October 31, 2019
It has become a reference point for anyone facing disruption. In January 2012, Kodak, a company synonymous with photography, filed for bankruptcy after years of decline. Its error was to miss the shift from photographic film to screens, or so the story goes.
The truth is more nuanced, and there was arguably no answer for Kodak to the arrival of camera-equipped smartphones in the late 2000s. But the expression "Kodak moment," once used to describe the perfect snapshot opportunity, has today become a cruel joke, told at the expense of any company in a similar predicament.
Parts of the telecom industry are now staring at their own Kodak moment. Following years of consolidation, just three companies provide most of the equipment used in today's mobile networks: China's Huawei, Finland's Nokia and Sweden's Ericsson. Their dominance is not unlike that of Kodak and Fuji, a Japanese rival, in the 1980s. And just like Kodak and Fuji, they are being threatened by a seismic technological shift.
Figure 1: Kodak Moment Storm clouds gather over the big kit vendors, as they once did over the photography giant.
In Kodak's case it was the digital camera. For the mobile equipment vendors, it is software. More specifically, it is software that diminishes the value and importance of the underlying hardware. Already used in other parts of telecom, a technique called "virtualization" is now entering the radio access network (RAN), where most telco investment goes. Virtualization means software does not have to be tied to a specific box. Ideally, it should allow an operator to run network functions on any commodity server.
It is being helped by a backlash against proprietary technologies. With the development of more open interfaces, operators are now promised the ability to use products from different vendors at the same mobile site -- something not possible in older networks. The O-RAN Alliance, an operator-led group, has already finalized new "open RAN" specifications.
Virtualization and the open RAN are potentially a huge challenge to Ericsson, Huawei and Nokia. In the old-fashioned RAN, an operator is forced to buy dedicated equipment at some expense from one of those companies or a smaller rival. The lack of interoperability means all the RAN products at a mobile site must come from the same vendor's system, including the radio units and the "baseband" products that process signals. Taking advantage of the latest upheaval, an operator could theoretically use a tiny software company and standardized equipment (so-called "white boxes") in preference to a RAN giant.
It is already happening. In Japan, Rakuten, an ecommerce company, is building a new mobile network on virtualization, open RAN principles. It started out using radio units from Nokia in conjunction with software developed by Altiostar, a US company with just 220 employees, according to market-research site Owler. But Nokia will have no role in the second phase of Rakuten's deployment, according to The Mobile Network, another industry site. Instead, the Japanese operator will use equipment developed by KMW and Flex (formerly Flextronics).
NTT DoCoMo, Japan's biggest mobile operator, appears to have similar goals. Announcing a trial 5G service in the run-up to the Rugby World Cup, DoCoMo said it would use baseband systems from Nokia in conjunction with radio units provided by Fujitsu and NEC.
Operators in other markets are also trying to break the stranglehold of Ericsson, Huawei and Nokia. In the UK, notably, Vodafone has kicked off open RAN trials with Mavenir and Parallel Wireless, competitors to Altiostar, as well as a UK startup called Lime Microsystems. Vodafone CEO Nick Read, who has previously grumbled about supplier concentration, said the aim was to "actively expand our vendor ecosystem." Spain's Telefónica, meanwhile, has joined Rakuten as an investor in Altiostar.
Figure 2: Read at the Ready Vodafone's Nick Read has taken a keen interest in the open RAN as he tries to find alternatives to Ericsson, Huawei and Nokia.
Reasons to be open
Service providers have several motives for backing virtualization and open RAN technologies. The first, as Vodafone's Read indicates, is to bring more competition into the supplier market. That should spur innovation and lower prices for debt-burdened operators struggling to boost sales. It would also address industry and government concern that a few big vendors have become too powerful. If 5G turns out to be as economically important as cheerleaders insist, dependency on one or two organizations would look risky.
Recent developments have exacerbated those risks. Huawei is currently fighting US efforts to have it blocked from Western 5G markets on security grounds. Its absence would leave operators with even less choice. Ericsson, meanwhile, is set to pay a $1 billion fine to US authorities for corruption under previous management, and investigations by other countries could follow. Nokia's share price has plummeted in the last week after setbacks in the 5G market.
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Telcos also remain hopeful that commodity servers and open-source code will shrink the equipment bill. According to Parallel Wireless, industry forecasts show 5G deployment costs between now and 2022 falling 30% if a network is built in the traditional way but 50% if open architecture is used. "Twenty percent is a huge difference when we are talking about billions of dollars," said Eugina Jordan, the company's vice president of marketing. It may prove essential in low-income markets.
Even some government bodies appear keen. US officials determined to wrench Huawei out of the country's rural networks have reportedly been in funding discussions with Altiostar. Given the obvious barriers to entry in the network equipment sector, open RAN specialists may seem like the only viable alternative to policymakers. Parallel Wireless says it is in talks with numerous US operators about replacing foreign equipment providers. Deals involving Altiostar, Mavenir or Parallel Wireless may be imminent.
Next page: Different strokes
For the big RAN vendors, virtualization and open RAN technologies are now a subject for board-level discussion. The nature of their response could determine if they have a Kodak moment or skilfully adapt to emerging demands.
Almost from the outset, Nokia decided it was better to participate in the groups steering the move toward open networks than actively resist or avoid them. Accordingly, it was a member of the xRAN Forum before it merged with the C-RAN Alliance, another association backed by Chinese operators, to form the O-RAN Alliance. It is also the only one of the big three kit vendors to have joined the Telecom Infra Project (TIP), a Facebook-led group committed to open networks.
Nokia's rationale is that resistance would ultimately leave it worse off. If the trend is toward virtualized, more open networks, a vendor wedded to the old ways seems bound to suffer. Better to accept more competition, lower prices and a possible loss of market share than end up like Kodak. Despite this display of interest, however, there is little mention of open RAN in Nokia's investor presentations. Critics say it is a bystander in TIP. And while other equipment makers are identified among TIP's project group leaders, Nokia shows up nowhere.
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Yet both Ericsson and Huawei have been even less enthusiastic. Ericsson remains firmly on the outside of TIP and has previously downplayed the significance of open source technology in the RAN market. While it joined the O-RAN Alliance earlier this year, it has not been the most active member of that group, according to Mikael Rylander, who last year quit the Swedish vendor, where he was head of the radio portfolio, to become head of Mavenir's radio access business. "They are not on the front. They are cherry-picking a bit. But they are not on the barricades," he told Light Reading during a recent interview.
Equity analysts are now pondering the impact open RAN technologies could have on Ericsson's business. Quizzed on this point by Handelsbanken's Daniel Djurberg during a recent phone call, CEO Börje Ekholm said Ericsson was determined to be a "strong competitor" in the open RAN market. Yet in his recent capital markets day presentation about Ericsson's strategic outlook, there was not a single reference to the open RAN.
Figure 3: Open or Closed? Ericsson's Börje Ekholm made no reference to the open RAN in his recent presentation on the Swedish vendor's strategic outlook.
If Ericsson is cautious, Huawei is downright unconvinced. Involved neither in TIP nor the O-RAN Alliance, it explained its aversion to the open RAN earlier this year, arguing that off-the-shelf equipment does not measure up performance-wise to its own dedicated gear. "We haven't got the evidence that says these [white boxes] are really beneficial for the industry," said Peter Zhou, then chief marketing officer of Huawei's wireless product line, during a presentation in London. "We have hesitated to join because if we do we may give the wrong message to the industry."
Open RAN supporters detect fear of competition in China. Government protectionism means Huawei has limited reason to worry about its Nordic rivals as 5G contracts come up for tender. But open network technologies could change the dynamics completely, according to John Baker, Mavenir's senior vice president of business development. "If Huawei goes open RAN in China, it will have tens of new radio manufacturers in China actually cannibalizing its market share," he said during a previous interview.
The inevitable roadblocks
Poor performance is just one issue that could hold back the open RAN, however. And given the multitude of operator concerns, the big kit vendors may be feeling confident about their chances and the survival of the old model.
Even open RAN players agree the technology is still not ready to be deployed in commercial networks at scale. "We need servers targeting this segment and radios with open interfaces, and both servers and radios need to be designed for high-volume production," said Mavenir's Rylander. "That is what we are working on in the ecosystem." The gap partly explains why open RAN has not made it past trials with the biggest service providers. Filling it could take a long time.
But it is not the sole explanation for the halting progress. Almost by definition, the open RAN necessitates the use of multiple suppliers, each with its own specialism. For some operators, this multivendor set-up is the perfect way to ensure there is no dependency on one or two big suppliers. But not everyone is convinced it looks preferable. Naysayers worry that operators will simply replace overreliance with greater operational complexity and cost.
These concerns, which also relate to other parts of the network, date back to the early days of virtualization, and yet they have never been satisfactorily addressed. Huawei has in recent weeks been arguing that a multivendor network would cost more than one built and managed by a single supplier. Just last month, France's Orange issued a plea for help with O-RAN integration. "It's a massive challenge," said Olivier Simon, the director of radio innovation at Orange Labs Networks, during a conference in Belgium. "The success or failure of an open RAN concept depends on operators' capacity to find a good test and integration model."
As they virtualize their networks and populate them with new suppliers, some operators are turning to systems integrators to provide an answer. Rakuten, notably, is using India's Tech Mahindra, which has also made an investment in Altiostar. Outside the RAN, Germany's Deutsche Telekom has turned to an Italian firm called Reply as it introduces software technologies into its central offices.
The worry here is that operators are merely substituting one overlord for another. Systems integrators appear to be growing stronger in the early days of 5G, too. While the kit vendors struggle to lift sales, Tech Mahindra recorded a 13% increase in revenues last year, to 347.4 billion Indian rupees ($4.9 billion). "We are encouraged by the revival of the communications business," said CEO Chander Gurnani in a results statement. Reply, meanwhile, saw revenues grow 17%, to more than €1 billion ($1.1 billion), hailing the telecom sector as one of its key markets. Its overall sales have more than doubled since 2012.
Figure 4: On the Up ($M) Source: Companies. Note: Currencies were converted using today's exchange rates.
That growth is happening while operators dabble in trials and watch their own margins come under pressure. During a panel session at the recent Broadband World Forum in Amsterdam, Simon Fisher, a consultant with the UK's BT, agreed that operators risked exchanging one form of lock-in for another. "You are squeezing complexity and cost into the software side of the business," he said.
The readiness of that software remains in doubt, moreover, and it is sniping within the open RAN vendor community that has drawn attention to the issue. Mavenir's technology is not mature, while Altiostar's software is not standardized or interoperable, says Jordan of Parallel Wireless. Mavenir flings back the accusation. "Parallel's solution is not based on open interfaces," says John Baker, pointing out that his rival is not a member of the O-RAN Alliance. "Just because you have been six years developing a proprietary solution does not mean it is best."
Figure 5: Big Dipper (Ericsson's Share of RAN Market) Source: Dell'Oro.
All this will be music to the ears of senior executives at Ericsson, Huawei and Nokia. By the time operators have negotiated a way around these various obstacles, they may be well into the 5G upgrade cycle, using tried and trusted systems. Yet geopolitical factors and business challenges have undoubtedly given impetus to the open RAN: Not until 2019 did a service provider CEO with the stature of Vodafone's Read take such a keen interest in the technology.
For the big kit vendors, the open RAN will probably not trigger a Kodak-like collapse. Yet even marginal gains by new competitors could spell trouble. Ericsson, after all, faced questions about its long-term prospects in 2016, after its RAN market share -- under attack by Huawei -- had fallen eight percentage points, to 28%, in the preceding four years. With so many of the world's big operators signaling their interest in the open RAN, change looks inevitable. The only questions are how quickly it will happen, and how disruptive it will be.
— Iain Morris, International Editor, Light Reading
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