Saudi Aramco has slim open RAN chance in shrinking 5G market

You won't find mention of telecom, let alone an open radio access network (RAN), in Aramco's financial reports. The Saudi Arabian company, which made a net profit of $94.5 billion on revenues of $372.6 billion for the first nine months of 2023, is well known for sitting atop some of the planet's most voluminous reserves of oil. Sucking it up and selling it on has made Aramco one of the world's biggest companies and historically given it little reason to look elsewhere. Yet on January 15 a subsidiary called Aramco Digital revealed plans to set up an open RAN development center on Saudi Arabian sand.

Open RAN, to the uninitiated, is a telecom industry effort to break the perceived oligopoly of Ericsson, Huawei and Nokia in the market for mobile network equipment. Somewhat ironically, it has now been co-opted by Ericsson and Nokia (Huawei's position remains unclear), which fear losing out if they don't embrace the concept. In short, it comes with new interfaces that should allow an operator to buy parts and software for any mobile site from multiple suppliers, rather than sticking monogamously to one vendor's system.

The hope was this would aid specialists and produce sustainable alternatives to the incumbents. A recent $14 billion deal between AT&T and Ericsson, branded as open RAN, shows the concept has mutated beyond recognition.

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Back to Aramco. As lucrative as oil has been for it, net profit for the first nine months of 2023 was 27% lower than in the year-earlier period, and sales fell 21%. It's a volatile business based on a finite and increasingly controversial resource, and it has left Saudi Arabia and similar petrostates unhealthily reliant on the uncertain future global appetite for fossil fuels. Cue government-backed efforts to diversify the economy through an initiative dubbed Saudi Vision 2030, which is where Aramco Digital partly fits.

What's handy, for the time being, is that Saudi Arabia can use its petrodollar wealth to fund this diversification along with a supportive image makeover. In a move that would have appealed to Roman Emperor Commodus, it has funneled billions into crowd-pleasing sports, the modern-day equivalent of Rome's gladiatorial games, and lured some of the world's best athletes to its sand-swept cities. It is all about convincing the west there is more to Saudi Arabia than misogyny and murderous Crown Princes, for whom dismembering a bothersome journalist is all in a day's work. Hell, it even today allows women to drive.

Shipping basestations besides oil

To the people responsible for telecom and tech in Saudi Arabia, open RAN must seem like a decent bet on diversification. After all, that is exactly how the concept is pitched in other countries. If Aramco can produce homegrown 5G goods, Saudi Arabian operators could theoretically spend their money on a local supplier instead of using only Chinese and European ones. Saudi Arabia, moreover, would gain something besides oil to sell overseas.

Unlike some of the western firms targeting the same opportunity, Aramco also has considerable heft. It spent $806 million on research and development (R&D) for the first nine months of 2023 – just about all of which will probably have been related to the energy business – and could easily sacrifice margins to boost the figure. This may be necessary in a market where Ericsson, Huawei and Nokia collectively invested about $32 billion on R&D in 2022.

Aramco has also named a highly regarded executive as CEO of its Digital venture. Tareq Amin previously led telecom activities for Rakuten, the Japanese ecommerce company that has built a new-look mobile network at home and started selling its products, which include open RAN software, to operators in other countries. In addition, the open RAN development center is to be run in partnership with Intel, a chipmaker that still dominates the nascent open RAN market. The expertise and experience contributed by Amin and Intel will be critical.

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Yet Aramco Digital's chances of becoming an international RAN force – if such are its ambitions – are not great. In the west, Saudi Arabia's dodgy image and reputation do not help. Realpolitik might have recently driven western leaders into an accommodation with Saudi rulers. But network products, in contrast to fossil fuels, can be obtained from other more likeable sources. And protectionist zeal has thrown up dozens of open RAN initiatives. If countries aren't buying from Nordic or Chinese vendors, many would also rather buy at home. Aramco Digital is unlikely to be high on the list of preferred suppliers.

Evidence so far suggests big operators would also prefer to continue buying most of their products from a single vendor after open RAN is introduced. Doing so leaves "one throat to choke" and means avoiding the hassle and expense of systems integration. But it is prompting former specialists to develop a more comprehensive portfolio of RAN products and more thinly spread their R&D funds. Flush as Aramco Digital is with oil money, the enduring appeal of the single RAN contract will make competing in this market even harder.

Market contraction won't help. According to figures provided in December by analyst firm Omdia, a Light Reading sister company, the global RAN market is likely to have generated sales of about $40.2 billion last year. If accurate, that would represent an 11% decline compared with revenues in 2022. Noting the reluctance of major telcos to spend money on equipment, Nokia recently announced plans to cut up to 14,000 jobs, which would equal 16% of the current total. In February last year, Ericsson, which has also recently complained of a market slowdown, said it would cut 8,500 jobs.

In other words, more vendors are piling into a stagnant sector where there is little prospect of meaningful short-term growth. Operators lauding open RAN will also appreciate how important economies of scale have been to the development of relatively low-cost but extremely sophisticated network products. Even if companies like Aramco Digital can acquire some market share, the net effect of adding players to a shrinking sector would be market fragmentation, squeezed R&D budgets and greater inefficiency.

Amin will know just how difficult the telecom industry can be. Symphony, the telecom vendor part of Rakuten, has struggled to land major contracts outside Japan, beyond a deal with Germany's 1&1. Others have also floundered as the incumbents have adopted open RAN. Airspan, a radio supplier to Rakuten's Japanese network, has seen its share price plummet 95% in the last year and lost four board members since November. With its resources and government backing, Aramco cannot simply be dismissed. But it may be the latest to find that telecom is stubbornly impervious to change.