Even after thousands of layoffs and a 5G turnaround, Nokia's mobile business struggles to generate profits outside America. That has ramifications for open RAN.
A €120 million (US$136 million) "settlement" paid to a mystery customer, linked to a mobile project that started in 2019, bore much of the blame for some disappointing first-quarter results from Nokia last week. But even if this figure were plugged back into the gross profit at Nokia's mobile networks business group, the Finnish vendor would have reported a thinner margin than it did the year before, despite sales growth of 2% on a constant-currency basis.
If all else were identical, this means Nokia would also still have reported an operating loss, albeit one of just €32 million ($36 million) rather than the €152 million ($173 million) its results showed. For Justin Hotard, who replaced Pekka Lundmark as Nokia's CEO this month, there is no obvious remedy. A product overhaul has already fixed the serious 5G problems Nokia had several years ago. Thousands of jobs in mobile have recently been slashed and cuts may have gone as far as they can without paralyzing Nokia.
Research and development (R&D), plus other critical functions, have been protected from cuts, said Tommi Uitto, the head of Nokia's mobile networks business group, when Light Reading caught up with him at MWC Barcelona last month. Investing more in R&D might ultimately boost product competitiveness at the cost of bigger short-term losses. But in a stagnant market for 5G network products, where telcos rarely switch vendors, the doubt is that it would pay off in the long term.
The contrasting mobile fortunes of Nokia and Swedish rival Ericsson also seem to highlight just how much vendors rely on the US market for their profits. Having lost both Verizon and AT&T as mobile customers this decade, Nokia had a mobile operating margin of only 5.3% last year. Even if Ericsson's intellectual property revenues were treated as pure operating profit and deducted from the figures, Ericsson would have been on 9.7% in 2024 after advancing at Nokia's expense in the AT&T network.
Remarks by Uitto's counterpart at Ericsson are not so conjectural. "I think it's well known that North America is typically good for our margins," said Per Narvinger, EVP and head of networks at Ericsson, on a call with Light Reading earlier this month. He dismissed concerns about the margin impact of replacing Nokia radios that had not reached the end of their natural lifespan in AT&T's network.
"I know there has been a lot of speculation that this would be a lower-margin deal, but the thing is we are, together with AT&T, creating enormous value," said Narvinger. First-quarter margins improved largely because Ericsson was doing an even bigger share of its work in North America. As US-generated revenues grew to account for as much as 45% of the total, up from 37% a year earlier, the operating margin at Ericsson's mobile unit rose by 7.5 percentage points, to 19.8%.
The awkward takeaway is that what some critics unfavorably regard as a vendor oligopoly survives on threadbare margins in most parts of the world. And the refusal of some European and Latin American authorities to ban Huawei and ZTE, the Chinese vendors ousted from various other networks, has put further pressure on the Nordic companies. "Obviously, they want to compensate for some of the volumes that they would have lost in other markets, and, similarly, we have lost footprint in China," said Narvinger. "When we then all meet in some of the countries, where it's fully open to everyone, of course it's fierce competition."
Nobody, meanwhile, thinks a revival is imminent. An oft-cited metric by this publication is the 12% drop in total radio access network (RAN) product revenues last year, to about $35 billion, according to Omdia, a Light Reading sister company. This year, it expects revenues to be relatively unchanged. Ericsson has been guiding for no RAN market growth over the next few years. These are not the conditions that would typically attract and be helpful to new entrants.
But that has not stopped telcos from trying. If the interfaces between various parts of the RAN were standardized, an operator would be able to combine products from different vendors at the same mobile site instead of buying one supplier's complete package. Supporters called the approach "open RAN" and believed it would spur competition by giving product specialists an opportunity they lacked in a world of proprietary interfaces. It has not worked out.
The problem with open RAN is to do with economics, not technology. In a shrinking or stagnant market for RAN products, any market share gains by a new entrant would implicitly hurt an incumbent that has already been squeezed. For evidence, look at what Ericsson's AT&T win has done to Nokia. The price of adding new suppliers would be to weaken an existing one.
This might not matter if the new players bring real innovation, but there is no sign they do. Operators are attracted to open RAN because the injection of rivalry should lower prices, but this would happen at the expense of vendor profitability. Open interfaces do not inherently reduce the cost of development or production. If anything, the extra work on systems integration could increase those costs. Besides, the incumbents now boast compliance with open RAN specifications, and big telcos like AT&T seem to agree they have adapted or are changing.
What about virtual RAN? The phenomenon is sometimes conflated with open RAN, or treated as a branch of it, and means substituting general-purpose hardware and IT platforms for telecom-specific technologies. Through economies of scale, resource pooling and automation, virtual RAN could lower costs. The concern is that performance might not be as good. Regardless, while they have taken different approaches, both Ericsson and Nokia have built virtual RAN into their offerings.
More importantly, the arguments used to promote virtual RAN are often overlooked, or conveniently ignored, by the supporters of open RAN. These are, essentially, about the need for "scale" in technology markets where the size of a company's R&D budget matters. The companies developing custom silicon for the RAN sector cannot possibly match the R&D investments of chipmakers serving the broader IT industry. Open RAN players are similarly dwarfed by the incumbents.
The top five vendors – Huawei, Ericsson, Nokia, ZTE and Samsung – collectively served 94% of the RAN market last year. The 6% contested by numerous smaller companies is currently worth just $2.1 billion in annual sales, according to Omdia's data. That is roughly what Nokia alone spends on mobile infrastructure R&D each year. Without muscular parents or deep-pocketed investors willing to shoulder losses, most others simply cannot compete for technology leadership.
If they brought anything unique, they would probably have been acquired already by Ericsson or Nokia. Since 2020, the Nordic vendors have spent more than $9.5 billion on takeovers, snapping up companies including Cradlepoint, Fenix Group, Infinera, Kathrein, Rapid and Vonage. But not a single player associated with open RAN is on the list, and none has received funding from the venture capital arms of the big telcos. That is a telling story.
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