January 25, 2021
A safe assumption is that some telco shareholders – the kind who care about such mundanities as quarterly profits and annual dividends – feel their bowels lurch when CEOs start prattling about open RAN. Picture Simon Cowell's go-to grimace whenever he is being aurally tortured by one of those X Factor contestants who sound like a fox raid on a chicken coop. That sort of feeling.
Despite all the attention it has impounded, open RAN is not going to enrich the investors in Deutsche Telekom, Orange, Telefónica or Vodafone, four European operators titillated by the new technology. Sure, any competition for Ericsson, Huawei and Nokia, today's dominant telco suppliers, might save the operators money spent on network products. But not enough to really juice profits. The radio access network is only about a fifth of total wireless capex, which is only a fraction of the overall telco bill.
Figure 1: Deutsche Telekom CEO Timotheus Höttges has not yet shown he is serious about open RAN.
There is not really a story of revenue growth, either. Open RAN lets operators mix components from several vendors, instead of buying them all from the same supplier. It will not supercharge connections, reduce lag or do anything revolutionary, like teleporting Simon Cowell to a place of musical safety. RCS, an ill-fated telco challenge to WhatsApp, stood more chance of lifting service provider sales.
This could partly explain why there are so few signs of telco investment in open RAN companies. The standout example is Altiostar, a US firm that has been supported by Spain's Telefónica and Japan's Rakuten, which bought a controlling stake in it last year. Rakuten is an odd case, though – an ecommerce firm using Altiostar's software to build a network from scratch. Nor, right now, is it a super advertisement for open RAN. Consumers are not racing to use its low-cost services, competition is mounting and Rakuten's network performance is shoddier than at launch, according to MoffettNathanson, an analyst firm.
Elsewhere, there is tumbleweed. The venture capital arm of Deutsche Telekom, Europe's biggest service provider, has previously backed several network players. Those include the very high-profile Affirmed Networks, a developer of core networks that was famously acquired by Microsoft last year. But none of the portfolio companies listed on Deutsche Telekom's website is linked to open RAN.
Then there is France's Orange. It has just made €350 million ($425 million) available to Orange Ventures, its rebranded venture capital business, and the portfolio section of its website today names 26 companies. As in the case of Deutsche Telekom, not a single one of these startups is developing open RAN products.
Other investors are not exactly scrambling to back open RAN developers, either. Last October, Mavenir, a prominent US rival to Altiostar, filed a registration statement for an initial public offering (IPO) on the Nasdaq. Just four weeks later, it had scrapped its IPO plans, blaming "market volatility." The details of its financial performance might have rattled a few prospective financiers. For its last fiscal year, they showed an $81 million loss on revenues of $427 million. But sales were up 9%, and losses had narrowed.
Unfortunately, open RAN is still something of a gamble in a market that is not expected to grow between now and the mid-2020s. Omdia, a sister company to Light Reading, reckons operators will spend about $35.2 billion on RAN equipment this year. By 2024, annual investments will have shrunk to $34.2 billion, it says.
Figure 2: Omdia RAN outlook ($) (Source: Omdia)
Yes, the open RAN part of this will soar from about $252 million in 2020 to roughly $3.2 billion in 2024, according to Omdia. The question is how much will be captured by open RAN specialists rather than large, existing vendors. Ericsson and Nokia are adapting. China's Huawei will probably follow if customers demand it. Operators say they want additional RAN competitors, but smaller companies may be vulnerable to a takeover. A history of RAN consolidation this century suggests few will be viable as independent firms.
Any telco would galvanize investors by promising a widespread rollout of open RAN technology. But none bar Rakuten and Dish, a greenfield operator in the US, is prepared to go that far. Last week, a joint commitment to open RAN by Deutsche Telekom, Orange, Telefónica and Vodafone had nothing at all to say about volumes. Separately, Vodafone has indicated it will deploy open RAN at 2,600 of its roughly 18,000 sites in the UK, while Telefónica aims to use it at 1,000 of the 28,000 it maintains in Germany. That 8% of the combined total is at least something. Deutsche Telekom and Orange have given no site assurances whatsoever.
They are right to be worried about open RAN's performance lag, especially given the latest analyst take on Rakuten. Orange expects the technology to reach "parity" with the traditional RAN by 2025, but four years is a long time to most investors. Nor is there any guarantee it will catch up with a moving target. In the meantime, many European operators have already signed 5G agreements with mainstream vendors. This will effectively shut the door on smaller, open RAN providers until operators have amortized the older products.
Confronted by grimacing private-sector investors, operators have turned to the public sector instead. In a recently published memorandum of understanding (MoU), Deutsche Telekom, Orange, Telefónica and Vodafone say they will "seek funding from European governments" to develop the open RAN ecosystem. Markus Haas, the CEO of Telefónica Deutschland, thinks part of Europe's €1.8 trillion ($2.2 trillion) recovery fund should be earmarked for open RAN.
The timing of their plea is auspicious. European governments are suddenly nervous about network security and the role played by China's Huawei in the telecom sector. Several have recently imposed restrictions on Chinese vendors or even banned them outright. Some authorities share service provider concerns that Ericsson and Nokia could subsequently become duopolistic. Moreover, when it comes to open RAN, all of today's alternatives seem to hail from Asia or the US. Europhiles want to nurture local firms.
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None of this would justify the use of taxpayer funds in the middle of the worst pandemic for a century. Airlines, hospitality venues and retailers are on the brink of collapse. Household budgets are being squeezed and unemployment is set to rocket. Public-sector debt will reach levels not seen since the end of the Second World War.
Amid this carnage, the telecom sector looks resilient and wealthy. Vodafone reported underlying profits of about €7 billion ($8.5 billion) for the six months to September, just 1.9% less than a year earlier. Deutsche Telekom's adjusted net profit rose 6.3% year-on-year, to €1.5 billion ($1.8 billion), for the first nine months of 2020. While operating income at Telefónica dropped 15% over the same period, it still came in at €9.7 billion ($11.8 billion). As for Orange, its earnings of €9.5 billion ($11.5 billion) were just 0.6% less than it managed the year before.
Those numbers do not elicit sympathy. To any harsh critic, the operators will seem like billionaire beggars leeching off a destitute taxpayer because they are unwilling to bear the risks. Telefónica Deutschland even had the gall to promise higher dividends for shareholders as it pleaded for state aid. John Strand, the CEO of Danish advisory group Strand Consult, is unimpressed. "The last industry that needs subsidies right now is the telecom industry," he told Light Reading last week.
Open RAN funding would undoubtedly be a hard sell to a general public recovering from COVID-19. Surrounded by much larger monetary commitments, it will probably be a line item that goes unnoticed. But that does not make it acceptable. Ordinary taxpayers are unlikely to see any real benefits. The best-case scenario is that funding creates some new telecom jobs. Given the no-growth market outlook, however, these would possibly come at the expense of Ericsson and Nokia, which already employ tens of thousands in Europe's telecom industry.
Alas, Germany has already pledged €2 billion ($2.4 billion) for open RAN, according to documents seen by German newspaper Handelsblatt. In its report, there is no suggestion the private sector is lining up an equivalent amount. But German public-sector funding would create a precedent for other countries in the region and let its operators off the hook. There are far worthier uses for that taxpayer dosh.
— Iain Morris, International Editor, Light Reading
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