A Shakeout Set for RAN Sector?

Article By : John Walko

The RAN sector of the market has for long been complex and relatively slow moving. Things are picking up and the market is getting roiled...

The mobile communications industry, and notably the RAN (radio access network) sector, has for long been a complex and relatively slow moving sector.

Not anymore! Not at the moment!

Just in the past weeks:

  • Nokia has outlined yet another reorganization following poor third quarter results, and a downbeat forecast for the near future;
  • Arch rival Huawei has just about met expectations for its first half, but it is becoming crystal clear that the US sanctions are hurting and as each week passes more countries are shunning its 5G offerings on national security grounds;
  • Sleeping giants such as Samsung and NEC are beginning to get their act together and making meaningful inroads into the RAN sector;
  • The Open RAN bandwagon seems to be taking two steps forwards and one step back.

Let’s unpick some of these headline events.

One of the first Special Reports published by EE Times was dubbed “The Redemption of Nokia” and the author chronicled the myriad of re-inventions and re-incarnations of the century-and-a-half year old Finnish group.

Set in that context, the latest restructuring, announced late last month, was not a game-changer but is still a powerful statement by relatively new CEO Pekka Lundmark. Accompanied by disappointing third-quarter results, including a 7% year-on-year decline in revenues to $6.2 billion , gloomy forecasts , and the bitter loss of a multi-year $6.6 billion RAN contract to Samsung at Verizon in the US, the new strategy laid out by Lundmark signals the end of the much touted “end-to-end” philosophy for tackling the mobile communications business.

All this was compounded by the revelation that Nokia had failed to win any contracts for RAN gear in the world’s largest market, China, and forecast that its global share of the RAN business could decline next year to 27 per cent.

Though stressing there are no current plans for any asset sales, Lundmark said the company is being reorganized around four main business units: Mobile Networks; IP and Fixed Networks; Cloud Network Services; and Nokia Technologies. There will also be four corporate functions, one of which will focus on strategic planning, long term research (including Nokia Bell Labs), and IT and digitalization.

The biggest challenge

The biggest challenge will face Tommy Uitto, who retains leadership of the Mobile Networks division, which currently accounts for almost half of the company’s total sales, but also faces the toughest pressures on margins, notably in the 5G RAN business. He must be reassured that Lundmark stressed Nokia “would do what it takes to win in 5G”.

That will include significant increased funding in R&D. In the recent past, spending on R&D, including in the vitally important Mobiles group, has been declining, a stark contrast with increased funding in this sector at arch rivals Ericsson and Huawei, and maybe even more so at Samsung.

Pekka Lundmark

One of the biggest problems in the mobile network group’s product line-up has been a reliance on FPGAs, but Lundmark signaled that this has been rectified by deploying new SoC’s based on the company’s ReefShark chip technology, which is expected to lead to major system cost savings. In the third quarter, the company said, 37% of 5G shipments were based on products using its in-house ReefShark portfolio, a major improvement on the last quarter of 2019.

Meanwhile perhaps the biggest changes will be seen in the newly created ‘Cloud and Network Services’ division. This combines the existing software and enterprise units, core network offerings including both voice and packet core, private networks, and also takes in the global services operation. It will be headed by Raghav Saghal, head of the fast growing enterprise business.

The carve-up also makes a new division out of the IP and fixed networks operations, but leaves the Technology division largely unchanged.

Lundmark suggested the new set-up “will simplify the structure and make it easier for customers to do business with us”. He signed off the new strategy announcement with a realistic tone, stressing “the good progress we have made is not enough. Our financial performance in 2021 is expected to be challenging, and more change is needed.”

At least part of this ‘change’ likely referred to a comment near the end of the official statement. “Proposed organizational changes referenced in this release may be subject to consultation with employee representatives in certain jurisdictions “. That seems to be a clear signal there may be further job losses at the company , which currently has 98,000 employees That headcount is already down from 103 000 in the previous year.

Meanwhile Huawei is facing its own demons, having last week reported a slide in growth and profits for its first three quarter of the year.
While the Chinese group reported revenues of Yuan 673 billion (about $100.6 billion) for the period -– up 9.9% over the same term last year that compares with growth in the same period of 2019 of a very impressive 24.4%.

It is important here to add a caveat that Huawei does not break out segment results, so it is difficult to know where the changes have occurred. The company now has a successful and fast growing handsets business as well, and is increasingly relying on this to boost both revenues and profits.

The company added the numbers “basically met expectations”, but Huawei warned its “global supply chain was put under intense pressure, and its production and operations saw increasing difficulties.” The company said it was working hard “to find solutions” at both its infrastructure and handsets groups.

Huawei’s banishments

The recent announcement of plans for a fab in the Shanghai area to get past tough sanctions imposed by the US administration is just one part of that effort.

But the banishment of Huawei’s 5G mobile communications gear from many European and other regions’ operators continues to intensify on an almost weekly basis. Over the past fourteen days, it was the turn of Belgian, Italian, Slovenian and Bulgarian carriers to cease buying gear from the company, joining bigger countries such as the UK, Sweden and Finland.

It was of course the UK that started the ball rolling, spurred on by its security services as well as pressures from the US administration.
In its arguably most strategic European market, Germany, Huawei has to date not been banned from installing 5G gear at operators such as Deutsche Telekom. But the government has insisted on new, strict oversight on what mobile operators can source from so-called “high risk” vendors such as the Chinese groups ZTE and Huawei for both the core part of their networks as well as the RAN.

DT is the biggest carrier exposed to the ban, being been heavily reliant on Huawei for much of its 4G and LTE networks. As in the UK, the operators may be forced to take out some of this gear and replace it with gear from other providers such as Nokia or Ericsson.

Meanwhile trade relations with India, an enormous market for the company for 3G and 4G gear, are being dangerously strained by security concerns, and compounded by regular border clashes between the two countries. These issues are expected to lead to a review of plans for India’s 5G network roll-out. This despite the reality that to achieve its ambitious plan to roll out the next generation cellular technology throughout the vast country and achieve its ambitious digitalization strategies, India is hugely reliant on relatively cheap infrastructure gear. To date Huawei has made that possible.

Fast growing Indian carrier Jio had opted for equipment from Samsung for its networks, and has indicated it would also opt for the South Korean company’s technology for 5G. However, things could change as India is only now setting the rules for its first spectrum auction for 5G, expected by the middle of next year.

Australia was the first to impose bans on Huawei network infrastructure gear, in late 2018, and Canadian carriers Telus and Bell Canada have inked a deal to collaborate on rolling out a 5G networks, and have chosen core and RAN gear from Ericsson and Nokia, and to exclude Huawei.

But of course, as already indicated, the Scandinavian duo are not the only players any more, with Samsung and Japanese group NEC making meaningful inroads, notably in the RAN part of the network. Apart from the game-changing Verizon deal, the South Korean company has scored 4G and some 5G deals for RAN at carriers such as Sprint and AT&T in the US, KDDI in Japan and Spark in New Zealand. Of course it helps that it has a massive lead in deals in its home territory, which has long been at the forefront of introducing new iterations of cellular technologies.

The market by the numbers

According to recent reports from market research group Dell’Oro, Samsung’s global market share has almost doubled over the past two years in existing infrastructure to 3%. The analysts also posit the company is poised to benefit for 5G deals on the back of its experience in helping build out South Korea’s 5G networks, one of the first to have gone live. Dell’Oro suggests its share in the 5G business as of this year is between 5% and 10%. The fact that it enjoys a secure supply chain, not least for semiconductor devices, certainly is adding to its advantage when it comes to competing against Huawei.

For all that progress, Dell’Oro figures Huawei, Ericsson and Nokia between them currently account for between 70 to 80 percent of the global mobile network infrastructure market. And when it comes to swapping out legacy Huawei equipment, an expensive and time consuming dilemma now faced by and ever-increasing number of operators, notably in Europe, they see Nokia and Ericsson as better options since they, unlike Samsung, are better able to supply gear that can cope with solutions covering networks working on 3G to 5G standards.

The South Korean company’s riposte to that is that there is limited benefit from having a ‘single RAN’, and that it can actually be more secure and faster for the carriers to overlay 4G and 5G technology on these existing 2G and 3G networks.

It is also interesting to note that, as of early this year, Samsung was second only to Huawei in patents activity for the 5G generation, according to intellectual property tracking group IPlytics.

Finally, let’s consider the disruptive Open RAN bandwagon. That term seems even more relevant as Ericsson is finally coming round to the ‘openness’ concept. The company’s response when asked whether it had any products or systems lined up for the concept, its immediate response would be that it was not convinced about its cost and performance measures, but it would continue to be a contributor to the work within the O-RAN Alliance.

And at its recent third quarter earnings call, Borje Ekholm, the company’s CEO conceded that Open RAN “is something that is clearly going to happen” but he “does not see Open RAN having a major impact in the 2021-22 timeframe. After that I think it will start to impact revenues for us — it will start to impact the way business models evolve going forward.”

He added “we are going to make sure we’re well positioned.”

Perhaps forecasts such as the recent one from Rethink Technology are beginning to get through.

Though hardly a strong endorsement, it is certainly a major shift from recent criticism of the technology notably its security aspects.
For now though, the Swedish group continues to focus on cloud RAN application software for distributed and centralized units, as well as a new radio gateway to connect to remote radio units.

Meanwhile, one of the groups that have sprung up around the O-RAN push, The O-RAN Alliance has celebrated its two years of operation by announcing a spate of new specifications for disaggregated RANs and said last week it had appointed three more executives to its board of directors, to serve for the next two years. Significantly, they are all from carriers — Japanese groups KDDI and Rakuten Mobile, and Vodafone.

All three are at the forefront of trialing and deploying at the earliest stage networks based on O-RAN technology. Their representation — there are now 15 operators on board — are crucial as it will, after all, be their decisions that decide the pace at which Open-RAN becomes a reality.

O-RAN, plus and minus

The new specifications include an end-to-end system testing framework and a hardware reference design for indoor picocells.

However the many positives regarding the prospects for Open RAN were somewhat dented when Mavenir, a pioneer in the technology, put on hold its planned IPO on grounds of “market volatility”.

The company only filed papers with the SEC for entry to the NASDAQ a few weeks ago. Those documents also showed that both Nvidia and Intel had bought shares in Mavenir from the company’s owner Siris Capital ahead of the filing.

Let’s end with part of a statement during Nokia’s third-quarter profits call by CEO Pekka Lundmark, which seems to be an excellent and insightful precis of where we are, and where we may be heading, in this exciting sector.

“Telco operators will continue to need to support massive capacity demands with commensurate cost increases. As a result, we expect capex to remain constrained as operators will look to drive a step-change in cost effectiveness.

“The broad trend towards open architectures with increasing virtualization will accelerate. This will be driven by cost pressures as well as the need to increase speed and agility.

“Adoption will vary widely and a full transition is more than a decade away, but the shift to more open interfaces, virtualization and cloudification, network function disaggregation, AI-driven automation and optimization is well under way.”

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