Monetizing 5G Will Be The Challenge For Incumbent Vendors

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.