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Ericsson breaking network outsourcing barrier with Sprint deal


Nokia Siemens Networks may have found the first outsourcing toehold in the US telecom market, but the Ericsson (NASDAQ:ERIC) surmounted the summit. Its $4.5 billion to $5.5 billion network management deal with Sprint (NYSE:S) opens the door for US operators to follow the lead of Europe, Asia and the emerging markets in handing over the day-to-day operations of its network to an outsider, while they focus on service. Now that the door is open, the question is will others walk through it.

“The North American telecom market has finally cracked,” Yankee Group analyst Camille Mendler said. “Sprint’s $5 billion deal with Ericsson is a game changer that challenges ingrained perceptions of what is core and non-core to telecom operator’s business activity.”

Technically NSN (NYSE:NOK, NYSE:SI) made the first outsourcing inroads, landing a deal with Embarq to manage its network operations centers last summer, but that deal was both small in size and scope. Ericsson itself has been in the outsourcing services game in the US for years, managing transport, SMS, MMS and even mobile music services for smaller operators. But the Sprint contract is the first where a major nationwide operator has been willing to turn the entirety of its network management and operations to a vendor.

“Until today, North American telecom operators had proved unwilling to outsource network functions on such a large scale,” Mendler said. “That said, North American operators are well acquainted with outsourcing: Between 2002 and 2008, extensive outsourcing of functions involving business administration, IT and customer service has already occurred. But externalizing the operation of physical network plant has largely been excluded until now.”

In a conference call today, Sprint executives took pains to point out that they were not ceding control to Ericsson. Sprint’s 6000 employees overseeing the CDMA, iDEN and wireline network would move to Ericsson where they would continue their former duties of maintaining and running the network, but any major technology, strategy, service and product decisions would remain firmly in Sprint’s hands, said Steve Elfman, Sprint president of network operations and wholesale.

“Sprint will remain in full control of the network,” Elfman said. “We own it. We’re not selling it. We’ll be doing all of the strategic roles in terms of network coverage, planning, quality monitoring, and we’ll be doing the integration and development of new products and services.”

“What this means is to the customer we think is very positive,” Elfman continued. “We’re going to focus our attention on improving the customer experience, expanding coverage, improving the quality of the network and bringing new open devices, applications and services and integrating them on that network.”

The goal of the outsourcing deal is produce cost savings that Sprint can then reinvest in the network, but Bernstein Research senior analyst Craig Moffett isn’t so convinced that Sprint can achieve any great level of efficiency.

“Any genuine cost savings for Sprint are apt to be minimal at best,” Moffett said in a research note. “As the nation`s third largest wireless carrier, Sprint already enjoys certain economies of scale in terms of network operations (albeit offset to a large degree by having to operate two of them) and has considerable management experience in this area. Smaller players, by contrast, would be much more likely to benefit from such an outsourcing arrangement. Large carriers typically view network operations as a core function.”

Moffett pointed out that Ericsson’s outsourcing efficiencies overseas have relied on sharing network and employee resources across several operators. If Ericsson is to achieve those sorts of economies of scale it needs to bring other North American network operators on board with similar outsourcing agreements, Moffett said.

“Those overseas carriers that have realized meaningful cost savings have done so by sharing subscale networks to gain economies of scale and improve coverage, not by simply shuffling employees around,” Moffett said. “In the U.S., the probability that AT&T or Verizon, whose competitive advantages in large part rest on their networks, would share with any other player is essentially zero. T-Mobile uses a different wireless standard (GSM) than Sprint (CDMA and iDEN), making a sharing agreement impractical.”

Elfman, however, said there were several areas outside of network sharing that Ericsson’s huge scale. Ericsson can negotiate better deals with suppliers and buy equipment and services for all of its outsourcing customers in bulk, Elfman said.

The choice of Ericsson also puzzled some analysts at Sprint’s conference call. Ericsson is the world’s largest wireless infrastructure vendor, but it focuses solely on the GSM family equipment, while Sprint’s CDMA and iDEN technology choices are decidedly outside that sphere. Even Sprint’s 4G strategy is foreign to Ericsson. Sprint has opted to pursue WiMax through its investment in Clearwire, while Ericsson is the only major vendor to have never pursued a WiMax product line.

But Elfman distinguished between an equipment contract and outsourcing relationship. Ericsson’s managed services business is technology agnostic, Elfman said, and any expertise in CDMA or iDEN Ericsson requires will come with the 6000 employees transferring to the vendor.

“This was a managed services decision, and one in which that is a very key part of their business and much more important to us than the hardware and technology decisions they’ve made,” Elfman said.


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