The blog speaks to Ericsson CFO Karl-Henrik Sundström

Karl-Henrik Sundström is Executive Vice President and Chief Financial Officer of the Swedish telecoms systems company Ericsson.
From May 2002 to April 2003, Karl-Henrik Sundström held the position of Vice President and General Manager of Business Unit Global Services.
From 1999 to 2002, Mr. Sundström was Managing Director of Ericsson Australia.
He joined Ericsson in 1985 as a trainee in financial management.
(the above is excerpted and adapted from Ericsson's homepage www.ericsson.com)

NOTE THIS HAS BEEN EDITED MONDAY MORNING at 0800 TO ELIMINATE SOME GARBLED TEXT

This blogger talked to Sundström in Stockholm recently. The following is an excerpt of approximate transcript of the interview, as conducted and recorded in English. I have selected the parts where he talks specifically about the telecoms industry, changing technologies and some thoughts about Ericsson and the Baltics. A longer Latvian version of this interview may appear you-know-where, but knowing them it will be published when, or shortly before, as the Latvians say "the owl's tail blossoms" /kad pūcei aste ziedēs.)

You’ve been with Ericsson for 20 years. 20 years ago, you were selling advanced circuit switched networks, now it is all moving toward IP based systems. Companies such as IBM are facing the customer in the same manner as the traditional telecoms suppliers and saying to the operators that we and our partners can give you the same services as traditional telecoms…

Karl-Henrik Sundström: The thing is, they are coming from the enterprise area, where you can control the environment. The fact is, the for over 100 years, Ericsson (and its competitors) has been able to deliver, regardless of the technology, what we call real time communication. That is what we call telecom grade, you lift the phone, get a dial tone, and there is somebody on the other side. That is regardless of whether the technology was crossbar, mechanical, digital circuit-switched or voice over IP. The IBMs of the world are coming from another world, they are coming with internet technology and they are coming from the batch world. Which is no quality of service. They are coming from datacoms,where if there is a byte that is lost, you resend it. Telecom grade, telecom service, the five 9s is our core competence. Ericsson and our competitors have changed underlying bearer technology all the time, and we did not invent the silicon chip but are using for certain things in our switches and other things. So they (the IBMs) will be there, but they are not the ones controlling the real time service and the quality of service. That is our core competence.

That’s on the fixed side. On the mobile side, VOIP on the radio interface is coming, but the (packet) header is bigger than the voice carried, so it is uneconomical at present. But it is coming. We haven’t been able to compress it, even though we have advanced algorithms, The header remains bigger than the content (the packet) carries.

I may be out of my depth technologically here, but I recall circuit-switched establishes a point to point connection…


KHS: hat’s where IMS (IP Multimedia Subsystem) comes in. It came from the 3G world, but the first ones using it are wire line operators, because they have to guarantee the quality of service. So if you want to have guaranteed 8 megabits, not best effort, you go up here (the IMS level) and you simulate signaling. IMS allows you to dedicate. Then you can charge for it. You need that for applications, voice, and high quality video. You can do it within an enterprise, but when you go outside into the uncontrolled public network, you need to.

But isn’t it a software solution?

KHS: It is. It is the traditional signaling capability, which you use in the new IP world with IP version six, where you can have the header that allows you to dedicate.

But won’t the IBMs be able to hack or reproduce it. They’ll say just give us the standards, and we will write something that performs…

KHS: It is the same in the AXE, the circuit switch. The software opens the circuit. In an AXE, say for the Latvian network, its one million man-years to fix all those variances of a call set up. They would have to reinvent those million man-years and start from scratch. We have this knowledge; it is part of our spine. It is the same as if I wanted to be a baker. I can make cakes at home, but I don’t have the knowledge to run a bakery.

So you are saying you have a legacy, translated to state-of-the art, of setting up circuits, that the IBMs and HPs cannot match?

KHS: They are coming from the batch-oriented world, which is not real time. The equipment is from different vendors, I am not sure they have their own IMS, so the brain has to come from some telecoms vendor. So you cannot earn big margins.

They are competing with us on the services side but may be a partner. When it comes to the technology behind it, they are not in there.

Niklas Zennstrom, the inventor of Skype, will scoff at all this quality of service stuff and say that look, this works, almost all of the time… So you can call anybody in the world for free.

KHS: There are issues of regulation and fairness of competition. This is basically an arbitrage. When I lived in Australia, my family used to call me using IP telephony. The circuit was good enough. Bit it is a little unfair competition. On the fixed side, you have to have, often by regulation, the emergency numbers (911 in the US), if the electric current fails, the phone must work. We did a study that if you build all these features into VOIP, the price difference is not that big. But if the authorities allowed an arbitrage, a service that doesn’t run on mainstream rules and regulations, then it cheap. It was good enough. My parents couldn’t afford to call Australia once a week.

So if you want to be something like a full service telecommunications service provider, then maybe it is best to have your systems delivered by someone like Ericsson?

KHS: We were the first one actually delivering voice over IP for RSL, six years ago. But the thing is, that if everything was voice over IP, you can’t guarantee emergency services to people out in the forest in Sweden. In Australia, there was a case against Telstra because a child died when its parents were unable to get an ambulance over the mobile phone, which is subject to different regulation. So there are these national interest and security factors. In a marginal arbitration, Skype is cheap and good.

So Skype is a toy and you have to build a serious telecommunications network if you are worried about these safety and national security issues…

KHS: Another thing to remember is that tariffs are set in a reverse way from costs. The biggest investment is in the local network, second biggest in the transit layer and the international switch is cheapest. But the tariffs are set so that the international calls pay for the local. For around USD 5 million I could route all the international traffic in Sweden through one switch, but one is not allowed to without agreements, etc.

Another thing we see these big companies doing is outsourcing. How does Ericsson see this? You are running the network you just sold in Italy. Are operators happy to have you offer to run most or all of what is their core business? What are the risks and rewards for the operator?

KHS: First of all, investment in most GSM operations is around 40 % of cash outlay. Of which, we can sell about 20 %. Opex (operating expenses) are by far the largest outlay. That is running the network and guaranteeing the quality service. Operators are moving down the value chain closer to the customers. So we follow them behind. We are now managing 38 million subscribers around the world. We have economies of scale and coordinate on a regional scale. We run three networks from one place in Australia, several in Poland, now the Hi3G network in Italy with some 750 people. We can eliminate functional overlaps; you can reduce costs 15 to 25 %.
The other thing is competence in how to manage advanced systems, networks, how to tune 3G networks and manage hybrid networks with an advanced service layer. This competence is scarce.
So while the operator moves forward to manager the customer and the market, we move forward to manage an area where he doesn’t have competence. . Plus the staff has to be constantly retrained for new things
The challenge for many operators is that they are delivering a channel to customers with new services that will have to be billed several times per week.
In the US, for example, we have hosted services, such as MMS, that we run for a number of 3G players. They sign a subscription with Ericsson and we run it for them.

So for Latvian alternative operators, as certain issues are resolved, such as interconnect, and when the new third mobile operator settles in, there may be a time to build out and one option would be to let Ericsson both build and run the operation…

KHS: Yes, if it is in their strategy to move toward the customer. Earlier I was in charge of Services at Ericsson, and in the US, someone said to me “Son how can we be called a mobile operator if we don’t operate or own network?” But a few months later, they were buying hosted services from us. That means in all new areas, we are doing it for them. It is a matter of strategy, do you want to focus on the market and let someone else run your network for you.
In some markets, in the early days, coverage is important and is an early competitive tool, so you might want to control that.

Lattelekom is going into this, they hope to set up network operations centers for customers. So what happens when they start competing with Ericsson?

KHS: That would be a bit of a threat, but also an opportunity. We already run Telia International’s network out of an operations center in Holland, where it was cheaper to add on another customer rather than build a center just for them. If TeliaSonera wanted to do certain things, it could put certain things, like inside engineering and data transcripts (IADT) in Latvia, where the engineering costs are lower.

But Lattelekom is looking to Scandinavia as a business process outsourcing market, and the hell with whose turf we are on…

KHS:The only thing Lattelekom has to think about is what do they want to be. Do they want to focus on telecommunications or on network operations. I have been in big companies, mostly Ericsson, for my whole life, and I know that the only time we got into trouble was when we didn’t know what we wanted to do.

But Ericsson isn’t an operator?

KHS: Oh no. In the 1920s and 1930s, setting up a telephone company was the only way to get customers for our equipment. After World War II, we decided we wanted to be an equipment maker and we got out of our last operator (in Argentina) in 1992. Now we have a strict rule not to compete with our customers.

Getting back to some global questions, aren’t we seeing the defacto disintegration of the company? I mean, you see a telecoms operator and Ericsson runs their network, the billing is done in Bangalore, someone else helps with sales. Where’s the company?

KHS: I think that is natural progress. Ericsson used to do all its plastic itself, We had the biggest plastics factory in the Nordic area. We did our own nuts and bolts. That is how it is when you start early and there is no supplier, but as we moved up the value chain, we manufacture 70 % of our products outside Ericsson. We control the software, the final assembly and guarantee that the system works. We design but don’t manufacture.

We do the blueprint, we do the software to make it work, design the printed circuit board, have it manufactured.

We started this a long time ago, this virtualization of the company, 10 years ago with AXE. You work with a limited number of specialized partners and put it all together.

What opportunity does this open for us in the Baltics?

KHS: We do much work with Elkoteq in Estonia, but nothing in Latvia. If I were to hypothetically look at what other things one could in the Baltic, it would be in software engineering. You have good education and knowledge and are close to our R &D centers. Also we would look at installation work, bringing temporary installers to work with customers.