Although both Nokia and Ericsson reported good third quarter financial results, top-level growth at their RAN businesses is likely to be challenged over the next few months, with Ericsson seeking to compensate for loss of market share in mainland China with growth elsewhere and Nokia needing to recover market share following a major contract loss at Verizon last year. In addition, both may struggle to manage what seems to be a worsening chip supply chain problem.

5G SA Core Market

Chip supply, however, will not affect their 5G SA* core and associated software businesses. After years of R&D investment and legacy portfolio rebalancing, there are encouraging signs that Nokia’s Cloud and Network Services and Ericsson’s Digital Services may have finally turned a corner - providing provisions for poorly performing legacy contracts have largely come to an end. Both vendors reported strong orders for their 5G SA core products during the quarter amid signs that MNOs are accelerating 5G SA core deployments.

Although overall revenue at Digital Services was down 1% YoY due mainly to lost market share in China, revenue excluding China was up 6% due to initial revenue from 5G SA core contracts. At Nokia, revenue at its Cloud and Network Services jumped 12.8% YoY driven by double-digit growth in core network sales and enterprise solutions. With high 5G SA core deployments expected to continue over the next year or so, Counterpoint Research believes that both business units will deliver increasingly positive financials during 2022.

5G SA Will Drive Software Revenues

5G SA cores will enable the introduction of a plethora of new Network-as-a-Service (NaaS) offerings, essentially cloud-enabled, usage-based business models that allow users to acquire and orchestrate network capabilities without creating, owning or maintaining their own network infrastructure.

5G network slicing - the Holy Grail for many MNOs - is likely to be the first NaaS offered on mobile networks using an on-demand business model. Both vendors have undertaken extensive end-to-end network slicing trials with leading MNOs, including tests on Android 12 devices, the availability of which will be an important milestone for the launch of network slicing services.

5G core deployments will also be the catalyst behind the transition towards more software-based sales (with increasing recurring revenue streams) derived from a range of applications encompassing analytics and AI, automation and orchestration, billing and monetization, managed security and private networks. Many of these services will be offered on a Software-as-a-Service (SaaS) basis. For example, earlier this year Nokia launched its Nokia Data Marketplace (NDM), a white-label platform designed for MNOs to offer SaaS-based software solutions to their enterprise customers.

Enterprises - Key For Long-Term Growth

NaaS offerings will predominantly be targeted at the all-important enterprise market, which both vendors are relying on for long-term growth. While Nokia's enterprise revenues fell slightly during the quarter, revenues at Ericsson increased more than 25% YoY due mainly to Cradlepoint. Although admittedly small in comparison to their MNO revenues at present, both vendors are banking on sharp increases in enterprise revenues in future reflecting their continuous  investment in the enterprise market over many years.

In what is certain to be a very competitive market, with many new players, Counterpoint Research believes that leading the NaaS enterprise market will be an important strategic objective for both vendors and a key test to see whether they can survive and prosper in a rapidly converging telecoms and cloud market. Both have recently announced new products designed to bolster their NaaS credentials.

For example, a few weeks ago Ericsson launched its Time Critical Communications (TCC) toolbox, a software package deployed on 5G networks to improve network latency - essential for gaming and industrial IoT type applications. Similarly, Nokia unveiled its MX Industrial Edge (MXIE) platform, a cloud-native Industry 4.0 edge solution built on the vendor's Digital Automation Cloud (DAC) which runs on its AirFrame edge servers.

Acquisitions on the Horizon?

Over the next few years, both vendors must continue to invest heavily to develop new products and capabilities to take advantage of emerging opportunities. No doubt, this will also involve acquisitions. With a healthy cash balance, Counterpoint Research believes that an acquisition (or two) looks very likely at Ericsson during the next six months or so. (Remember, you read about it here first!)

*= Stand Alone

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