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How a century of telephone expertise doomed Ericsson

Updated 4 years ago
Published Jul 3rd, 2012 11:20AM EDT

The mobile phone industry is used to vendors flaming out, sometimes just a couple of years after companies peak. Yet few handset companies have self-destructed as spectacularly as Ericsson — particularly considering its pedigree in telephony.

During the summer of 1997, Ericsson spent a few months as the No.1 mobile phone brand in the world, buoyed by the early success of its brand new miniature phone called the 788. Ericsson’s global market share briefly spiked to 27% around the same time Motorola’s long decline finally cost the company its global leadership position. Nokia was rapidly gaining ground, but had not yet pulled decisively ahead of its two main rivals.

For a brief moment, it looked like Ericsson might be able to retain its position as the world’s No.1 mobile phone brand. Yet just four years later, Ericsson was forced into a merger with Sony’s handset unit.

How can a company that became a leading landline telephone brand in 1890’s fumble its golden chance of dominating the mobile handset market so badly? The answer is most likely very simple: a long and successful history in a specific industry can fatally handicap a manufacturer when a device or a product morphs into a radically new form. In Ericsson’s case, the company was able to make the leap from landline phones to analog mobile phones in 1980s — and then to digital mobile phones in 1990s — but it was unable to comprehend how the mobile phone started evolving rapidly from a voice device into a data device.

LM Ericsson started out as the Huawei of 1880s. Its crafty Swedish founder, Lars Magnus Ericsson, reverse engineered Siemens telephones and started manufacturing sleeker versions that undercut Siemens and Bell on pricing. It’s worth noting that the Ericsson phones were not particularly innovative even back in 1890s. They were simply better engineered and designed versions of the leading models. You could argue that Ericsson’s corporate philosophy started hardening around the concept of engineering improved versions of existing models rather than pioneering new functionality a hundred years ago.

Geographically, Ericsson was unusually adventurous for a Scandinavian company; it became a leading telecom vendor in Brazil during 1890s. Gustaf Öberg oversaw Ericsson’s successful expansion in China, including the break-through network contract in Guangzhou in 1913. The early push into Latin America and Asia meant that Ericsson was perfectly positioned for the mobile telephony revolution of the 1980s.

Ericsson’s strategy of classy copy-catting was particularly well-suited for competing against Motorola, a company that grabbed an early lead in mobile handset market. Motorola pioneered the analog mobile phone market and grabbed more than 60% of the global market, but was notorious for bad ergonomic design and clunky user interfaces.

Ericsson made hay during the 1990s by essentially repeating its 1880s strategy. Instead of reverse engineering Siemens, Ericsson used Motorola handsets as a template for creating more sophisticated devices.

This worked like a charm until it stopped working. The turning point was the year 1997, when Nokia began rolling out a massive range of new devices in the 6100 and 5100 series. As odd as it now sounds, Nokia played the role of Apple back then — an aggressive, creative disruptor. Nokia’s market research team had realized that text-messaging, games and calendar functionality were about to revolutionize the mobile handset market. Consumers would start using their phones as data devices, not just conduits for voice.

Nokia’s sleek 1997 cell phone models introduced a shockingly large, five-line monochrome display, which made reading text-messages easy and enabled playing popular games like “Snake.” In addition, Nokia moved to using internal antennas in its models just one year later.

And Ericsson? Ericsson was busy copying and subtly improving Motorola designs. The most notable Ericsson model in the year 1997 was the 788. It received a rapturous welcome when it debuted and clearly improved on many aspects of Motorola models of the time. It was notably light at 135 grams, as well as slim at 24 millimeters. Yet it was soon clear that the 788 and its siblings were rapidly becoming obsolete.

They featured stubby external antennas and one-line displays, which were suddenly looking ancient. Worst of all, their UI technology was a mess. Text-messaging was not featured prominently and the tiny screens made using SMS or calendar functionality downright painful.

The 788 sold like hotcakes for several quarters, and then turned cold as ice. Used to the three- to five-year handset product cycle of the 1990s, Ericsson was unable to push out truly novel product designs for the rest of the decade. The 788 was the peak of Ericsson’s 120-year history of manufacturing phones — and it was also the phone that sunk Ericsson as a popular consumer brand.

A century of telephone manufacturing expertise had given Ericsson a vast distribution network and great brand awareness stretching from Brazil to China. But those advantages counted for nothing when the company’s R&D program missed the transformation of the mobile phone from a voice-centric device to a vessel for data delivery.

Less than five years after Ericsson’s global market share had briefly topped 25% and its flagship model 788 had been a short-lived sensation, the company was forced to merge its mobile phone operations with Sony. The resulting joint venture limped along for a decade before being absorbed by Sony.

After launching mobile game company SpringToys tragically early in 2000, Tero Kuittinen spent eight years doing equity research at firms including Alliance Capital and Opstock. He is currently an analyst and VP of North American sales at mobile diagnostics and expense management Alekstra, and has contributed to, Forbes and Business 2.0 Magazine in addition to BGR.