Ericsson, a company which has 45% of the $35 billion market for mobile network equipment and software, announced that its third-quarter profits fell 36%. Ericsson said the lower profits were driven by weaker-than-expected demand in the United States and Europe. Operators in those markets are cutting costs by pooling and renting networks instead of building their own infrastructure.
Ericsson’s president and chief executive Carl-Henric Svanberg said he decided to announce the drop in profits a week before the company’s earnings conference on October 25. He said that Ericsson would work to improve its internal financial forecasting procedures to avoid further surprises.
“There is no change in the long-term outlook or in the market going forward or in how we see data traffic developing on wireless networks,” Mr. Svanberg said. “But we do need to draw conclusions about how we can better understand the variations that can occur in our industry, and we will improve our early-warning systems.”
Despite attempts to reassure investors, Ericsson shares dropped nearly 24%, to finish trading at 20.10 kronor ($3.11) on the Stockholm exchange. Some investors see Ericsson’s lower profits as evidence that there is a slowdown in demand for third-generation (3G) wireless networks.
A few years after wireless operators started investing billions of dollars to build third-generation networks; operators are beginning to realize that the predicted demand for third-generation technology isn’t as great as hoped. Lower than expected growth is forcing operators to find ways to cut costs.
“What Ericsson is experiencing is affecting the whole industry, not just Ericsson,” said Roland Pitz, an analyst at HVB Bank in Munich. “What we are seeing in Europe especially is that operators are either sharing their networks or renting them out to virtual service providers. The net effect is that the pace of investment in network construction is slowing slightly from what it had been.”
One reason for the decline in expected 3G growth may be due to the aging demographics in Europe and the United States. Fast Internet access and downloadable music videos may be appealing to younger people, but older generations are less likely to want these services. To increase growth, retirees and near-retirees have to be convinced that a mobile phone has more uses to them than just making calls.