At the start of the year, 5G networks were the future. They still are. It’s just that carriers have been delaying deployments to hold down debt, while advertising it heavily to get some uptake. So, what does that mean for Nokia (NYSE:NOK) and Nokia stock?
In the past, technology placed on cell towers was proprietary, as handset chips are controlled by Qualcomm (NASDAQ:QCOM) patents. Nokia, which bought the heirs of Lucent and Alcatel in 2015, would seem to have an advantage.
But the push of China’s Huawei into the market changed things. To beat China, carriers have coalesced around support for OpenRAN, a common set of interfaces for Radio Access Networks. Nokia supports OpenRAN, so proprietary profits are dead, right? Right?
Proprietary Not Dead
That’s not necessarily so.
While the OpenRAN community has its aims right, its technology suite is incomplete. The Common Public Radio Interface (CPRI), which sits at the front of the network, isn’t nearly as good as proprietary alternatives. This means that, for now, carriers must still buy radios and signal processing products from the same vendor. OpenRAN isn’t as open as it seems.
Nokia has been using OpenRAN support mainly to compete with Huawei and its Scandinavian rival, Ericsson (NASDAQ:ERIC). Its press office says a complete set of OpenRAN interfaces will be available on Nokia AirScale products next year.
New Nokia CEO Pekka Lundmark, known as much for being a diplomat as a salesman, is expected to sign big deals based on these promises without giving away Nokia’s technology store.
How Open the RAN?
Privately held Mavenir, built since 2016 through acquisitions by Siris Capital, a private equity firm, is now telling operators it has a truly open solution. Its virtual Radio Access Network (vRAN) is just software. Since Mavenir itself is based in Dallas, the thinking goes, it should be the basis of new 5G builds.
But Mavenir is a small company. Siris might like a quick profit. If small vendors like Mavenir can simply be bought out by big ones, or parts of the CPRI can be held back, competition can still be limited. The OpenRAN vendors are so small their acquisition might be a blip to regulators. They still represent less than 1% of the market, and the equipment still doesn’t perform as well as customized products.
Rakuten, a Japanese mobile provider which signed Nokia to an equipment deal this year, admits Nokia is making a hefty profit.
A short price war, initiated by the larger vendors, could quickly finish off the OpenRAN folks, analysts believe.
But there’s another potential threat, the cloud czars.
Microsoft (NASDAQ:MSFT) has already bought Affirmed Networks and Metaswitch, making its bid for an OpenRAN company look likely. Facebook (NASDAQ:FB), meanwhile, is backing the Telecom Infra Project, an “open” consortium aimed at lowering its costs, much as the Open Compute Project cut costs for its cloud.
Open source, in other words, is coming. It’s the basis of the cloud czars’ dominance in wired networks. It could be the basis for it in wireless, too.
The Bottom Line
Nokia stock is trading just over $4 per share with a market cap of $23 billion.
That sounds cheap, but Nokia’s up only 10% on the year. If 5G were a gold mine, and Nokia’s OpenRAN put it in pole position to win it, the stock should be flying. While open technologies won’t destroy Nokia, they should put a limit in its profits. The arrival of the cloud czars could also limit Nokia’s profit runway.
There’s a thumb coming down on proprietary profits in the wireless equipment space. That’s why Nokia stock has yet to move higher. Its gold mine may just be pyrite after all.
On the date of publication, Dana Blankenhorn held a long position in MSFT and QCOM.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.