Companies building mobile telecom networks normally buy their equipment and software from the likes of Ericsson, Huawei and Nokia. Germany's newest operator, to paraphrase Monty Python, is trying something completely different.
Rakuten, the firm 1&1 has commissioned, is better known as an Internet company that operates its own, state-of-the-art mobile network in Japan. Its technology is cutting edge but still relatively immature, and its lack of experience as a vendor makes 1&1's decision either bold or reckless. 1&1 probably hopes to spend less than it would with a traditional supplier and gain a cost advantage over rivals. But it could find itself with a dead parrot.
The German company is attracted to Rakuten as a pioneer of open RAN (sometimes shortened to O-RAN), a fashionable concept that promises to end what critics see as the tyranny of vendor "lock-in." In most of today's mobile networks, all the various components and software at a particular site are supplied by a single giant vendor. Due to the way standards have developed, an Ericsson radio is unlikely to be compatible with computing products from Huawei, any more than pickled herring works with dim sum. Open RAN's new interfaces are an attempt to fix this sort of interoperability problem.
Open RAN networks would naturally be more "virtualized," allowing compliant software developed by any company to run on general-purpose equipment. Rakuten already claims to have built this type of network in Japan and is now trying to sell its expertise – alongside products from numerous partners – to service providers in other countries, styling itself as the "unvendor" (clearly ripping off the "uncarrier" marketing used by T-Mobile US). 1&1 becomes the first prominent European customer of what Rakuten calls the Rakuten Communications Platform (RCP), a pick-and-mix store of cloud and software tools.
Tied to Rakuten
The irony of the whole affair is that 1&1 could still find itself heavily dependent on a single supplier. Rakuten's statement on the deal is full of upbeat language about moving "away from proprietary networks" and toward "multivendor network architecture." But most of the important tools come directly from Rakuten. Rather than a menu of RAN software options, RCP offers only Altiostar, a US firm that Rakuten wholly owns as of this week (having previously held a majority stake in it).
This means that if 1&1 preferred Mavenir or Parallel Wireless, US rivals to Altiostar, it would have to shop outside RCP and hope this did not have consequences for its broader relationship with Rakuten. As the effective systems integrator, Rakuten would then have to work with competitors that might be unhappy about exposing themselves and their technology to Altiostar's owner.
When Light Reading previously spoke with Steve Papa, the CEO of Parallel Wireless, about his company's potential involvement in RCP, he did not sound convinced. "When RCP demonstrates they are committed to 'open,' we remain prepared to collaborate," he said last year. "Of course, the challenge for RCP will be in adhering to open principles while simultaneously continuing to pour resources into Altiostar."
Curiously, Rakuten's statement on the 1&1 deal mentions no other suppliers whatsoever, but the impression is that decisions will be left to Rakuten. The German network, then, is likely to be a carbon copy of the one Rakuten is building at home. If so, this would hand a star role to NEC, a Japanese vendor whose relationship with Rakuten could charitably be described as cozy (and uncharitably as incestuous). Besides providing most of Rakuten's 5G radio units, NEC is also developing its 5G core.
The other big winner is Intel, whose x86 processors currently monopolize the open RAN market. Altiostar's own software is based on Intel's FlexRAN platform and switching to Mavenir or Parallel Wireless would not bring choice because their code is also rooted in FlexRAN. The dearth of hardware and software alternatives to Intel is arguably the main failing of open RAN – given all its proponents' claims about the "multivendor" open RAN ecosystem.
It's all about the economics
Still, this is probably lucrative business for Rakuten, which needs the money. Yet to report second-quarter results, Rakuten recorded a $230 million loss in the first quarter on its mobile rollout, despite managing sales of $3.5 billion across the entire organization.
It has had to budget for an additional $2 billion after underestimating how many 4G basestations it would need to cover Japan. This will drive overall capital expenditure up to about $9 billion and has already forced Rakuten to raise funds through a sale of shares. What's more, in a market of 126 million people, it had managed to attract only about 4 million customers by June. New Street Research reckons it needs 20 million just to break even.
The network has recently won some analyst plaudits for performance, however, and 1&1 has presumably bought into the marketing pitch about costs, despite Rakuten's $2 billion snafu. The line seems to be that building an open RAN network is about 40% cheaper than constructing a traditional one.
How Rakuten arrived at these figures is not entirely clear. But even if they are taken at face value, greenfield operators would still face enormous costs. Data provided by Dell'Oro Group, a highly respected analyst firm, shows that annual spending on radio access networks typically amounts to between $30 billion and $35 billion a year, while overall wireless capex is as much as $150 billion. A lot of this goes on physical infrastructure such as towers, steel and cement, which cannot simply be virtualized or turned into software.
Moreover, according to calculations previously carried out by John Strand, the CEO of Danish advisory group Strand Consult, spending on radio access networks represents only between 2.8% and 3.6% of telecom ARPU (average revenue per user). These open RAN capex savings, then, would equate to just 1% of ARPU.
1&1, as a subsidiary of fixed-line operator United Internet, at least has a network of data centers and fiber-optic lines it can already use. Its plan with Rakuten is to use four data centers for its core network and connect these to "hundreds" of decentralized facilities throughout Germany. Those, in turn, will be linked to thousands of antenna locations via United Internet's fiber-optic lines.
The project hardly sounds inexpensive, though, and 1&1 has already spent nearly €1.1 billion ($1.3 billion) just to acquire 5G spectrum. It faces three big German rivals in Deutsche Telekom, Telefónica and Vodafone, all of which are also either investigating or investing in open RAN. Rakuten's difficulties in Japan should be a warning of what could lie ahead.
- Open RAN adds to 6G dilemma
- Rakuten's 4G rollout is holding up a 5G push
- Rakuten to expose what open RAN kit makers charge
- Open RAN might not save you much after all
- Germany raids telcos for €6.5B in epic 5G auction
— Iain Morris, International Editor, Light Reading