise of this model is that cost of customer acquisition can be amortized over the life of the customer. 

While I still believe that this is a viable approach, I recognize that it is difficult and extreme for a company with such a history and channel base.  In fact, it may be akin to chopping carrots with an ax.

A Changing View…

As I have spent more time with various members of Ericsson and learned more of the global service portal/E-mode initiatives I am beginning to believe the wireless internet solutions lines of business and the network infrastructure can co-exist and that E-mode does represent an elegant approach to avoiding channel conflict and capturing great value.

On a macro-contextual level it is my belief that Ericsson can derive tremendous value by simply re-positioning itself to the market.  On a micro-contextual level Ericsson must alter the nature of its relationship with its operators in order to gain ongoing access to user data and participate on a broader basis.  

Cisco is to the internet what Ericsson is to the Wireless Internet

Many people much smarter than I have stated that WAP will grow much in the same way the internet has.  The question for Ericsson is Who does Ericsson want to be in the new wireless economy ?

In looking at several major internet players we see:

·        AOL –an  ISP /media company which directly owns its customers and trades at 30 times TTM (trailing 12 months) revenue with a market cap of $160 Billion (just merged with Times Warner for content and subscribers).

·        Yahoo – a search engine / media company which directly owns its customers and trades at 247 times TTM revenue with a market cap of $114.8 Billion.

·        Amazon – the dominant e-retailer,  owns its customers and trades at 19 times TTM  with a market cap of $23.6 billion

·        Cisco - the dominant network solutions provider does not need to own the customer  and is trading at 28 times TTM with a market cap of $376 billion. 

Of these players, the only one that derives value without direct customer ownership is Cisco.  In my estimation, and with all due respect, Ericsson would be well served by positioning itself much the way Cisco is positioned in the internet space. 

Re-Positioning Ericsson to Unlock the Value:

Today Ericsson trades at roughly 5 times TTM  revenue with a market capitalization of $112 billion.  The low multiple reflects that the company is viewed by the market as a large mature telecommunications company and seller of commodity terminal devices.

The E-Mode B2B strategy, if well executed, can be a critical driver in the re-positioning of Ericsson to the market as the dominant network infrastructure provider and one-stop technology and content (dial-up service) shop for operators /ISPs.   This is the “Ericsson is to wireless what Cisco is to the internet” approach.  Such a re-positioning will give Ericsson a major boost in market valuation.  At a valuation level comparable to Cisco– 28 times TTM revenue–  Ericsson would have a market capitalization of roughly $670 Billion USD, 6 times its current levels.   In short, The E-Mode strategy combined with and a high level marketing and PR campaign such as those formerly implemented by Cisco and Intel  (costing approx. $100 million each) will go a long way towards achieving this objective.

The good news is that regardless of how Ericsson chooses to deal with issues of channel conflict relative to its mobile internet solutions lines of business, it can substantially increase its market value by expanding its message to the both the public and financial markets.  A re-positioned message combined with a well executed global service portal strategy can be implemented through the use of the right advertising agency and an aggressive approach to content licensing and partnering.

Altering the relationship with the operator to achieve the most value:

Of course, in order for E-mode and Ericsson’s re-positioning to be successful, all Ericsson operators must understand what the Company is trying to do.  In  order to sign the numerous licensing deals required to build a comprehensive offering set, operators/ISPs must understand that it is not Ericsson’s intent to go directly to the user.  However, the trick in driving the most value is in making the operators comfortable enough to both allow Ericsson the ability to execute its content strategy and to provide Ericsson ongoing access to customer data.   If a significant level of comfort can be achieved,  operators  may be willing to share customer information under the premise that it is only being used in order to continually refine the offering set which at its core is developed to increase airtime usage and create enhanced revenue opportunities.  In the best case scenario, operators allow Ericsson both continual access to user information and participation on a revenue share basis in the various opportunities that are created through the global service portal approach.

Tapio,  these are really nothing more than some thoughts that I hope you find useful.  I will continue to expand upon them but wanted to get you something for your newsletter.

Warmest best regards and Peace, Health and Prosperity for the New Millennium, 

Scott D. Lipsitz

Partner, Rainmaker Capital. LLC

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This is a weekly newsletter describing the non-confidential part of my work during the past week and how I see market evolution affecting Ericsson (as interpreted my me in my role working for LME/DMA in San Francisco as a business developer with a focus on Internet applications and enablers). The report will be published every Monday. For subscriptions go to http://webacademy.ericsson.se/elists.