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.
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