The global telecom sector has seen a few bum deals in the last decade, led mainly by the “Dumb and Dumber,” as former T-Mobile CEO John Legere would have called them, of AT&T and Verizon. An $85 billion acquisition of Time Warner by AT&T in 2018 made zero sense to most bystanders and was abandoned via a spin-off in 2022. Verizon wasted almost $9 billion on incomprehensible takeovers of AOL and Yahoo, wrinkled and cobwebby relics of the first dotcom age, when Google was just a protozoa.
Measured against those disasters, Ericsson’s $6.2 billion move for Vonage, a pioneer of Internet telephony, is less easy to condemn. But it is starting to look like one of the worst deals in Ericsson’s nearly 150-year history. In October last year, Ericsson was forced to write down the value of the company by about $2.9 billion, almost half of what it paid, after business prospects went south. This week, it booked yet another massive impairment charge of about $1.1 billion. The equivalent of all this would be AT&T knocking $55 billion off the value of Time Warner just two years after the takeover.
Vonage is supposed to be Ericsson’s growth story, and today it has no others. Overall sales fell 15% year-over-year for the first quarter, to 53.3 billion Swedish kronor (US$5.1 billion). Net income did rise 66%, to around SEK2.6 billion ($250 million), but this was largely due to cost cutting. By March, 6,400 employees had left the company since the end of 2022, and the number is still falling. Big telcos are no longer spending on 5G, Ericsson’s specialty, with the same gusto. Omdia, a Light Reading sister company, expects the market for radio access network products to shrink between 7% and 9% this year, after sliding 11% in 2023. The results Ericsson reports next week for its second quarter, then, are likely to be grim.
Rotting carcass
Ericsson’s bosses, however, will cling to the line that Vonage remains a good bet. Its problems, they have insisted, relate entirely to a shrinking “legacy” communications platform-as-a-service (CPaaS) business that apparently holds little interest. Yet this legacy accounts for most of Vonage’s value, judging by the scale of impairment charges. Even the most sympathetic investor may be asking why Ericsson had to buy the whole rotting carcass instead of a few fresh cuts.
“We continue to advance our strategy to build a Global Network Platform for network APIs, which was the strategic impetus for the Vonage acquisition,” said Niklas Heuveldop, Vonage’s newish boss (his predecessor Rory Read, who came with the acquisition, looked too damn expensive, earning $32.76 million in 2022) in canned comments. “We recently announced additional partnerships with leading mobile network operators and we see continued positive momentum across the industry.”
Global Network Platform? APIs? For the uninitiated, the justification for the takeover was all about getting software developers to write monetizable 5G-specific features into their applications. They have supposedly not done this so far because the application programming interface (API) links to networks have been telco-specific – a turn-off for any developer seeking a big audience – and hard to access.
Ericsson’s pitch was that Vonage, with its expertise in APIs and software community, could be the middleman (via Global Network Platform) between developers on one side and telcos brandishing standardized APIs on the other. Vonage would charge developers and Ericsson would play Robin Hood, showering some of the gold on impoverished telcos, pocketing the rest and hoping telcos would spend some of their newfound wealth on expensive Ericsson radios.
A less-shit button
Confused yet? Parts of the financial world certainly are, with one equity analyst admitting he was totally nonplussed to Light Reading at the start of the year. Ignoring all the complicated mechanics of the business model, customers already pay regular monthly fees for what is marketed as a high-quality 5G service. Why should someone pay more for an API-enabled quality-of-service boost (a “less-shit button,” as it was once described on a Telecoms.com podcast)? Why are network APIs needed to pinpoint user location or guarantee identity? Technology firms seem capable of doing those things in other ways.
The fundamental question, again: Why did Ericsson need to spend $6.2 billion on Vonage, a company now worth $4 billion less than it was just two years ago, to exploit this opportunity? Vonage does not have a pivotal, revenue-generating role in the standardization of network APIs. Such work is being led by the open source-loving Linux Foundation through an initiative called Camara. Worse, Vonage has no protective moat around the commercial network APIs opportunity. Several other companies also want to be the middlemen or aggregators, and they include Amazon, with its vast developer community.
A mishmash of platforms would be a nightmare for developers, who will gravitate to a small number of appealing ones. This looks far more important than attracting operators – seemingly the focus for Heuveldop. “The question is not which platform can attract the most operators, but which can attract most developers, and here the outcome remains uncertain,” said Caroline Chappell, an analyst at Analysys Mason, in a sharp research paper published in February.
Chappell will make any reader further doubt the logic of Ericsson’s Vonage takeover. “Vonage can boast a CPaaS ecosystem but Vonage’s traditional developers do not necessarily have much use for advanced network – as opposed to communications – APIs,” she said. “Nokia’s strategy of recruiting systems integrator partners to its NaC [network as code] platform (such as Kyndryl and Innova) looks more promising.” Ouch. Nokia, of course, did not build NaC on top of a $6.2 billion takeover, subsequently written down by $4 billion.
Since it bought Vonage, Ericsson has reported cumulative operating losses at the unit of about $57 million (at today’s exchange rate) on sales of $2.3 billion. Quarterly sales fell a tenth year-over-year for the first quarter, to SEK3.7 billion ($350 million), sending Vonage from an operating profit of SEK300 million ($29 million) a year earlier to a loss of the same amount. Have patience, is Ericsson’s perennial message, as investors visibly age.
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