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Obstacles loom in Cisco-Ericsson tech partnership

While the broad tech partnership between Cisco and Ericsson looks good on paper, such deals often fail over time.

The tech partnership between Cisco and telecom equipment maker Ericsson AB is expected to deliver a stronger product portfolio to service providers than either company could provide on its own. But to make that happen, the companies will have to sustain long-term cooperation between sales, marketing and product development -- a historically difficult task in the tech industry.

The deal announced this week falls just short of a merger in terms of the cooperation between the companies' business operations. The relationship will cover a broad set of technologies that encompass routing, data centers, networking, cloud, mobility, management and control, and global services.

Driving the partnership is a market in which the lines between telecommunications and the Internet are blurring. That dynamic led to Nokia's recent $16.8 billion acquisition of French networking supplier Alcatel-Lucent. The combined company is expected to be a major rival of Cisco and Ericsson, along with China-based Huawei Technologies Co.

By combining mostly complementary portfolios, Cisco and Ericsson will be in a stronger position to battle competitors, analysts said. But building that merger-like organization is much easier said than done.

"Like all partnerships, a lot remains to be seen beyond the paper and ink that's used to sign the deal," said Rohit Mehra, an analyst at IDC in Framingham, Mass.

Like all partnerships, a lot remains to be seen beyond the paper and ink that's used to sign the deal.
Rohit Mehraanalyst at IDC

Indeed, tech partnerships usually fail over time because of changes in the companies' strategies and leadership, Rob Enderle, principal analyst at the Enderle Group in Bend, Ore., said in a recent blog. The companies may be in perfect alignment at the beginning of the partnership, but priorities shift with market changes.

Examples over the last decade include Cisco ending its system integrator contract with HP in 2010 because of intensified competition between the two. HP and Oracle also had an ill-fated partnership. The once chummy relationship ended with each side filing a lawsuit after Oracle stopped developing business applications for HP's Itanium chip in 2011.

Another high-profile tech partnership that accomplished little was a 2007 joint-development deal between Sun Microsystems and Microsoft. Two years later, Oracle acquired Sun in a $7 billion deal.

Benefits of Cisco-Ericsson tech partnership

On paper, Cisco and Ericsson make good partners, since each has something the other wants. Ericsson, a major supplier of telecom gear, has struggled in the Internet infrastructure market, where Cisco is a leader. On the other hand, Cisco is hoping to reap the benefits of Ericsson's global services business, which spans 180 countries.

"It's very easy to see the potential upside compared to many such partnerships," said Peter Christy, an analyst at 451 Research LLC, based in New York. "The overlap and competition is very limited."

Cisco and Ericsson expect to add at least $1 billion each in annual sales by 2018. Ericsson's annual revenue last year was $26.3 billion, while Cisco's was $49.2 billion in the fiscal year ended in July.

Besides additional sales, the partnership makes Cisco the premier Ericsson partner over rival Juniper Networks Inc. In a Bloomberg interview with Cisco CEO Chuck Robbins, Ericsson CEO Hans Vestberg wouldn't comment directly on the reseller agreement with Juniper. But he did say Cisco was "the only choice I saw that was viable for our customers and financially for us."

Robbins believes the partnership will be successful because of the synergies between the companies' products. Also, Robbins said a "great deal of trust" has developed between the organizations over more than a year of negotiations.

That may be the case today, but as Enderle points out, partnerships are fragile and "one executive change, acquisition, product expansion or unplanned additional partnership can blow it up."

Only time will tell whether that happens to the Cisco-Ericsson partnership.

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