4 Capturing the Direct and the Serendipitous Spillovers:
4.4 Digital Mobile Telephony: A Swedish World Success
4.4.5 One Technology Wave After Another: Nobody Is Safe
In the last 20 years or so telephone technology has moved at breakneck speeds, and each technology generation changes into another every few years. The analog NMT system was based on Frequency Division Multiple Access (FDMA) technology.
One carrier radio frequency was needed for each phone call. This analog technique was very capacity demanding. Once mobile telephony had grown into a volume business the need for more efficient solutions became acute. Military radio technology based on TDMA technology within Ericsson, notably the digital troop radio, together with the other military technologies listed above became the foundation for the rapid development of Ericsson’s digital TDMA technology during the 1980s.
Under TDMA one radio wave is modulated digitally with a number of channels (calls) partitioned in time. GSM had eight such channels.
The military TDMA was a complete digital system (even the calls were trans-mitted digitally) that was developed into the civilian Global System for Mobile service (GSM) which became the European digital mobile telephone standard.
The once military synchronized frequency-jumping technology now became critical for the quality of voice transmissions and to make it possible for senders and receiv-ers to stay in touch. The frequency jumps were synchronized when the signal became too weak. This frequency jumping was monitored through a digital signal that was constantly switched on.
Ericsson got its own civilian TDMA system accepted by the FCC in the USA in the 1980s. It was there called DAMPS. DAMPS is not a version of GSM. Instead of eight calls per carrier radio frequency, as in GSM, DAMPS can only handle three.
By way of an advanced vocoder technology these three channels have been squeezed into 30 KHz, which is much less than the 200 required by GSM. The smaller frequency range, however, lowers the voice quality in the US system. But these specifications have been deliberately chosen. With its system Ericsson, according to its manage-ment, was the top of the line world developer and producer of telecom systems.
For a while, it appeared as if the US telephone equipment producers were prepared to accept TDMA as the mobile standard. Suddenly, however, in the early 1990s a number of telephone operators became interested in an alternative system: Code Division Multiple Access (CDMA), also a military radio technology that was developed in the USA. Under CDMA each call carries one address (a code). All calls are then
carried on a digitally modulated radio wave, and the calls are sorted out at the receiving end. CDMA was developed by QualComm and was used in the Vietnam War already during the 1970s. CDMA had been partly adopted by Motorola and AT&T, but by the early 1990s it had still not been possible to make the CDMA system operational in civilian contexts. One problem with CDMA was that its capacity was heavily taxed by the administration needed to distribute signals in batches as well as to collect and integrate them again at the receiver end. Computers were not up to that at the time. Even though promises were extended that it would soon become operational it took far too long to see any civilian application that worked.
CDMA may be a more advanced technology than TDMA but the US mobile telephone market was impatient. The telephone operators had paid large sums for the frequency slots that FCC auctioned off during 1994 and 1995. They could not afford to wait for the US companies (QualComm, Motorola, and AT&T, or rather, since 1996, Lucent Technologies, AT&Ts technology arm, which merged with France’s Alcatel into Alcatel-Lucent in 2006) to get their CDMA systems to the market. It was not enough for the operators to be offered better systems in the future, the systems had to be much better to make it profitable for the operators to wait, and the technology providers could still not guarantee that their better systems would neither be delivered on time nor work, which they did not. So Ericsson, with a functioning TDMA system in the market, won the first round. But technical change was continuing, and much of it now within the civilian telephony, an increasing part of the competition originating in the US computer industry. Currently (2009) CDMA appears to be a fading technology (see below).
Around the mid-1990s the US president was concerned about the lagging US companies and announced an initiative, the Personal Communications System (PCS), which was part of his earlier so-called information highway initiative (Eliasson 1995:112). The idea was to integrate mobile telephony with the existing fixed line telephone systems to make it possible for several competing networks to function simultaneously and to raise technological competition in the field.
This initiative was, however, both political and late. The same development was already on the way spontaneously in the market and Ericsson’s Minilink (with a military radio origin, see Sect. 5.2) became an effective facilitator for the private competing mobile telephone systems operators to interconnect with the fixed line systems.
By the mid-1990s technological change was already heading toward broadband digital mobile telecommunications (BTDMA). That technology was expected to be needed for the wireless transfer of the large data volumes that (inter alia) multimedia would require. Multimedia was then expected soon to become an integral part of the mobile Internet.
This development in turn required a corresponding upgrading of switching tech-nology, Ericsson’s core technology. The standard circuit coupled AXE switches (circuit switches) when connected ties up the entire system and cannot be used for broadband transfer under a PCS system. So an entirely new packet-switching tech-nology was being developed for mobile telephony. The Asynchrous Transfer Mode (ATM) technology wraps up telephone and data calls in packets. This switching
110 4 Capturing the Direct and the Serendipitous Spillovers
technology had already been in use for a considerable time in the computer industry in so-called Local Area Networks (LANs). And Ericsson’s past in combined mechanical and electronic telecom technologies no longer carried any advantage in this new market, probably the opposite.
The telecom crisis of 2000/2001 was triggered by the extreme auction of 3G licenses that initiated a wave of optimism in the equipment industry (Ericsson, Nokia, Motorola, Nortel, etc.), a bubble that collapsed when the operators got cold feet about the prices paid and the demand now realistically expected. The entire industry on both sides of the Atlantic went through a shake out and thousands of people had to go from the large equipment makers (Eliasson 2002a:149ff). In the wake of that crisis, telecom equipment makers such as Ericsson, Lucent, Motorola, Nortel, and Philips emerged much reduced in size, but the market had sorted out Ericsson and Nokia as the promising players in the mobile telecom systems market.
Ericsson’s reorganization toward product development at the one end, and the installation, servicing and (sometimes) operating of the mobile systems, on the other hand, meant that software programming now made up the bulk of development work, perhaps more than 90%. Even though Saab has been a pioneer developer of software engineering (see next chapter) this was not necessarily a Swedish competitive advantage.
Even though Ericsson’s market is enormous and Ericsson the dominant player with 29% market share (SvD, September 30, 2008) the swift technological winds expose Ericsson to dangerous competitive challenges from two ends. As mobile and fixed line telephony converge the Internet protocol (ip) that merges voice, data, and multimedia increases in importance and raises competition from router developers such as Cisco.29 To counter that challenge, Ericsson acquired a share in US Juniper in 1997, only to be forced to sell it in stages during the telecom crisis that struck in 2000 and 2001, realizing a huge capital gain (see further Technical Supplement S2).
Computer makers and related communications firms (Cisco, Intel, and Google in particular, and even Nokia) from the USA are edging into the mobile telecom systems markets pushing in different directions. Computer industry and data commu-nications technologies offer a challenge. Small computers, using the Linux operat-ing system are becomoperat-ing mobile communicators (SvD, October 5, 2009) and Cisco’s routers represent dangerous competition. Ericsson has initiated a joint project with Intel in which Intel’s new platform for very small computers is to be integrated with Ericsson’s modems that give the computer a constant broadband connection via the mobile networks. The trend around 2008 appeared to be toward very small computers (so-called netbooks) that are constantly connected to the Internet and that are often undistinguishable from the very advanced mobiles (SvD, November 3, 2008). The other challenge, surprisingly, did not come from the old established players, but from the new Chinese upstart Huawei, that does not at all offer old technology at a low price. Already in 2004 Huawei had set up office in Kista, the mobile telecom valley of Sweden in Stockholm, to spy on Ericsson (Ny Teknik, Del 2, No. 21, March 19, 2004) as did Chinese ZTE (founded in 1985) that estab-lished a research center in Kista in 2008 (Ny Teknik, September 17, 2008, SvD, September 30, 2008). Change in Ericsson’s markets has therefore been fast and
there is no way for the company to relax (The Economist, September 26, 2009, Special Report:10f).
To cope with the new situation and to focus Ericsson has shedded defense elec-tronics (to Saab in 2006), the office switches (not long ago the technology core of Ericsson’s bold venture EIS into business information systems, in 2008). On technical platforms for mobile telephony, Ericsson has merged with Swiss ST to make their platform technology more generic and available to other systems developers. The shifting of focus toward Symbian and Windows mobile platforms means that the recently acquired Uiq platform technology is put aside (DI, June 25, 2008). Instead Ericsson has been on a buying spree to complement missing technologies, so far for 60 billion SEK. Marconi, and its fiber optics technology that will combine with the minilink technology, was acquired for 17 billion SEK in October 2005, Redback in December 2006 for its broadband routers (for 13 billion), and Tandberg in February 2007 for its ip-tv compacting technology (for 10 billion).30
Ericsson is now an almost 100% mobile-based telephone systems company. To prepare for future technology and market developments Ericsson has reorganized itself into three business areas; Networks (the largest with 63% of sales in 2007), Professional Services (the promising growth engine with 23% of sales), and Multimedia, the most recent business area with 8% of sales.
Most competitors have now given up on Ericsson’s core business, mobile high performance telephone systems. Nokia and Siemens merged their underperforming mobile systems businesses into Nokia Siemens Networks in 2007. Alcatel-Lucent, currently the world leader in fixed line and broadband telecom systems has not given up on mobile telephony. It is however locked into the US CDMA standard that is los-ing market share and WiMax, which Ericsson does not believe in, and lags far behind in GSM technology and notably in Ericsson’s specialty Long-Term Evolution (LTE) or “Super-3G” technology31 (BW, April 8, 2002; SvD September 3, 2008; DI, May 23 and September 6, 2008). Ericsson recently (DI, September 16, 2009) captured an LTE order from Metro PCS, the fifth largest mobile telecom operator in the USA. But both Nokia Siemens Networks and Alcatel-Lucent have been rapidly losing market shares and money in the last few years, and Nokia Siemens Networks at times have appeared ready to back out, at least of Ericsson’s core business (DI, September 2, 2008).
The business situation is however far from simple. Ericsson is expecting a surge in mobile services that demand large data transmission capacity such as multime-dia, games and search services. The question is whether Ericsson will enjoy that increase in demand indirectly from the telephone operators service businesses such as Apple’s IPhone, Youtube, etc. that hire transmission services from the operators at low prices, or directly from the operators, that still have rather thin profit mar-gins. Even though Ericsson has been the largest and technologically leading mobile systems developer in the world its share owners have since 1980 not enjoyed more value growth than a passive investor who has followed the index. Intense competi-tion is quoted as the reason. But the company has no choice but to go on investing heavily in R&D (DI, Nov. 28, 2008). So far, however, Ericsson’s main technology choices seem to have been the right ones even though it has left a string of mistaken acquisitions along the way. And Sony Ericsson is currently (2009) suffering.
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Ericsson is developing its next generation network brain called IP Multimedia Systems (IMS) for multimedia applications that will make it simpler for the operators to offer sophisticated services.
Ericsson is also involved in developing its Gigabit Passive Optical Network (GPON) system for AT&T to be used for data transmission to firms and homes over high capacity optical fiber, a technology that was acquired with the purchase of Entrisphere in the USA in 2007.