Ericsson vs. Nokia: Who's Ahead in 5G Right Now?

Market reaction suggests Ericsson is now racing ahead of Nokia, but the contest between them is finely balanced.

Iain Morris, International Editor

August 1, 2018

8 Min Read
Ericsson vs. Nokia: Who's Ahead in 5G Right Now?

"It's only a flesh wound," Nokia CEO Rajeev Suri could almost have said, fighting bravely on as operating profits were nearly obliterated at his networks business. Reporting second-quarter results last week, Suri had the unenviable task of persuading investors the Finnish vendor is in healthy shape despite worrying signs of margin destruction. (See Profits Crash at Nokia's Networks Biz.)

The contrast with Ericsson AB (Nasdaq: ERIC) was stark. Days earlier, the Swedish equipment giant showed it had patched up its wounds and turned an operating profit for the first time in seven quarters. Nokia's share price dropped 5% on the day of its earnings update and has lost about 16% of its value in the last year. Ericsson's shares gained 8.5% on earnings day. They are worth about a third more than in July 2017. (See Ericsson Back in Profit After Fierce Cuts & 5G Action.)

Figure 1:

But it would be a gross mistake to assume Ericsson is beating Nokia Corp. (NYSE: NOK) in the mobile networks market, the main arena in which they fight. Both saw underlying mobile revenues grow by around 2% during the second quarter, compared with the year-earlier period. Ericsson slashed about 20,500 jobs, 16% of its workforce, to boost profits. Nokia took a hit to secure contracts. The overarching contest is actually as finely balanced as the mobile sales numbers suggest. Yet each company's strengths and weaknesses look very different from the other's.

The big attraction of Ericsson remains its recognized expertise in radio access networks (RAN). With its newish Ericsson Radio System, a RAN platform that already accounts for 84% of all its RAN sales, it has been able to land some major deals. In Germany, notably, it has dislodged Nokia as a RAN supplier to Deutsche Telekom AG (NYSE: DT). The suggestions are that increased R&D spending has made this a very profitable technology, allowing Ericsson to be more price-competitive in equipment tenders. (See DT Ditches Nokia From Its German Radio Access Network.)

Ericsson's weaknesses lie outside the RAN. Above all, it is struggling to execute a turnaround at its digital services business, which saw a 12% drop in underlying revenues and racked up heavier losses, compared with the year-earlier quarter. Ericsson cannot afford to neglect this business, acknowledges Helena Norrman, its chief marketing officer, because it develops the virtual core and management systems that its customers also demand. Any divestment would make Ericsson look like a RAN supplier with only a smattering of other goodies. A sale is not on the cards, although financial analysts have previously asked why. (See Ericsson's R&D Workout Piles 5G Pressure Onto Rivals.)

For all the latest news from the wireless networking and services sector, check out our dedicated Mobile content channel here on Light Reading.

This RAN focus and digital services weakness conveniently support Nokia's marketing narrative. Since acquiring Alcatel-Lucent in 2016, the Finnish vendor has rarely kept quiet about the breadth of its technology portfolio -- what Nokia calls its "end-to-end" capability. Much like Ericsson, Nokia had concentrated on mobile broadband before buying a company lauded for its skills in fixed and Internet Protocol (IP) networks. The takeover gave Nokia a complete toolbox of radio, core, optical and digital technologies to sell to its customers. And when you are building a next-generation mobile network, all are needed.

This puts a different spin on the contest. For starters, in the non-RAN areas where they compete, Nokia is now easily beating Ericsson. While second-quarter sales slid at Ericsson's digital services business, Nokia's comparable software division managed a 2% increase in underlying revenues. James Crawshaw, a senior analyst with Heavy Reading, has described the performance as "encouraging." For a service provider that wants to buy RAN products and management tools from the same supplier, Nokia may seem like the safer bet.

Other telcos may demand a much broader selection of technologies from one vendor, including even the transport networks that support huge volumes of data traffic. If such an "end-to-end" offering is a telco prerequisite, Ericsson could be out in the cold. After striking a $3.5 billion 5G deal with T-Mobile US Inc. this week, Nokia was unsurprisingly keen to highlight the details of all the various technologies it will provide. Those include a radio platform, core network, management systems and cloud hardware. (See Nokia Reels In $3.5B 5G Deal With T-Mobile US.)

Next page: RAN reputations in the balance

RAN reputations in the balance
The possibility that operators will look to buy more products from one vendor puts Ericsson under enormous pressure to defend its RAN reputation. The Swedish vendor has a thinner product catalog than Nokia and the equally versatile Huawei. In 2015, it tried to address its visible IP shortcomings through a ballyhooed tie-up with Cisco Systems Inc. (Nasdaq: CSCO), but that partnership has become an embarrassing failure. Ericsson must, therefore, compete on quality rather than portfolio breadth. This partly explains why it is injecting more into research and development as it makes cutbacks elsewhere. Overall R&D spending was up 16% in the second quarter, compared with the year-earlier period. (See Cisco + Ericsson: From Soup to Nuts and Huawei Shrugs Off Challenges With Surge in H1 Profit.)

There is no guarantee an operator will prefer Nokia's "end-to-end" approach. Ongoing efforts to virtualize networks are driven partly by operators' desire to become less dependent on one or two big suppliers. Thanks to open standards, operators can already use one vendor's RAN system with another vendor's transport technology. Further progress might ultimately give rise to a multi-vendor RAN costing less to build than one from a single supplier. (See The Future's Bright, the Future's ORAN.)

The US campaign against ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), a Chinese vendor punished for breaching trade sanctions, will also make operators think twice about single supplier deals. With multiple vendors in the mix, there will always be an alternative if a damaging regulatory backlash topples one. (See ZTE Racks Up $790M Q1 Loss on US Ban.)

Nevertheless, Suri claims "end-to-end" deals account for about 40% of Nokia's sales pipeline, up from 30% a year ago. During his recent earnings call with analysts, he lauded the rationale for Nokia. "You lock in the customer on various fronts, you get more strategic, you're talking about long-term network architecture," he (actually) said. "If you have more of the end-to-end portfolio, you have more offsetting mechanisms if a discount is asked [for] in one place or the others."

Its portfolio clearly gives Nokia more options for playing in a multi-vendor network, and sales opportunities it would otherwise miss. Underlying revenues at its optical networks division soared 18% during the second quarter, for example, offsetting pressure in fixed. And a customer relationship in one part of the network could eventually lead to other business.

Want to know more about 5G? Check out our dedicated 5G content channel here on
Light Reading.

As operators prepare for the rollout of 5G technology, neither of the European vendors is clearly ahead of the other. Suri is at pains to correct a "misperception" that Nokia has lost market share to Ericsson. "There are many more cases where customers have decided to move business to us from that competitor than the other way around," he said during his earnings call. "Second, we are not losing any footprint in North America." While some work has dried up at Verizon Communications Inc. (NYSE: VZ) -- whose incoming CEO, Hans Vestberg, was Ericsson's former boss -- Nokia seems busier than ever at T-Mobile. (See Verizon Names Vestberg as New CEO.)

Will there even be a 5G winner? The current structure of the mobile market, with just three big global vendors, makes it unlikely, especially given the near demise of ZTE, whose future remains uncertain. In the US, Huawei's enforced absence means Ericsson and Nokia are essentially in a two-horse race, although South Korea's Samsung Electronics Co. Ltd. (Korea: SEC) could present a challenge in very high spectrum bands. US operators keen to preserve a healthy competitive environment will not want to see one European vendor galloping into the distance.

Indeed, the biggest threat to the equipment giants may come from not one another but the younger software companies and radio specialists eyeing 5G opportunities. An operator-led push to make network interfaces more open could change the rules of the game entirely. The vendor that best adapts may be the one that ultimately thrives. (See Why Resistance to the Open RAN May Crumble.)

— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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