Has the 5G Upturn Begun?

A flurry of 5G announcements and rivalries in the US could point to an improvement in mobile equipment markets.

Iain Morris, International Editor

January 19, 2018

6 Min Read
Has the 5G Upturn Begun?

The world's biggest mobile network vendors would rather forget about 2017. Major customers had already built their 4G networks and were still waiting for the first 5G standard to arrive. Spending dried up and sales suffered. Ailing Ericsson braked the hardest. Even China's Huawei changed down a gear, despite continuing to outperform its Western rivals. (See Ericsson Sees Networks Progress Despite Mounting Losses and Huawei Hits $92B in 2017 Sales.)

But last year's progress on standardizing the initial 5G new radio (NR) specification already seems to have put some fuel in the tank for 2018. Even before the 3GPP froze the NR spec on December 20, Ericsson AB (Nasdaq: ERIC) was touting a deal to provide "5G-ready" equipment to Deutsche Telekom AG (NYSE: DT) in Germany. Nordic rival Nokia Corp. (NYSE: NOK) today landed a similar contract with Japan's NTT DoCoMo Inc. (NYSE: DCM). That came after it heralded a 5G-related core network deal with Nordic operator Telia Company earlier in the week. (See Nokia Lands 5G Deal at NTT DoCoMo , Ericsson Replaces Major Rival as DT Supplier in 5G Deal and 5G Is Official: First 3GPP Specs Approved.)

Ericsson and Nokia can also expect to mop up much of the business in the US market, where operators are in a race to build 5G networks. Deemed a security threat because of their alleged ties to the Chinese government, Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) have been frozen out of network deals with major US operators since 2012, when they were blacklisted in a US government report. Recent legislative moves could make conditions even worse for them in the future. (See AT&T Warned to Cut Ties With Huawei – Report and Huawei Still Knocking on US Door – but AT&T Deal Thwarted.)

Pump up the baseband
The deals in Germany and Japan are especially noteworthy because they cover the radio access network (RAN), which will gobble up between 50% and 70% of 5G spending, according to Bruno Jacobfeuerborn, formerly chief technology officer of Deutsche Telekom and now head of its towers subsidiary. Major RAN deals are where most of the money lies, agrees Nokia (while declining to put a valuation on the contract with NTT DoCoMo). (See The Growing Pains of 5G.)

In both cases, Ericsson and Nokia are providing operators with the baseband equipment that processes radio signals. This gear is typically installed at radio sites, although moving it into central data facilities could improve the economics of 5G rollout. NTT DoCoMo plans to support 5G services with such a "cloud" RAN. Either way, both vendors claim their hardware is "software-upgradeable" to 5G: Operators can move it from 4G to 5G without deploying new equipment. (See Facebook's TIP Seizes vRAN Initiative From 3GPP.)

Some one-upmanship is at play as operators jostle for 5G market leadership. NTT DoCoMo has had a long-standing RAN relationship with Nokia. But the Finnish vendor will be delighted to have snatched a core network deal from under the nose of Ericsson in Sweden, where Telia is also based. Ericsson, meanwhile, has replaced either Nokia or Huawei as one of the two RAN suppliers that Deutsche Telekom uses in Germany.

Next page: Hold your 5G horses

Hold your 5G horses
Earnings reports this year should indicate just how significant these and other 5G deals really are. But any optimism about a 5G upswing should be guarded.

For starters, the history of mobile network standards suggests that 5G will not boost service provider revenues. Any splurge on 5G gear would therefore hit profitability. For that reason, Bengt Nordström, the CEO of the Northstream consulting group in Sweden, reckons 5G will only gradually replace older technologies, co-existing with 4G for many years. A pioneer in the 5G field, South Korea's SK Telecom (Nasdaq: SKM) has also argued that 4G will not disappear anytime soon. (See SK Telecom CTO: 'We Need New Business Models for 5G'.)

Nor do the recent deals appear to cover the provision of new and more sophisticated antennas. Those will probably be deployed more widely as and when Europe releases frequencies specifically to support 5G services. Northstream estimates that between 50% and 60% of all 5G radio site spending will occur during that particular upgrade phase.

Price-based competition between vendors is another concern for investors hoping 5G will spur growth. During its last earnings call, Ericsson acknowledged that an aggressive bid for 5G market share would hit Chinese gross margins in the final three months of 2017 (it reports figures at the end of January). Francois Meunier, an analyst with Morgan Stanley, demanded to know if it is effectively "giving away" equipment to win business, arguing that similar largesse in Europe, under former CEO Hans Vestberg, did not previously lead to any "lasting market share advantage." CEO Börje Ekholm dodged the question. (See Facebook's TIP Seizes vRAN Initiative From 3GPP.)

For a vendor desperate to restore profitability, a market-share push seems risky. But Arun Bansal, the head of Ericsson's European business, insists the deal with Deutsche Telekom will have no adverse effect on targets. "This deal will not impact our capital markets day commitment to double operating income in 2019 compared with 2016," he told Light Reading last month.

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Despite the doubts, there have recently been a few encouraging signals from Europe's biggest operators, which are typically accused of lagging North American and Asian peers on 5G. In December, France's Orange (NYSE: FTE) said 2018 would be a peak year for capital expenditure (although this seems largely because of fiber rollout, and a capex decline will commence in 2019, it also said). Deutsche Telekom is reportedly eyeing a spin-off of the towers business led by Jacobfeuerborn to raise capital for investment activities. It has also put Alex Choi, formerly chief technology officer at SK Telecom and a 5G expert, in charge of its technology strategy. The appointment hints at a prioritization of 5G this year. (See Orange Capex to Peak at €7.4B in 2018, DT Is Not Going Radio Gaga About 5G and Choi Succeeds Jacobfeuerborn as DT Tech Boss.)

With both Ericsson and Nokia anticipating further shrinkage in the mobile market this year, any 5G spending boom looks improbable. But the forecasts are for a shallower drop. Ericsson expects overall RAN market sales to fall 2% this year, compared with 8% in 2017. The midpoint of Nokia's guidance is for a mobile market decline of 3.5% in 2018, an improvement from 4.5% in 2017. The green shoots of recovery may be starting to show.

— Iain Morris, News 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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