The unexpected setback from the industry’s most dependable performer led its shares to slide by a third in early trading, though by the time the New York market opened stock had fallen 24.16% to $31.04.

As a result, shares in Alcatel-Lucent fell 2.87% to $9.46, while stock inNokia, which holds a 50% holding in Nokia Siemens Networks, was down 1.37% at $35.94.

Stockholm, Sweden-based Ericsson, which cut prices ruthlessly on new network roll-outs to regain the advantages of scale it once held over its recently merged competitors, has been hit by a slump in orders for upgrades.

It expects third-quarter sales to drop sequentially by 9% to SEK 43.6BN ($6.78bn) while it said net income is likely to come in 38% lower at SEK 4bn ($624m).

The news shocked the market because Ericsson has so far been bullish about prospects from mobile networks experiencing a boom in data revenue and the huge efficiency advantages it held over competitors still in the process of trimming their workforces.

CEO Carl-Henric Svanberg said the unexpected development was mainly due to a shortfall in sales in mobile network upgrades and expansions, which resulted in an unfavorable business mix that also negatively affected margins.

While 80% of Ericsson’s quarterly revenue is predictable, it was caught out on the remaining 20% of software upgrades that had shorter sales cycles but fatter margins. Among items that hit the company in the quarter included a decision by AT&T in the US to put off wireless upgrades until 2008, discussions on network-sharing that had held back investment by operators in the UK, and uncertainties in the Italian market.

Ericsson has ensured a brutal start in life to its newly merged competitors, Alcatel-Lucent and Nokia Siemens. When it saw it was faced with newly strengthened competitors approaching its own market share, Ericsson was determined to regain its advantage, and now claims a 45% of the GSM/WDCDMA market. However, it did this by paring back margins on new network roll-outs, which left it heavily dependent on its traditional customers in western markets.

In other sections of its business it is still faring well. Ericsson was the first to grasp the importance of service revenue. Professional services revenue is up 7% sequentially and 26% over last year’s level to SEK 11bn ($1.7bn). The operating margin of 15% is up from the 12% achieved last year.

The multimedia sector, buoyed by acquisitions, is likely to show a 31% rise to SEK 4bn ($623.9m), though with only a 1% operating margins against 3% last year.

Our view

Ericsson has a huge task to regain credibility with the stock markets. CEO Carl-Henric Svanberg deserves credit for turning a company facing extinction into the largest wireless equipment provider. Yet its market dominance seems to have generated an arrogance that prevented it seeing how vulnerable it could be to changes in the market.