Incumbent Vendors Reveal Early 5G Monetization Trends

Both Ericsson and Nokia showed continued growth in their top-line revenues during the 1Q 2022 although profits and margins were adversely affected by numerous factors. In particular, Ericsson reported a 12% growth in its mobile networks revenue while Nokia reported a 14% growth in its fixed networks business, but both were boosted by favourable currency conditions. Counterpoint Research expects that the vendors will face a continuation of the headwinds experienced in Q1 during the remainder of the year, which include supply chain issues, inflationary pressures plus the impact of developments in Russia and the Ukraine. In addition, both are increasing R&D investments which will hit their bottom lines.

However, there are encouraging signs that efforts to develop new 5G monetization technologies will start to come to fruition during 2022 with the commercial launch of a range of ARPU-boosting services leveraging CSPs’ recent 5G SA core deployments – plus accelerating enterprise wireless revenues.

AI-based Network Optimization

For the first time, both vendors reported commercial traction in the use of new AI-based network optimization services by their CSP customers. After many years of R&D investment this is a welcome development as it will result in a transition from low to high margin network support services. With their large installed base of CSPs, Counterpoint Research believes that both vendors are well placed to benefit from this opportunity. However, with several CSPs exploring alternative platforms with the hypercalers, it is becoming clear that this could turn out to be a very competitive market.

For example, Vodafone recently announced the roll-out of its alternative Unified Performance Management (UPM) platform, a pan-European network optimization platform in partnership with and Google Cloud. Other vendors with similar initiatives include BT, which earlier this year signed a AI/ML and data analytics deal with AWS.

ARPU Boost via Network Slicing

 With ARPU either static or falling, many CSPs are looking to vendors to help them monetise their 5G networks. As 5G SA core deployments accelerate during 2022, Counterpoint Research believes that vendors will start to introduce a range of ARPU-boosting services during 2022. During the first quarter, Ericsson announced two such services: Dynamic Network Slicing and Dynamic End-User Boost. The latter is particularly interesting as it is a data-boosting app controlled by smartphone users themselves.

Offered by Ericsson One Network Solutions – the vendor’s cloud-based intelligent platform – the app enables users to boost mobile data connectivity on-demand on 4G and 5G networks as well as improve security. For example, using the app could enable an user to download a file quickly or participate in a video conference when out of the office. The service is offered as a white label service, which means that CSPs can market the service as they wish and decide whether to target consumers, enterprise users or both.  Counterpoint Research understands that both services are now being offered on a commercial basis by Hong Kong CSP SmarTone. However, Ericsson claims that several CSPs in Europe will be launching similar services throughout 2022.

Targeting The Edge

While Nokia has been offering its MXIE edge-focused platform for some time, Ericsson made an effort to catch-up this quarter with its own edge-related product launches including an Edge Exposure Server and a Local Packet Gateway (LPG).

The LPG is a single unit/single-server full-stack appliance which integrates seamlessly with Ericsson’s dual-mode 5G Core and OSS systems. The key objective here is to reduce the cost and complexity of deploying 5G edge use cases and enable enterprises to launch new services quickly.  As a hybrid private network solution, Ericsson claims that the LPG can be a more cost-efficient alternative to a traditional, dedicated private network solution, while still maintaining strict 5G central core security and satisfying the highest data privacy requirements. The vendor claims that it has six customers working to deploy its LPG and expects commercial services to start in 3Q 2022.

Incumbents vs Hyperscalers

It is inevitable that all incumbent vendors will face stiff competition from a multitude of new entrants, but particularly from hyperscalers such as AWS, Google Cloud and Microsoft Azure, who are leveraging their core technical competences and huge enterprise customer base to target all the emerging opportunities described above, including private networks. As Exhibit 1 shows, the majority of CSPs have already developed edge partnerships with one or more of the hyperscalers. However, as no player can offer end-to-end solutions across all verticals, developing the best ecosystems through partnerships will be critical for all of them, including the hyperscalers.



Exhibit 1:  CSP Edge Partnerships with Hyperscalers

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Monetizing 5G Will Be The Challenge for Incumbent Vendors in 2022



Monetizing 5G Will Be The Challenge For Incumbent Vendors in 2022

Nordic duo Ericsson and Nokia both had a good 2021. With strong cash generation from its core networks business, Ericsson had one of the best years in its history. Meanwhile Nokia provided proof that its turnaround is on track, with a solid improvement in margins and a return to profitability – although it needs to increase its RAN market share in 2022. With most of the largest operators having deployed their 5G networks, the challenge for all vendors now is to develop technologies and solutions to enable their CSP customers to monetize them.

Enterprise Revenue Opportunities

As 5G SA deployments gather pace, CSPs are turning to vendors for new enterprise-focused services. Both Ericsson and Nokia are investing heavily in the hope that these service-based businesses will generate new revenues streams to offset the inevitable decline in mobile network infrastructure spending in a few years’ time.

Leveraging their connectivity heritage, both have developed a comprehensive range of mission-critical network options coupled with multi-cloud solutions and a range of digital enablers, including industrial devices.  This should enable their CSP or enterprise customers to introduce a variety of new services ranging from NaaS type offerings, such as network slicing, private networks and IoT connectivity platforms to SaaS-based software services, edge based platforms and solutions. Ericsson even seems to be targeting the autonomous vehicle market with its Ericsson Routes app! In addition, both vendors have developed an extensive network of ecosystem partners – a differentiator and a critical requirement for success.

Exhibit 1 compares revenues at Ericsson’s Emerging Business unit with Nokia’s reported enterprise revenues over the past four years.

Exhibit 1:  Ericsson Emerging Business and Nokia Enterprise revenues

Another revenue opportunity will be network APIs. 5G is touted as a platform that will enable CSPs to offer a range of new services that leverage the key attributes of 5G. However, mobile networks today are essentially closed networks. If 5G is to deliver on its potential, then CSPs must open-up their networks and adopt open interfaces.

Ericsson’s Vonage Acquisition

All vendors see a market opportunity to offer APIs. However, Ericsson may have gained an advantage over rivals with its recent purchase of US-based Vonage, providing it can convince Vonage’s 1+ million developer community to engage in 5G and guarantees that Vonage will be a truly open platform.  Clearly, the hope is that the much-enlarged developer ecosystem will be able to leverage 5G’s inherent network features, such as low-latency, quality-on-demand, network slicing, etc. and that developer/enterprise innovation will drive usage of CSPs networks across various industry verticals resulting an ROI for CSPs.

Despite the inevitable fears of lock-in, Counterpoint Research believes that a vendor-led platform stands a better chance of succeeding than any operator-led platform. With its dominant market share (outside China) and global relationships with CSPs, Ericsson’s API platform could offer an attractive alternative option to the big three public cloud players, which would become more attractive if other vendors could be persuaded to come aboard.

Nokia’s SaaS Launches

5G SA core deployments will also be the catalyst behind the transition towards more software-based revenues for vendors. With more CSPs adopting a cloud-native approach, this will result in an increasing demand for SaaS-based delivery. In fact, the enterprise market offers attractive SaaS revenue opportunities that can be scaled and leveraged to strengthen a vendor’s 5G SA core business.

Widely seen as the most cloud-friendly of the five incumbent vendors, Nokia recently announced a barrage of SaaS offerings covering data trading, analytics, network anomaly detection and iSIM connectivity with further applications covering 5G core, digital operations, monetization and private networks expected to follow in 2022. As SaaS generates recurring revenue streams, this should result in higher margins. However, this will depend on volumes, which will take time to grow. Revenue growth will therefore be evolutionary over several years rather than exponential.

Starting From a Low Base

As Exhibit 1 shows, Ericsson and Nokia’s enterprise revenues varied between $750 million and just over $1.8 billion between 2018 and 2021. Although not intended as a back-to-back comparison – and not strictly accurate as some revenue is split across multiple business units – it does serve to illustrate the scale and largely stagnating growth of enterprise revenues during the period.

Nevertheless, Counterpoint Research believes that both vendors are well-placed to benefit from new enterprise opportunities for a variety of reasons, not least their long-standing, trusted relationships with the majority of the world’s CSPs. However, they are starting from a low base. The challenge over the next few years will be to capitalize on the opportunities – with CSPs and directly with enterprises themselves – in the face of stiff competition from an increasing number of players, both established and new entrants.

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5G SA Core and Enterprise To Drive Growth at Nokia and Ericsson?

Although both Nokia and Ericsson reported good third quarter financial results, top-level growth at their RAN businesses is likely to be challenged over the next few months, with Ericsson seeking to compensate for loss of market share in mainland China with growth elsewhere and Nokia needing to recover market share following a major contract loss at Verizon last year. In addition, both may struggle to manage what seems to be a worsening chip supply chain problem.

5G SA Core Market

Chip supply, however, will not affect their 5G SA* core and associated software businesses. After years of R&D investment and legacy portfolio rebalancing, there are encouraging signs that Nokia’s Cloud and Network Services and Ericsson’s Digital Services may have finally turned a corner – providing provisions for poorly performing legacy contracts have largely come to an end. Both vendors reported strong orders for their 5G SA core products during the quarter amid signs that MNOs are accelerating 5G SA core deployments.

Although overall revenue at Digital Services was down 1% YoY due mainly to lost market share in China, revenue excluding China was up 6% due to initial revenue from 5G SA core contracts. At Nokia, revenue at its Cloud and Network Services jumped 12.8% YoY driven by double-digit growth in core network sales and enterprise solutions. With high 5G SA core deployments expected to continue over the next year or so, Counterpoint Research believes that both business units will deliver increasingly positive financials during 2022.

5G SA Will Drive Software Revenues

5G SA cores will enable the introduction of a plethora of new Network-as-a-Service (NaaS) offerings, essentially cloud-enabled, usage-based business models that allow users to acquire and orchestrate network capabilities without creating, owning or maintaining their own network infrastructure.

5G network slicing – the Holy Grail for many MNOs – is likely to be the first NaaS offered on mobile networks using an on-demand business model. Both vendors have undertaken extensive end-to-end network slicing trials with leading MNOs, including tests on Android 12 devices, the availability of which will be an important milestone for the launch of network slicing services.

5G core deployments will also be the catalyst behind the transition towards more software-based sales (with increasing recurring revenue streams) derived from a range of applications encompassing analytics and AI, automation and orchestration, billing and monetization, managed security and private networks. Many of these services will be offered on a Software-as-a-Service (SaaS) basis. For example, earlier this year Nokia launched its Nokia Data Marketplace (NDM), a white-label platform designed for MNOs to offer SaaS-based software solutions to their enterprise customers.

Enterprises – Key For Long-Term Growth

NaaS offerings will predominantly be targeted at the all-important enterprise market, which both vendors are relying on for long-term growth. While Nokia’s enterprise revenues fell slightly during the quarter, revenues at Ericsson increased more than 25% YoY due mainly to Cradlepoint. Although admittedly small in comparison to their MNO revenues at present, both vendors are banking on sharp increases in enterprise revenues in future reflecting their continuous  investment in the enterprise market over many years.

In what is certain to be a very competitive market, with many new players, Counterpoint Research believes that leading the NaaS enterprise market will be an important strategic objective for both vendors and a key test to see whether they can survive and prosper in a rapidly converging telecoms and cloud market. Both have recently announced new products designed to bolster their NaaS credentials.

For example, a few weeks ago Ericsson launched its Time Critical Communications (TCC) toolbox, a software package deployed on 5G networks to improve network latency – essential for gaming and industrial IoT type applications. Similarly, Nokia unveiled its MX Industrial Edge (MXIE) platform, a cloud-native Industry 4.0 edge solution built on the vendor’s Digital Automation Cloud (DAC) which runs on its AirFrame edge servers.

Acquisitions on the Horizon?

Over the next few years, both vendors must continue to invest heavily to develop new products and capabilities to take advantage of emerging opportunities. No doubt, this will also involve acquisitions. With a healthy cash balance, Counterpoint Research believes that an acquisition (or two) looks very likely at Ericsson during the next six months or so. (Remember, you read about it here first!)

*= Stand Alone

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