Ericsson sees cash crop in data field

Much like recently liberated telecommunications equipment giant Lucent Technologies, the Swedish firm--perhaps best known for its cellular phones--has cut deals with numerous data communications firms amid a rush of merger activity in recent months.

In a sense, there is nothing unique in Ericsson's newfound love of data. International communications behemoths like Siemens, Alcatel, and Fujitsu, also have long supplied the worldwide telecommunications market with equipment that supports traditional circuit-based phone systems.

But a new trend is directing the voice business, and it is based on data technology provided by the likes of Cisco Systems and Ascend Communications, among others. A combination of cheaper high-end switching and routing devices can now handle voice traffic wrapped in a transmission method called IP, or the Internet protocol--the transport mechanism for the Net.

This technology shift has essentially forced the hands of providers of traditional circuit-based voice switching equipment, like Ericsson. The merger of veteran voice communications player Northern Telecom and data equipment supplier Bay Networks to form Nortel Networks earlier this year is among several plays that signal the beginning of a market evolution.

"All these guys recognize they need a complete product line," noted David Passmore, president of industry consultants NetReference. "They all need to jump into IP."

Analysts say the easiest way for a company like Ericsson to catch up, is to cough up the cash to buy the technology it needs. "If any of these big telecommunications companies want to make a real play in the data world, they're going to have to lay the cash on the table," said Jeremy Duke, industry analyst with the Cahners Instat Group.

As an indication of Ericsson's drive, the company has set up a data networking division in Burlington, Massachusetts, which is comprised of existing units focused on high-speed access, routing and switching gear, and voice implementation using IP. The division includes the equipment acquired recently in a $285 million deal from Advanced Computer Communications.

Another school of thought has the firm making a play for one of a number of startups currently setting up shop outside the Boston area.

"Our acquisition plan is to pursue what we call the string of pearls," said Michael Thurk, vice president of Ericsson's infocom systems division. That string, he explained, is comprised of companies that incorporate a similar culture and offer technology that complements Ericsson's business model.

Thurk said the company has set the lofty goal of growing its data business 50 to 100 percent annually--far above current industry levels. "We have a very strong position against all of our rivals," he said.

Ericsson is more likely to succeed in the data communications market given its pedigree, according to the executive. "My view is right now the telecommunications players have a stronger position," Thurk said. "I think the complexities of telecommunications networks is underestimated by datacom players."

Though Ericsson is best known for its huge wireless business, the company also offers equipment for circuit-based phone networks. In this sense, the company is reacting to the data trend, rather than leading the charge. But analysts don't believe it will make a difference.

"Are they unique? Nah. Are they an 800-pound gorilla? Yeah," said Virginia Brooks, vice president of networking and telecommunications at the Aberdeen Group. "I think they understand the critical nature of the data piece. The question is: How far do they want to go?"

Ericsson may have more pressing issues to deal with. Earlier this month, the company announced that upcoming quarterly earnings would fall short of consensus estimates. It is also in the midst of cutting 20,000 employees from its worldwide workforce of over 100,000.

The company has attributed many of its woes to the global economic slowdown. It has also been hurt by increased competition from Finnish wireless player Nokia.