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1. Results briefings bring RAN pickings
The fallout from Ericsson’s deal with AT&T still rumbles on. Theories floated so far: Ericsson won with some low ball offer that Nokia refused to match. There’s a lot of vendor financing involved. Ericsson threw in a load of services on the deal. The deal involves replacing Nokia gear and Ericsson is taking the hit for that. It’s about enabling Open RAN. It’s exactly about not enabling Open RAN.
Well, such is the uncertainty and, it has be said, somewhat gnomic messaging from both parties to the contract so far, analysts on three results calls this week returned to the topic. What did the parties themselves say?
At Ericsson’s investor’s call its CEO Borge Ekholm, presenting a 2023 financial year where network sales were down 15%, said that Ericsson won its deal because its technology is more efficient to deploy and operate, allowing AT&T to invest a higher percentage of its capital into revenue earning “active” equipment, rather than into things like truck rolls, passive equipment and other sunk site costs.
Here’s what he actually said, when asked by an analyst if Nokia was right to say that Ericsson won on a very low ball offer.
“It’s always interesting when competitors apparently know everything. So you can question how much they know sometimes, to be honest.” (Get lost Nokia – TMN translation.)
“But if you look at the contract like the one we’re talking about, how does this actually work? It’s all about looking at the total CapEx, OpEx envelope and actually optimising that total cost. So you make sure that you can invest in technology in order to actually increase the portion of that cost envelope that goes into revenue-generating equipment. And that is what this is all about.
“So it’s about putting a technology in place that allows a much more efficient rollout and operation of that network, and that’s what we’re doing together with AT&T. So the substantial benefit here is actually that it allows within the CapEx envelope, a faster rollout, but that is really created by leveraging new technologies. So we’re putting new energy savings features in place, multi-band radios in place, standardised sites in place, et cetera. All of those contribute to make as much of the capital go into productive equipment as humanly possible. That’s really our competitive advantage, and that’s why that contract is so important.”
What’s Ekholm saying here? He’s saying that standardised site builds, integrated and multi-band antennas, energy savings, are making it easier for AT&T to to put more of its investment towards the active equipment, and spend less on site builds and operational costs.
“Then that’s the reality, and that’s the fact. That’s why it’s value-creating for us, but it’s also value-creating for our customers. So this is a way, I think, for the future. We have a lot of interest to look at similar type of solutions for the future. It’s too early to say that there’s going to be a lot of contracts coming, but we’re seeing a great interest in exploring similar type of solutions for the simple reason that it actually reduces the non-strategic spend.
“And you now think about the normal network, right? It’s kind of a lot that goes into, I call it, concrete and towers, right? But the reality is it’s in passive equipment. It’s in truck rolls going back and forth to sites. It’s in energy costs, et cetera. All of that we like to put into active equipment instead, and that’s what we’re doing in this contract. I think it’s a model for the future and can create a big potential for us.”
Is this enough to explain the win? It seems to be enough for AT&T at this point to consider replacing Nokia equipment faster than it had originally planned. The carrier for its part, seemed to confirm that it is moving to take out Nokia kit quicker than planned.
On its earnings call it said, Pascal Desroches, Senior EVP & CFO, AT&T, said, “Moving to EPS. Here’s what to think about when you do your calculations. Our full year guidance reflects noncash headwinds of about $0.24, which include the following: $0.17 higher depreciation. Approximately half is from accelerated depreciation on Nokia assets impacted by our Open RAN transformation, and we expect this impact to continue through 2026.”
On his call, Nokia CEO Pekka Lundmark, said that Nokia signed a five year contract with AT&T in 2021, and it is now negotiating with AT&T how to “execute” on that deal. That would seem to align with AT&T’s 2026 date for the impact of “accelerated depreciation” of Nokia assets.
Lundmark said, “So as a reminder we said that AT&T represented 5-8% of mobile network sales. The 2023 number was [already] significantly lower than in 2021/22 because of lower investments. Now we have an existing five year contract published in the beginning of 2021, Negotiations are still ongoing in respect of how we execute on this contract. Before we conclude it is hard to give answer on how the trajectory of decline will look.”
So – are we any clearer? Nokia insists it didn’t lose on a technical beauty contest – something it has managed to get AT&T to publicly confirm. Ericsson’s line is that it has a new way of doing contracts that optimises cost allocation, and that it can do this because of advances in site designs and base station and antenna efficiencies. AT&T is admitting that it is stripping out Nokia faster than planned, rather than running a natural replacement programme.
2. RAN outlook – trust to wait and see and 5G SA?
Outside of what has happened at AT&T, both Nokia and Ericsson admitted that the RAN market is going through a slow down. Both companies used the word “normalisation” when it came to spend in India. Higher interest rates and the end of 5G phase rollouts in the USA had led to operators ingesting existing inventory and reducing capital expenditure. Neither company mentioned much about Europe.
Nokia said that 2024 would be tough for its networks business, especially in radio networks. Network infrastructure and cloud would go better, with some “green shoots” on the horizon, while the mobile networks business will see margins benefit from the company’s “cost savings programme”.
Ekholm said, “We expect the RAN market outside of China to decline further as our customers remain cautious and the investment pace normalizes in India.” Nokia is predicting its network sales will decline 10-15% in 2024.
But they both insisted that brighter times lie ahead. Ericsson’s Ekholm said that operators will need to invest eventually, when capacity demands get too difficult to ignore, or when new apps come along that place strains on the existing network. He also said that 5G SA would unlock a lot more 5G usage, as has been seen in China, and that this could also kick start another round of investment.
“It’s important to note that looking historically large declines in the mobile network market are followed by a rebound. So operators can sweat the assets up to a point, but eventually, will need to invest to manage the data traffic growth, cost, energy usage and of course, network quality and give the customer experience that the customer demands. And that is actually something we see will happen this time as well. So we fully anticipate the market will recover to more normalized levels.However, the timing is very difficult to predict.”
“So what will then be the trigger for that? It will probably be competition offering a better service. It may be a front runner in the market that actually drives the others, therefore, to invest. It may be new type of use cases that come up that demands more bandwidth, whether that is XR applications, whether it’s new type of streaming services, new type of social media, I don’t know. But we know when you get those new type of use cases into the network, it actually drives the need to invest.
“And lastly, I would say, for the world to really benefit from 5G, we need to migrate to 5G stand-alone. And there are – if you look across the world, very few 5G stand-alone networks built out. Really, where it’s a front runner is China. And in China, you start to see enterprise applications coming on top of the 5G network that we are not seeing in the rest of the world yet. For the simple reason, the infrastructure is not built out.”
However, 5G SA may well not be the answer that Ekholm wants it to be. Dell’Oro, which tracks carrier spend and vendor shares, said that RAN revenues are on target to decline sharply in 2023. But the analysts added that waiting for 5G SA is not likely to result in a big capex boom. “5G-Advanced is expected to play an important role in the broader 5G journey, however, it is not expected to fuel another major capex growth cycle,” the analyst said.
Not does it think waiting around for capacity to run out is necessarily going to pay off.
“The upper mid-band capacity boost is rather significant relative to current data traffic growth rates in some markets, which could impact the timing for capacity upgrades,” it said. That’s analyst speak for – there’s plenty of capacity right now.
Not necessarily good news for Ekholm’s, “wait a bit and they will come around” messaging.
Within the decline, there are some growth areas, however. Even if these aren’t enough to offset the overall decline Dell’Oro expected to see growth in mMIMO, Open RAN, vRAN, small cells, mmWave and private networks.