Nokia CEO Pekka Lundmark presided over his first Capital Markets Day last week and used it to provide more detail behind the turnaround plan he has been setting out since he took the helm last August.
In November he announced a top-level reorganization that ditched a strategy based on end-to-end networks in favor of reverting to a heavily 5G-centric approach. Heavy emphasis was put on investing to reverse mistakes of the past, notably the failed 5G base station chip platform, which is steadily being replaced with a new more efficient and cost-effective system-on-chip. But the new approach also looks to build quickly on areas of success and differentiation for Nokia, such as enterprise cellular and cloud-based networks-as-a-service.
Announcing the 2020 financial results last month, Lundmark adopted a cautious tone and warned that this would be a transition year, in which mobile network sales would fall before they started to recover, and in which Nokia would continue to have to make hard decisions. These include further layoffs, in a headcount reduction process that has been going on spasmodically for years. Nokia has warned 10,000 jobs could go over the next two years as part of a restructuring and realignment aimed at reducing cost base and boosting R&D around 5G, cloud and digital infrastructure.
The company stated that it will end up with 80,000 to 85,000 employees instead of the 90,000 plus it has today, saving about €600m ($715.7m) by the end of 2023.
This should help with the ongoing battle to improve margins. The strategies to do this include digitization of Nokia’s own operations, increased automation, and addressing emerging market opportunities. The Mobile Networks unit is targeted with achieving an operating margin of between 1% and 2% this year, and between 5% and 8% in fiscal 2023. For Nokia as a whole, the aim is to increase margins to between 7% and 10% this year, and 10% to 13% in 2023.
Lundmark has also made it clear he will be ready to exit market where Nokia cannot become a technology leader. Some of the savings on salaries will be spent on maximizing its chances in that respect by increasing R&D in core areas, with particular focus on the enterprise segment and private 5G networks. This effort will be supplemented by strong new partnerships, such as those just announced in the cloud and edge areas with the big three webscalers – Google Cloud, AWS and Microsoft Azure – to accelerate development of 5G technologies and services for the enterprise segment.
The enterprise market is critical to Nokia’s turnaround strategy. As demand for private or semi-private 4G and 5G networks rises in many industry segments, in order to support business critical functions on mobile infrastructure, Nokia is in pole position.
Ericsson has been more cautious about the potential conflicts of interest with MNOs when going after enterprise business, and while it has set up a unit to target this sector, it has been careful to work through operator partners. Nokia, despite many protestations that it aims to keep MNOs in the loop, has gone a lot farther in positioning itself to deliver and manage private networks directly, where required. This will be helped by its development of a variety of cloud-based offerings, such as its Cloud Packet Core, where it can support network-as-a-service for enterprises, competing with Microsoft and Google more than with its traditional rivals.
The company also believes that enterprise interest, as well as expanding the addressable market for 5G networks, will also prolong the lifecycle of the market. “We estimate that the peak of the 5G market will last roughly twice as long as it did with 4G,” said Lundmark. “These trends of next generation access and digital connected enterprise still have a long way to run.”
To build on its early advantage, Nokia has created a dedicated sales division for the enterprise, recognizing that these customers buy differently from telcos. The new sales team will work across all the business units that Lundmark announced last autumn and can sell products from any combination of the Mobile Networks, Network Infrastructure, and Cloud and Network Services groups.
This aims to build on the work done, in the previous structure, by the Nokia Enterprise unit, which also had its own sales team. That unit was run by Raghav Sahgal, who is now president of the Cloud and Network Services business group.
“From 2022 onwards, the company will accelerate competitiveness and aims to grow margins through enhanced technology leadership, digitalization of own operations, automation and capturing emerging opportunities,” said Nokia in a statement. “It then plans to scale up to drive growth in new use cases and business models including in enterprise and private wireless in order to grow faster than the market.”
In 2020, Nokia generated just over 7% of its total sales from the enterprise market, which was up 11% on the previous year at €1.57bn. It has 1,545 enterprise customers, a figure that highlights the large number of targets for the new sales team, but also the fragmentation of this space, and the need for agile sales structures and carefully packaged products and services, in order to mitigate the lack of the economies of scale to which Nokia is accustomed in the telco space. The different structure of this market makes partnerships very important, since the margins can be quickly cancelled out if a company tries to serve huge numbers of industries and customers entirely on its own resources – hence the tie-ups with the three webscalers (see separate item).
However important private and enterprise networks are to Nokia’s recovery, it cannot effect a real turnaround without regaining growth and confidence in the MNOs’ 5G RAN build-outs. These macro networks are where the bulk of the 5G dollars will still be spent in the 2020s, and Nokia has suffered, over the past 18 months, from its semiconductor missteps, teething problems with high profile early customers such as Sprint and Verizon, and being excluded from the most recent wave of Chinese 5G awards. The latter dwarf the spending of operators anywhere else, but last year – while Ericsson managed to gain new sales despite the tense relations between China and western countries – Nokia went home empty-handed.
Lundmark is determined to exude confidence that the situation could change in 2022 or later. “We are in Chinese 5G but our market share is tiny compared to what it was in 3G and 4G and the reason is not an active decision not to participate in 5G but that at a time when big, centrally led purchasing decisions were made for 5G our products were not yet competitive enough,” he told journalists in a Q&A session to accompany the Capital Markets Day.
But he insisted: “Now the situation is different. We have increased significantly our product competitiveness and there will be new rounds and we continue to see China as an important market.”
The next phase of Chinese RAN contracts is likely to focus on broad coverage, especially in China Broadcasting Networks’ 700 MHz spectrum, where it will deploy an estimated 350,000 base stations as part of a joint roll-out with China Mobile. The earlier 5G RAN phases were focused on urban capacity and Massive MIMO.
China Unicom and China Telecom, which are also sharing networks, are likely to procure base stations next for 2.1 GHz as they start to switch off 3G and refarm the spectrum to add 5G coverage.
Nokia’s support for Open RAN, and any renewed opportunity in China, will both be central to 5G recovery. Nokia has taken the gamble that, while open RAN platforms aim to break the lock-ins it has enjoyed in the past, it will gain more than it loses from supporting them.
It presumably believes that its decades of radio engineering and network deployment expertise will put it in prime position to win deals when competing against other Open RAN suppliers; that it will enable it to steal the high ground from Ericsson and Huawei, which have not announced commercial Open RAN solutions; and that, while its equipment could be swapped out more easily in future thanks to open interfaces, it will also be able to poach customers from its rivals more easily and cheapy too.
Tommi Uitto, head of Nokia’s Mobile Networks business, said on the Capital Markets Day that there are 27 large operators in the O-RAN Alliance, which is driving many open specs, and 23 are Nokia RAN customers. Supporting their wishes for more open platforms is, then, a defensive strategy as well as an aggressive one.
“We believe that by being leaders in O-RAN and vRAN, endorsing and defining them when some of our competition is not, we can win more share and margin than we would lose, simply by opening base station interfaces,” Uitto said. Nokia is prepared to compete against new entrants, and “can take share from those who refuse or hesitate to comply with O-RAN and vRAN2”, he added, pointing out that Nokia’s weight would help the community to address the immaturities of open RAN technologies more rapidly (another potential point of advantage, of course – standards bodies usually end up being dominated by those that send the largest number of engineers).
Nokia can build on a relatively long history of thinking about mobile networks in a software-first way. A decade or more ago, before telco networks were moving to the cloud, it speculated that it would end up selling its RAN software separately from its hardware. In the cloud-based world, that may now become a necessity.
Uitto said that in vRAN, Nokia “might not even sell any baseband hardware, and our mission becomes pure software”. This has been a theme in Nokia for far longer than most major RAN suppliers – its challenge now is to ensure that Open RAN enhances that goal rather than threatening its opportunities. “We will make O-RAN a commercial reality to gain share and margin,” Uitto said.
Of course, the level of Nokia’s success will depend partly on how open the real world Open RANs turn out to be. The introduction of the near-real time RAN Intelligent Controller in the O-RAN Alliance architecture is one potential game-changer that takes the market well beyond an open fronthaul interface, and Nokia has been careful to seize a lead on RIC development, contributing code to O-RAN and conducting trials with AT&T and China Mobile.
However, there are multiple RIC projects, including the ONF’s SD-RAN, and so Nokia may end up backing the wrong horse – or, in time-honored large vendor fashion, playing on operator fears of fragmentation to encourage them to take a single-vendor solution after all (albeit with ‘open’ specs supported). Surveys show that many operators still want to buy vRAN as an integrated stack from one supplier, even when they are specifying open interfaces and generic cloud infrastructure. Established vendors will continue to dream of that outcome, as Uitto seemed to hint at, when he said: “We can win radio business, we can win baseband, we can win both. Actually we expect that even if some operators require open RAN compliance in the contracts, they may actually be still buying radios and basebands from the same supplier.”
He added that Nokia would deliver fully open RAN, as well as a fully virtualized RAN with hardware acceleration, later this year. Both objectives were described when it unveiled its vRAN 2.0 platform, which has O-RAN and closed modes, earlier this year.
Summing up his strategy, Lundmark said Nokia has adopted four broad commitments that should drive business:
- to be a trusted partner for critical networks
- to focus on technology leadership in each of its business groups
- to capture the value shift to cloud and new business models
- to create value with long term research and intellectual property.
“The three-phase journey of reset, accelerate, and scale” is a structure that will help Nokia deliver on those commitments and return to sustainable, profitable growth, he concluded.