Ericsson’s acquisition of Vonage: short or long-game?

Vonage is a US-based cloud communications provider that started in the consumer and Small-Medium Enterprise (SME) domain in early 2000 to offer Voice over IP (VoIP) services. At that time, voice services were still the biggest revenue driver for carriers and Vonage offered an alternative approach to bringing voice to homes and businesses. The company has since then grown to offer enterprise services and has acquired several companies to progress its enterprise strategy. Vonage reported US$1.25bn revenues for the 2020 financial year and $170m, indicating a healthy business. The cloud communication provider has also created a global developer ecosystem with more than 1 million developers and has created a global API-based platform with sourcing agreements with more than 200 global communication system providers.

Ericsson on the other hand, is a Swedish Tier-1 cellular infrastructure vendor that is considered the leading company in 4G and 5G networks and now aiming to break in the enterprise domain. The US market is by far the most lucrative one for Ericsson, especially now that geopolitical challenges have limited the reach of Western vendors in the Chinese market. Ericsson announced the acquisition of Vonage on 21st November 2021 for Euro 6.2bn, an unexpected announcement that caused confusion in the market as there are major differences in the business models of the two companies.

Ericsson’s announcement includes many interesting details. For example, Vonage operations will not be impacted, and the company will continue to operate normally using its current name with all its employees. The current Vonage CEO will report to the Ericsson CEO and company financials will be reported as a separate segment in Ericsson accounts. Ericsson aims to help Vonage grow its business and take advantage of synergies available through the combination of the two companies unique selling points.

The Ericsson acquisition strategy could have two distinct implications, one for the short term and one for the long term.

In the short term, Ericsson will get access to an extensive client list that Vonage already has and can potentially increase its odds of breaking into the North American enterprise market with its 5G expertise. The US is arguably the biggest priority and opportunity for all Western infrastructure vendors and the enterprise domain promises to bring the next wave of profitability beyond the consumer business. There are synergies between the two companies’ product lines here, but Ericsson will need to address specific enterprise requirements and proceed gradually, especially with the cloud communications market is extremely competitive in the US.

Ericsson has also commented on the long-term strategy: they will aim to take advantage of Vonage’s global API platform to extend its reach to 5G networks, including network slicing, to create new use cases and applications. Vonage will be well positioned to introduce its developers to the 5G opportunity and Ericsson will be able to use this unique value proposition to its global customer base. Similar developer platforms may also become an interest for infrastructure vendors as they are planning to accelerate their enterprise strategies. The question is whether these platforms are the correct size and have the right global enterprise footprint to be acquired by a telecoms company. For example, Twilio is a similar company to Vonage and has a very diverse developer community behind its API programs.

The acquisition highlights that all infrastructure vendors need to evolve their product portfolio and help CSPs become Platform-as-a-Service (PaaS) providers for enterprises. The combination of Ericsson expertise in access networks with Vonage’s platform will help Ericsson become a valuable partner for CSPs, not just an infrastructure provider. All infrastructure vendors are facing a turbulent future with open networks, competition from hyperscalers, market saturation and a complex, long-tail enterprise opportunity. The acquisition of Vonage is definitely a positive move, but Ericsson’s challenge is now to orchestrate a seamless integration of two distinct businesses, something that many similar companies have failed with in the past. For example, Telefonica attempted to start an API business with Bluevia but failed to attract developer interest  and generate a significant revenue stream. The Bluevia and Telefonica’s Digital initiative was discontinued.

ABI Research expects similar acquisition, partnership or co-creation strategies to become the norm in the enterprise space, especially as enterprise 5G matures. The Ericsson-Vonage case is an extreme strategy, where an infrastructure vendor acquires expertise, but ABI Research expects more partnerships and co-creation programs rather than acquisitions in the future. For example, the Vodafone-Google Cloud partnership for managing data or the AT&T-Microsoft Azure partnership for edge cloud development. These partnerships will likely shape how 5G will be deployed in the enterprise space, and the race is just starting.