One of the major challenges to the adoption of open RAN in 5G networks in dense, urban environments is its sub-optimal support for massive MIMO radios. While there are several reasons behind this performance deficit, a key reason is that the O-RAN Alliance 7.2x open fronthaul specification was not originally designed to accommodate massive MIMO radio systems. Recently, the O-RAN Alliance announced a new fronthaul interface specification designed specifically for use with massive MIMO radio systems in dense, high-traffic environments.
This Technology Report provides an objective analysis of the O-RAN Alliance’s Next Generation Lower-Layer Split (LLS) and discusses the implications of the new interface on the adoption of open RAN massive MIMO radios.
Key Takeaway 1: Impact of Incumbents
With the availability of the new NG-LLS fronthaul split, it “appears” that the open RAN community has united around a single specification which will enable open RAN to be adopted in high-traffic urban regions. This should be welcome news as it means that operators will be able to use open RAN technology across all parts of their networks, from rural deployments to dense, high traffic urban environments. However, the NG-LLS standard has brought major incumbents such as Ericsson and Nokia into the open RAN limelight. While this brings scale and credibility to open RAN in the high-end 5G market, it also raises questions about open RAN’s goal of diversifying the radio supply chain and lowering barriers to smaller vendors.
Key Takeaway 2: Massive MIMO Use Cases Suitable for Split 7.2b
Although Split 7.2b has limitations when deployed in dense, high-traffic urban networks, Counterpoint Research believes that it will continue to be a good choice for other mMIMO use cases. For example, in uses cases with moderate traffic loads, where cell sizes are larger and where end-user mobility is low such as in Fixed Wireless Access applications. Radios based on Split 7.2b will also benefit from reduced complexity and lower costs compared to NG-LLS based radios. In future, the application of advanced AI/ML algorithms in the DU may narrow the performance differential between Split 7.2b and NG-LLS for some use cases.
In some markets, operators await evidence of successful use cases before switching to 5G SA.
In H1 2023, the Asia-Pacific region continued to lead in terms of 5G SA Core deployments.
Ericsson led the overall market followed by Nokia, Huawei, ZTE, Samsung, and Mavenir.
Counterpoint Research’s recently published July update of the 5G SA Core Tracker is a culmination of an extensive study of the 5G SA market. It provides details of all operators with 5G SA cores in commercial operation at the end of H1 2023, including market share by region, vendor, and the popular frequency bands for deployments. Apart from that, it touches upon the potential monetization opportunities for telecom operators across different domains and uses cases.
Last year, there was steady growth in the commercial deployment of 5G Standalone (SA), with more than 20 operators moving to 5G standalone core. However, the pace slowed down in H1 2023 with the number of operators launching commercial 5G SA ranging in single digits. The primary reason for the slowdown in commercial deployment of 5G SA was the restraint arising from global macroeconomic factors and the lack of a clear picture of 5G monetization for operators. Although the pace of commercial deployment has slowed down in 2023, operators are working on monetization avenues, and are working on SA-specific use cases, including on-demand network slicing and FWA.
Most of the 5G SA commercial deployments have been in developed economies, and Counterpoint Research expects the next bulk of network rollouts will take place in emerging markets. This will drive the continuing transition from 5G NSA to 5G SA.
Exhibit 1: 5G SA Deployments by Region, H1 2023
As shown in Exhibit 1, the Asia-Pacific region led the segment, followed by Europe and North America, with the other regions – Middle East and Africa, and Latin America – lagging.
Key Points
Key points discussed in the report include:
Operators – 47 operators have deployed 5G SA commercially with many more in the testing and trial phase. Globally, most of the deployments are in developed economies with those in emerging economies lagging. Although the pace of deployment is steady in developed markets, it is progressing slowly in emerging markets, and in some markets, operators are biding their time and looking for evidence of successful use cases before switching from 5G NSA to SA. The ongoing economic headwinds also delayed the commercial deployment of SA, which was seen in H1 2023.
Vendors – Ericsson and Nokia lead the 5G SA Core market globally and are benefiting from the geopolitical sanctions on Chinese vendors Huawei and ZTE in some markets. South Korea’s Samsung and Japan’s NEC are mainly focused on their respective domestic markets but are expanding their reach to Tier-2 operators and emerging markets, while emerging vendors Parallel Wireless and Mavenir are working with leading operators in Europe, and Middle East and Africa.
Spectrum – Most operators are deploying 5G in mid-band frequencies, n78, as it provides faster speeds and good coverage. Some operators have also launched commercial services in the sub-GHz n28 and mmWave wave n258 bands. FWA seems to be the most popular use case at present but there is a lot of interest in edge services and network slicing as well.
Use Cases – Operators are looking for avenues to monetize the 5G services, as they are struggling to make the RoI from their investments in 5G. Although FWA is a promised application for 5G SA monetization, there are many other use cases that operators can look into to increase their RoI, including network slicing, live broadcasting, XR applications, and private networks. Although eMBB is the most widely used 5G use case currently, MNOs need to move to 5G SA to leverage URLLC and mMTC use cases.
Report Overview
Counterpoint Research’s 5G SA Core Tracker, July 2023 provides an overview of the 5G Standalone (SA) market, highlighting the key trends and drivers that are shaping the market, along with details of commercial launches by vendor, region, and frequency band. Additionally, the tracker provides details about the 5G SA vendor ecosystem split into two categories – public operator and private network markets.
Table of Contents:
Overview
Market Update
5G SA Market Deployments
Commercial Deployment by Operators
Network Engagements by Region
Network Engagements by Deployments Status
Leading 5G Core Vendors
Mobile Core Vendor Ecosystem
5G Core Vendors Market Landscape
Outlook
5G Standalone Use Cases
Background
Counterpoint Technology Market Research is a global research firm specializing in products in the TMT (technology, media and telecom) industry. It services major technology and financial firms with a mix of monthly reports, customized projects and detailed analyses of the mobile and technology markets. Its key analysts are seasoned experts in the high-tech industry.
Ericsson and Nokia’s Q2 2023 results are in line with their revised expectations.
The telecom gear manufacturers are convinced that a few short-term hurdles can be managed to drive growth.
The mobile network segment, the largest contributor to both firms’ revenues, witnessed some slowdown in Q2 2023 due to decreased demand from capex-saturated regions.
Nordic telecom giants Ericsson and Nokia announced their Q2 2023 results last week, which were in line with their revised expectations despite lower revenues. The overall market condition remains challenging due to macro uncertainty, but the telecom gear manufacturers are convinced that a few short-term hurdles can be managed to drive growth both in the short term and long term.
Fast 5G rollouts in emerging nations such as India were highlights for both the vendors as revenue growth in these regions was able to offset the sales decline in North America and North-East Asia where operators slowed down their network expenditures after several quarters of high investment.
Swedish giant Ericsson generated net sales of $5.9 billion for the quarter, reporting a 9% YoY decline in organic sales. Ericsson’s Finnish counterpart Nokia generated $6.2 billion in revenue for the quarter, which was flat YoY on a constant currency basis.
Mobile network segment
This segment is based on the core competence of these organizations and is also the largest contributor to both firms’ revenues. It witnessed some slowdown for the two companies in Q2 2023 on the back of decreased demand from capex-saturated regions. Operators in these regions continue to be selective in spending and are depleting their inventories that have been running high after the 2021-2022 boom.
Revenue from Ericsson’s Networks division stood at $3.9 billion. It doubled for emerging markets like India and Southeast Asia but plummeted for regions like North America. India is now Ericsson’s second-biggest market. During the quarter, the company also marked the shipping of 10 million 5G-ready radios.
Revenue from Nokia’s Mobile Networks division stood at $2.85 billion, a slight growth YoY. The increase in revenue due to faster 5G rollouts in India and Europe was able to offset the decline in North America.
Gross margin was impacted for both operators as the sales mix changed drastically. Adapting to changing demand and expecting a recovery in the North American region, both manufacturing firms are looking forward to an improved gross margin by the end of this year.
Cloud software services
Telecom service providers too have been hit by cloud disruption as network evolution has witnessed operators migrating to the cloud. The two Nordic vendors have been at the forefront in assisting operators in transitioning to cloud-native operations, which helps in future-proofing and improving network performance and efficiency.
Ericsson’s revenues from its Cloud and Software Services division stood at $1.39 billion, a marginal increase over the previous year. The sales, for a change, were driven by 5G in the North American region. Ericsson currently leads the global market for 5G Standalone Core deployments with a majority of operators choosing the Swedish company for their cloud-native 5G SA Core. Ericsson’s managed services, however, took a hit.
Nokia registered $806 million in net sales for its Cloud and Network Services division. Unlike its Swedish counterpart, Nokia’s growth came from the Europe and Middle-East and Africa (MEA) regions, while it faced a decline in the North American region. Nokia too has been actively helping operators worldwide to deploy 5G Standalone Core (just behind Ericsson in the number of deployments), which alongside Enterprise Solutions helped boost its revenues in this segment, marginally offset by declines in the Cloud Services and Business Applications.
Ericsson’s enterprise segment, network APIs and IPR licensing
Last year, Ericsson acquired Vonage, which contributed revenues of nearly $390 million during the quarter, a 12% increase YoY. The company strongly believes that the enterprise segment will continue to grow as it redefines how the capabilities of 5G networks are utilized and paid for by the customers.
Ericsson will also continue to digitize the ecosystem for CSPs by maintaining its investments to build the Global Network Platform (network Application Program Interfaces or APIs). With time, a variety of global network APIs will complement the existing communication APIs like video, voice and SMS to help CSPs better monetize their 5G networks, accelerate 5G network rollout and improve network capex.
The company also signed a 5G IPR licensing agreement during this quarter to help validate its IPR portfolio strength.
Nokia’s diverse portfolio – Networks infrastructure and enterprise
Despite facing some short-term challenges and macroeconomic uncertainty, which resulted in a YoY revenue decline, Nokia’s Network Infrastructure segment generated $2.15 billion in revenues and continued to gain market share across the globe.
The IP networks grew in Europe with increasing sales to enterprise customers.
The optical networks unit registered a double-digit growth driven by increasing broadband penetration in India.
The fixed networks unit witnessed a decline on the back of slowing FWA deployments in North America.
Nokia’s revenue from its enterprise customers grew by almost 30% YoY. The company added 90 new enterprise customers this quarter. Its private wireless business reached more than 635 customers.
Nokia also signed a long-term patent license agreement with Apple. Multi-year revenue recognition might start in January 2024.
Nokia also struck an important deal with Red Hat this quarter, where the latter will serve as the primary reference platform to develop, test and deliver core network applications in an attempt to rebalance Nokia’s portfolio.
Analyst outlook
Network equipment vendors and software providers are looking to transform obstacles into opportunities. Both Ericsson and Nokia are expecting their business performance to improve towards Q4 2023 and to continue improving in the coming years. Inventory correction by operators has been the prime reason for the revenue decline this quarter. But network sales have been able to weather the slowdown as operators need to increase the capacity of their networks.
Counterpoint Research believes that 5G investment has not yet peaked. Over the next few years, the industry will witness the advent of 5G Advanced starting with 3GPP Release 18, operators transitioning to 5G SA, an increase in the number of monetizable 5G use cases, FWA going global, and increased 5G investments in mid-band and mmWave bands. The entire mobile industry is bullish about private networks, which present a significant opportunity for operators and vendors alike. Amid the growing geopolitical turbulence, with the West hardening its stand on the “rip and replace” of Chinese networking equipment, Nokia and Ericsson might even see other markets opening up for them. Reducing internal costs and streamlining internal operations remains a challenge for both suppliers. The two should benefit from growing confidence in the enterprise segment. Nokia expects to leverage its leadership in the network infrastructure business and attain market leadership in the fixed-broadband space with its wide variety of ONTs, OLTs and FWA CPEs.
CSPs are showing an increasing interest in leveraging the benefits of RAN virtualization and cloud-native technologies and vendors are responding to this demand. As a result, future RAN networks are expected to evolve gradually towards Cloud RAN based solutions, which will be deployed alongside traditional, proprietary 5G networks.
In contrast to traditional RAN networks, the baseband unit of a cloud RAN base station is split into two units: a Distributed Unit (DU) and a Centralized unit (CU). Today, the vast majority of commercially deployed DU basebands run on x86 processors. However, alternatives to Intel’s x86 platform, based on ASICs, GPU and RISC-V architectures are expected to become widely available during the next three years.
Cloud RAN platforms typically use PCIe-based accelerator cards to process the compute-intensive Layer 1 workloads. There are essentially two types of accelerator architecture: look-aside and in-line:
Look-aside accelerators offload a small subset of the 5G Layer 1 functions, for example, forward error correction, from the host CPU to an external FPGA-based accelerator.
With an in-line accelerator card, all the Layer 1 data passes directly through the accelerator and is processed in real-time – a critical requirement for Layer 1 workloads. This processing is done by other processor types, for example, ARM or RISC-V based DSPs.
However, there is a marked difference in the approach of vendors towards Layer 1 acceleration, with some vendors supporting the look-aside option, some supporting the in-line option, while others plan to offer both options.
5G network has seen steady growth in deployment globally, with the total number of subscribers of 5G services crossing the billion mark. Although most of the deployment has been through the Non-Standalone (NSA) mode, the Standalone (SA) core will see big commercial deployment in the years to come to explore the full potential of 5G, including venturing into newer 5G applications such as Network Slicing. To provide high bandwidth and low-latency connectivity with processing capabilities at the Edge to support enterprise and mission-critical use cases, it becomes important to manage the network effectively and autonomously, and AI/ML can help in this case. As the algorithm is advancing every day, AI/ML can help automate most of the tasks. The huge amount of data collected by network vendors and operators can be used to train an effective algorithm, thereby helping in the effective management of resources.
Some of the verticals where AI/ML will be useful in network management are:
Intelligent Network Automation
5G networks are complex and managing them is a difficult and expensive task. AI/ML can provide intelligent algorithms that can automate various network management tasks, thus reducing the time and resources required to manage the network. AI can help in managing the network traffic, as an increasing number of devices connected to a network makes it harder for an operator to monitor the usage, and the algorithm can monitor the network traffic pattern and optimize it, and allocate resources based on the devices’ bandwidth requirements, thus ensuring the efficient use of resources.
AI can also be used to get insights into network behavior, which can be used to identify bottlenecks and anomalies in the network that can cause security issues.
RAN Enhancement
AI can help improve network energy savings by managing energy usage. The algorithm can optimize the transmission power of base stations for the devices based on their proximity. Another application can be the activation of sleep mode to reduce energy consumption when there is less network load on the base station or it is idle.
AI can also be used for precision planning in small-cell deployments. The ever-increasing demand for data is congesting the network in some areas, especially in urban and compact spaces such as stadiums. To solve the problem, small cells are required to be deployed. AI can analyze the data on network traffic and latency, and identify the black spots where small cells can be deployed. It can also help in identifying suitable locations for small-cell deployment so that not many cells are deployed at a site.
Source: Huawei
Huawei has launched intelligent RAN solutions iFaultCare and iPowerStar. The company claims that its iPowerStar AI-based intelligent RAN solutions can generate power savings of 25% and reduce OPEX by 20 million KWh per year, whereas iFaultCare can improve troubleshooting efficiency by 40%.
Network Management
One of the major use cases of automation will be network management. The algorithms can monitor the network metrics, such as load factor, traffic and latency, and adjust them to optimize the performance. Another way in which AI can help is by improving network reliability through the prediction of issues that may arise. The algorithm can analyze the network data to identify patterns that may lead to outages, thus allowing time for preventive action.
Network Security
In 5G, we are going to see an increasing number of connected devices along with an increasing volume of data transmitted across the network. With an increasing number of devices, the potential for cyberattacks also increases, and operators must enhance cybersecurity to prevent a possible attack on the network. Critical use cases such as private networks are more prone to cyberattacks, which can result in revenue losses to the enterprise. AI can come in handy in preventing cyberattacks. It can help identify potential threats, such as malware or phishing attacks, and respond quickly to mitigate the risk. Besides, AI can play a significant role in 5G network security by detecting, analyzing, and responding to security threats in real-time. With the past dataset provided to analyze network behavior, the algorithm can identify patterns and anomalies that may lead to cyberattacks. AI algorithms, for instance, can recognize a potential security breach if a certain device is transmitting an unusually large volume of data. It can then take appropriate steps to prevent any damage.
MIMO
AI can help in effective MIMO management. The algorithm can analyze the network and adjust the number of MIMO antennas to be used for optimized device performance. AI can also be helpful in beamforming, a technique that allows the transmitter to focus its energy in a specific direction to improve network coverage and capacity. The algorithm can identify from where the demand is coming and ensure that sufficient bandwidth is provided to the device. By effective use of beamforming, operators can provide high-speed, low-latency services to different devices and applications.
Network Slicing
Network slicing is one of the most discussed topics in the industry. It is being touted as one of the important use cases for 5G networks. Network slicing is a technique that allows operators to create multiple virtual networks on top of a shared physical infrastructure. Each virtual network can be designed to meet the specific requirements of a particular use case, such as high-speed data transfer and low latency. AI can be of immense help in network slicing, as it can automate most of the prerequisite tasks, such as:
Preparing the network: The algorithm can use past data to predict the demand that might come from the user.
Resource reservation: The algorithm, after predicting the demand, can slice the network and reserve it for the task which the network might be getting.
Resource allocation: Once the requirements come from the user, the reserved resource can be allocated to the user.
5G Advanced
Networks are becoming complex and AI/ML-based solutions are being used to reduce the complexity and make the network more intelligent. Introduced with Release 15, and with subsequent enhancements in Releases 16 and 17, AI/ML is being used for different use cases, such as network energy savings, network load balancing and mobility optimization.
Release 18 will be looking to incorporate more enhancements for automating the network and predicting the network behavior to make it efficient. Different areas are being looked into to study the potential of AI/ML for different elements of air interface, such as beam management, mobility, and position accuracy.
Drawbacks of AI/ML
Although AI offers lots of benefits in effectively managing the network and automating most of the tasks, it also has some deficiencies. One of the biggest problems faced in writing an effective algorithm is getting a large amount of reliable and relevant training data. Bigger players have access to large amounts of data and resources to train their models, whereas smaller players lack them and have to rely on other players to get the algorithms, which might not be relevant for their use cases. A lack of appropriate training data can make the model less reliable and relevant, and it might produce undesired outcomes.
Some of the challenges which an AI algorithm can face are:
Complexity: Implementing AI technology in 5G is a complex task and it requires significant investments in resources. Besides, the AI algorithm needs to be effectively trained and tested before being deployed, to ensure that it provides the desired outcome.
Bias: AI algorithms are trained on the data they get. If the data on which they are trained is biased or skewed towards one side, then it can generate biased results and could lead to the wrong label of false positives or false negatives.
Privacy: Privacy has become one of the most important issues today for AI algorithms, as the algorithm needs data to be trained upon, but some of the data might contain sensitive information. Privacy laws must be in place to ensure that sensitive information is not used for inappropriate purposes.
Last week, Cradlepoint announced the launch of its subscription-based NetCloud Private Networks solution, an SME-type enterprise solution targeted at office buildings, retail outlets, stadiums, hospitality venues, smart city, schools, etc. It will complement Ericsson’s Private 5G product which is designed primarily for industrial applications such as manufacturing, energy and utilities, etc, where low-latency, high reliability and business-critical capabilities are essential.
Key Features of NetCloud
Key features of NetCloud include:
A “Private Networks-in-a-Box” solution – which includes access points, core/gateway, network planning software, routers, private SIMs plus a single pane of glass cloud management and orchestration system via NetCloud.
Cradlepoint Distribution Channels – NetCloud will leverage Cradlepoint’s existing sales channels via network enterprise resellers, managed service providers, etc. Later in the year, the company plans to target distribution via mobile operators.
Flexible Customer Offering – based on a CAPEX or OPEX business model to suit customers. Enterprises can buy cellular access points, core capacity, etc on a capacity and service duration basis. For example, Cradlepoint offers 500Mbps 2 Gbps and 5 Gbps options for its core on a 3 or 5 year basis with SIM cards being sold in packs of 10.
At present, NetCloud is only available for use in the US’s 4G LTE CBRS market, but later this year, Cradlepoint will offer 5G radios for use in markets beyond the US, for example, Europe. The company also expects to introduce eSIM capabilities at the same time.
The key elements of Cradlepoint NetCloud solution are shown in Exhibit 1 below:
Exhibit 1: Overview of Cradlepoint’s NetCloud Private Network Solution
Viewpoint
In the past year or so, there have been many “Private-Networks-in-a-Box” announcements from numerous vendors such as AWS, Cisco, HPE, etc. as well as operators such as Dish, etc. who believe that private network solutions can be marketed as an “out-of-a box” product like Wi-Fi. With so many offerings, this could turn out to be a very competitive market with thin margins, where success is largely determined by the vendors’ “go-to-market” strategy and distribution channels.
The launch of NetCloud is a clear indication that Ericsson (with Cradlepoint) plans to play across the whole breadth of the private networks market. Although surprisingly a bit late launching its own “box” solution, Counterpoint Research believes that Cradlepoint is well-positioned to benefit from the opportunities in this market due to its strong position in the enterprise market (32,000 customer base), its global distribution network of 6,000 resellers and partners – and backed by Ericsson’s connectivity expertise.
Large companies Like Google, SAP, IBM, and Ericsson have quit loss-making IoT businesses.
Ericsson’s failure highlights the fragmented IoT value chain, which makes it difficult for players to capture a significant portion of the value.
Aeris is expected to benefit from the scale of its operations following the closure of the deal with Ericsson.
Further industry shakeout is expected in 2023 as an unsustainable number of players are trying to get a pie of the lucrative IoT market.
Ericsson has announced that it will be exiting the Internet of Things (IoT) market, joining a growing list of companies that have decided to quit this space. The Swedish company has agreed to sell its IoT connectivity management and connected vehicle cloud platform IoT Accelerator to Aeris for an undisclosed amount. Aeris is an MVNO purely focused on providing cellular connectivity for IoT.
Google IoT Core, SAP, Bosch Device Management, and IBM Watson are among the other major players that have decided to cease IoT operations in 2023. Ericsson’s decision is a reflection of the challenges and setbacks the company has faced in this market, as well as the broader challenges that the IoT industry has been grappling with.
Why Ericsson decided to hang up?
Ericsson’s announcement comes after several quarters of disappointing financial performance of its IoT business. Despite investing heavily in IoT technologies and solutions, the company has struggled to break even. Ericsson’s IoT business saw a loss of around SEK 1 billion ($98 million) on revenues of SEK 0.8 billion($78.6 million) in the 2022 full year. Ericsson attributes the limited returns on its investments in the IoT market to the fragmentation of the market, which has resulted in the company only capturing a small part of the value chain. As a result, Ericsson has decided to focus its resources on other areas, such as enterprise 5G and 5G private networks, that will continue to cross paths with IoT.
Aeris gets scale with acquisition
Aeris is a leading IoT MVNO having partnerships with major communication service providers such as Vodafone, AT&T, and SoftBank, as well as leading automotive OEMs. The recent deal is beneficial for Aeris as it will immediately increase the scale of its operations. Upon closure, Aeris will gain 95 million connected devices in addition to its current 5 million devices, while the number of customers is expected to increase from 400 to 9,400. The deal will also shift to Aeris Ericsson’s global connectivity agreements with 35 mobile operators. In a nutshell, Aeris will get the scale and geographical reach. However, the transaction is more like a reverse merger, which may bring new challenges for Aeris as it will have to manage operations at a much larger scale while rationalizing them to drive the combined company toward profitability.
Aeris is planning to combine its intelligent, software-defined IoT network with Ericsson’s connectivity management platform to create synergies and provide new value-added services. Aeris would be looking to bring down the operating costs by consolidating the platforms. However, execution of this strategy may be difficult, as Aeris may face the same challenges as Ericsson unless it partners with companies that bring complementary capabilities to the IoT value chain.
Our take
Despite challenges, the IoT market is expected to continue growing in the future. The increasing adoption of IoT technologies in various sectors, such as healthcare, transportation, and manufacturing, is likely to drive the market’s growth. Additionally, the development of new technologies, such as 5G and edge computing, is also expected to open up new opportunities for IoT companies.
Ericsson’s decision to exit the IoT market not only reflects the challenges and setbacks that the company has faced in this space but also the broader challenges faced by the IoT industry. These challenges include a lack of clear business objectives, a fragmented value chain, and the inability to generate decent returns on investments. This has led to many players leaving the IoT market, and it is likely that further consolidation or exits will occur in 2023. An industry shakeout would be healthy for the IoT market’s growth as an unsustainable number of players are trying to get a pie of the lucrative IoT market.
5G in Russia is looking like a distant dream, as major network vendors Ericsson and Nokia have decided to suspend their operations in Russia, while Chinese vendors Huawei and ZTE are grappling with US sanctions.
To compound matters, Russia’s 4G network is yet to reach full penetration levels, and Nokia and Ericsson’s exit might impact its expansion and upgrade. Although 5G is available in a few parts of Moscow and St Petersburg on the MTS network using Huawei equipment, the sanctions on the supply of semiconductors to Russia might hamper further imports of 5G equipment from Huawei and ZTE.
Telecom operators’ problems
Russia’s major telecom operators MTS, MegaFon, Beeline and Tele2 are facing the challenge of maintaining their network equipment as they are mainly dependent on Nokia and Ericsson for such requirements. Although MTS is also using Huawei’s equipment for providing 5G services in some parts of Moscow and St Petersburg, that too looks in limbo.
Russia Mobile Subscribers by MNOs, 2017-2021
Sources: Company reports, Counterpoint Research
Huawei and ZTE might face difficulty in providing network equipment to Russian telecom operators, as they are heavily reliant on TSMC, Intel and Samsung on semiconductors, and wouldn’t want to be falling foul of US sanctions.
It might be a costly affair to replace the existing equipment with the new ones for providing 5G services, and telcos might look at focusing on improving their 4G coverage. Also, the Russian government is yet to auction the 5G spectrum. Deliberations are still on to decide the spectrum to be used for 5G services.
To overcome problems associated with 5G spectrum allocation, the telcos have formed a joint venture, New Digital Solutions, to test electromagnetic compatibility, conduct research on frequencies suitable for 5G services and implement measures to free up radio frequencies for 5G services.
Consumer distress
With major global service providers suspending their operations in the country, the Russian consumer is facing an increase in costs as telcos are increasing their tariffs to be able to maintain equipment and avoid frequent network disruptions.
Another issue that Russian consumers are facing is that they are not being able to purchase 5G smartphones from some of their favorite brands. While Apple, Samsung and some other brands have suspended their supplies to Russia, the sales of Chinese smartphone players are increasing.
Outlook
Russia might have to wait to get 5G services, as the government hasn’t finalized the spectrum band for the auction, although the ministry concerned is moving towards mmWave in the 24.25GHz-27.5GHz band from existing radio relay stations and 4GHz. The plan is expected to be finalized not before 2023.
In the absence of Nokia and Ericsson, the telcos have to depend on Chinese vendors Huawei and ZTE for most of their 5G equipment, but the situation here also looks uncertain for the time being. Chinese vendors are already reeling under the pressure of US sanctions and would be careful not to fall foul of the sanctions.
Nordic vendors Ericsson and Nokia had a good second quarter. Ericsson reported a 13.7%* growth in revenue to $6 billion with net profit jumping 19.2 % to $451 million. Nokia’s revenue was almost identical at $6.1 billion, up 10.5%, while profits surged 31.1% to $478 million. Both benefited from favourable currency conditions, particularly in the US, their biggest market. The two vendors remain bullish for the rest of 2022 and into 2023.
Regional Trends
Ericsson reported growth across all its regions with the top markets in terms of revenue being North America, up 27.3%, Europe and Latin America, up 9.4% and South East Asia, Oceania and India, up 12.2%. The Middle East and Africa region also reported a strong 17.1% growth. Nokia reported growth across several regions (excluding Europe and India), with its strongest markets being North America, up 34.6%, Middle East and Africa, up 22.8% and Greater China, up 13.9%.
North America continues to be the preeminent market in revenue terms for both vendors. And as has been the case for several quarters, Nokia’s strong growth in the US was driven by a double-digit growth in Network Infrastructure and helped this quarter by a return to growth at its Mobile Networks business.
Network Infrastructure continues to be a star performer for Nokia with a 21% growth overall, led by Fixed Networks up 34% and Submarine Networks, up 27%. Nokia reports that increasing 5G and fibre access penetration is leading to increasing demand for backhaul solutions, which is driving sales of its IP routing and metro/backbone optical network solutions. Although Nokia expects its double-digit growth to continue in the short-term, maintaining this growth rate will inevitably become more difficult over time.
Nevertheless, Counterpoint Research expects that Nokia’s Network Infrastructure revenues will surpass Mobile Networks before the end of 2023, driven predominantly by continued growth in Fixed Networks. In fact, Fixed Networks revenue equalled IP Routing revenues for the first time at the end of Q2, and together the two businesses now account for 67% of total Network Infrastructure revenues. Exhibit 1 compares the growth of Nokia’s Mobile Networks compared to Network Infrastructure during the past two years.
Exhibit 1: Nokia: Mobile Networks versus Network Infrastructure Growth
Both vendors are carefully managing their supply chains but with perhaps a slightly different focus, with Ericsson seemingly more concerned on maintaining top-line growth. Overall, Ericsson claimed that supply chain issues have not had any impact on revenues up to now, with products delivered in quantity and on-time due to good supply chain management. However, increased inventory costs are clearly having an impact on its bottom line, denting its gross margin and reducing cash flow metrics.
In contrast, Nokia seems more focused on managing the bottom line and keeping costs under control. Throughout 2021, it faced challenging supply chain constrains with many of its suppliers. However, the vendor recently reported that these constraints are now more supplier specific, with a shortage of optical components being a particular concern. Faced with volatile lead times, Nokia increased inventory by $240 million in Q2 and will maintain this level of inventory until lead times become less volatile. Both vendors expect that supply chain challenges will start to ease in late 2022 and early 2023.
5G Outlook and Headwinds
Like most 5G vendors, the two Nordic vendors believe that the 5G capex peak will be higher and last longer than previous generations although there might be some normalization in 2024. Nokia continues to see strong investment in 5G connectivity and fibre deployments, two priorities for CSPs and their enterprise customers, as they deal with increasing data consumption and the need to improve productivity. To date, Nokia claims that it has not seen any major changes in customer demand and order intake remains strong with the company being more supply limited than demand limited. Ericsson also expects continued solid demand throughout 2022 and has increased its forecast revenues for North America.
However, a deteriorating macro environment could dampen customer demand over the next few months, particularly in emerging market countries, where currency fluctuations could impact the affordability of 5G products typically priced in dollars or euros. In addition, vendors are experiencing other headwinds such as inflation, higher R&D costs, etc. However, Counterpoint Research believes that both companies have a limited degree of pricing power, and by increasing prices and the cadence of new products, they should be able to offset some of the inflationary pressures, For example, offering new products that reduce opex costs – such as smaller, lighter, lower-power radios – would enable CSPs to justify additional investments.
Low 5G and Fibre Penetration
Counterpoint Research expects that the 5G market’s secular growth pattern will continue, as even in a worsening macro environment, CSPs need to invest in networks to increase bandwidth and improve productivity. The demand for enterprise digitization is also unlikely to wane in the short term. Outside China, the penetration of 5G and fibre remains low. For example, in North America, the penetration of mid-band 5G is less than 25% while in Europe it is under 15%. With such low penetrations, CSPs are extending 4G network coverage, densifying networks while at the same time transitioning to 5G. Unlike for many other industries, therefore, the impact of the impending recession could well be minimal for 5G infrastructure vendors.
* All revenue data is YoY, i.e. compared to Q2 2021 and is reported rather then adjusted constant currency revenue.
Private networks are still an emerging market and many players offering vertical-specific solutions or specialized services are entering the space to grab a piece of the pie. There is a vast selection of vendors offering small-cell, LTE and 5G hardware as well as end-to-end easy-to-deploy solutions.
MNOs also view private networks as a growth opportunity against the backdrop of stagnating revenues from the consumer segment. After all, revenue diversification is need of the hour! Many operators have forged partnerships with vendors either to develop private network solutions or collaborate on network deployment.
Tier-1 operator-vendor partnerships
We studied a selection of Tier-1 operators and their private network go-to-market strategies. These strategies can be broadly categorized as “offer spectrum and private network solutions in partnership with vendors” and “offer only managed services to enterprises with their own spectrum”.
MNO-Equipment Vendor Partnerships
Source: Counterpoint analysis
These partnerships may also differ from one another as some of them may be aimed at co-developing industrial use cases or combining hardware and software with the operator’s assets, while others may be formed to act as global marketing partners. At times, these partnerships evolve as a result of long-term relationships for public networks. Some examples to help understand these dynamics:
BT and Ericsson, which had partnered in the past to build the UK and Ireland’s first private 5G network for ports at Belfast Harbour, signed a multi-million-pound deal in May 2022 to provide commercial private 5G for the UK market. The partnership combines the operator’s expertise in building converged fixed and mobile networks with the vendor’s network technology and enterprise solutions.
AT&T offers private enterprise network solutions with Nokia and Ericsson using CBRS spectrum in the US. On the other hand, Verizon has partnered with Nokia to market private 5G for international customers, mainly in Europe and Asia-Pacific.
Deutsche Telekom and Ericsson have recently partnered for a new 5G standalone (SA) campus network offering. Ericsson provides the required modern 5G SA technology, while the operator looks after planning, deployment, operation, maintenance as well as optimization.
So, what do operators gain?
Many operators and vendors partner to co-develop private network solutions. A pre-packaged or end-to-end solution offering allows operators to reach a wider set of enterprises, especially small and medium businesses. They are better placed to sell a predefined solution as compared to the one with a high degree of complex customization, which at times makes it difficult for the enterprise to understand the business rationale in respect of investments.
Also, partnerships help operators increase their outreach across the ecosystem and gain access to new markets.
Takeaways
Since MNOs lack the specialized knowledge to target a large swathe of vertical markets, they should focus and prioritize their resources on three or four broad verticals. In order to profit from the enterprise sector, Counterpoint Research believes, operators need to invest in and partner with numerous vertical-focused companies. For every single vertical, and even some use cases within those verticals, a distinct set of partners will be required.
The success of operators may well depend on how willing they are to scale down, i.e. extend their reach into smaller organizations, verticals and sub-verticals. For many of these use cases, operators may not offer spectrum but provide network support services. For instance, Vodafone Germany and Lufthansa Technik launched a private 5G network in Hamburg based on standalone technology. The operator does not own the spectrum used to provide the connectivity but takes on the role of technology and service partner to support the deployment and operation of the private network.
It is important to acknowledge that although operators are set to gain by collaborating with various vendors, the same set of vendors may also be viewed as competition, especially in markets with enterprises having direct access to spectrum to set up private networks. We will be looking at this perspective in an upcoming blog. Stay tuned!
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