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October 24, 2019updated 25 Oct 2019 9:27am

5G Rollout Burns Nokia: Shares Plummet on “Risks Materialising”

Nokia to "progressively mitigate these issues"

By CBR Staff Writer

The road to 5G is a winding one, and it may yet turn out to be one of the shibboleths of our time. (The jury’s out; it’s early days). The new standard certainly throws up ample challenges. Even mobile network operators sound caution. T-Mobile CTO Neville Ray noted in an April 2019 blog that millimeter-wave spectrum (mmWave) “will never materially scale beyond small pockets of 5G hotspots.”*

Critics note that even in dense urban environments, “obstacles” – like that rather common urban obstacle, buildings – put a dampener on the idea of seamless mmWave 5G connectivity. (As Ray notes, “mmWave spectrum doesn’t penetrate materials at all”).

Whatever industry’s take on the outlook – the dominant one being that 5G will “transform” the world with cutting edge AR, remote surgery, connected factories, game streaming and more –  companies trying to monetise the emerging technology face pronounced challenges: capex requirements are high, incentives still emerging, and froth pervasive. But the issues haven’t stopped businesses trying to get in early, and the issues above, along with the scramble for turf, hit Nokia hard today.

Nokia 5G: Burned, But Persevering

The company’s shares plunged 25 percent today, the most single-day drop in decades, after it warned that “some of the risks that we flagged previously related to the initial phase of 5G are now materializing. In particular, our Q3 gross margin was impacted by product mix; a high cost level associated with our first generation 5G products; profitability challenges in China; pricing pressure in early 5G deals.”

The company says it expects to “progressively mitigate these issues over the course of next year” and is doubling down on 5G regardless, as it reported Q3 earnings.

(Nokia’s “Future X” 5G offering includes radio, baseband, transport, transformation services and business modelling, a cloud-native core, integrated management systems and turnkey services for MNOs. Central to this is 5G NSA-3x: a preintegrated solution that focuses on radio performance and low latency services for “enhanced Mobile Broadband and ULLRC use cases, with initial network slicing”).

Rajeev Suri, Nokia’s president and CEO, said the company will “increase investment in 5G in order to accelerate product roadmaps and product cost reductions”, but Nokia has adjusted its earnings per share targets sharply downward for full-years 2019 and 2020 as a result (to the €0.18-€0.24 range, from €0.25-€0.29, It expects to see recovery in 2022.)

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Detailing the challenge in fresh commentary, Nokia said: “Competitive intensity has increased in some accounts as some competitors seek to take share in the early stage of 5G, which is particularly impacting Mobile Access.”

The company is looking to ramp up investment regardless, with investment areas
include “System on Chip based 5G hardware… diversifying and strengthening the related supplier base… and additional digitalization investments focused on driving automation and productivity, including further simplification of IT tools.”

Europe’s 5G Uptake: “Structural Issues” Remain

Nokia is unlikely to be alone in facing the struggle, although Bloomberg notes that Ericsoon has adjusted to the emerging standard’s demands better, and been busy taking on lower profit network contracts to build out market share.

And while competitive intensity might be increasing, European 5G uptake remains stymied by some structural issues. As consultancy Northstream (recently acquired by Accenture) notes: “CAPEX-to-revenue ratios of European operators are currently at historically high levels and are higher than those in, e.g., the US and Japan.

“And yet this is still not enough to make up for the gap in CAPEX invested per inhabitant…

“Because of these inherent structural disadvantages, European MNOs [mobile network operators] find themselves trapped in a vicious circle which leads them to continuously underinvest in their networks, irrespective of whether those are branded as “5G” or not…

“European MNOs are bound [as a result] to continue generating lower revenues and the vicious circle starts anew.”

The CEO of another consultancy, who didn’t want to be quoted on the record, told us: “We might not see more lift-off until there is further carrier consolidation. There are going to be issues like this along the way here. Roll-out has actually been quite smooth compared to other standards, with South Korea and the US making good progress.

“This is the first time a new standard has been launched into a mature market however; everyone has a handset already and there’s been a decade of slightly declining revenues. What happens next? It’s hard to say.”

Nokia’s net sales for the quarter meanwhile were €5.6 billion, up four percent year-on-year and the news was not all bad: “customers continued to invest in their networks in preparation for the rise in broadband traffic driven by 5G”, it noted.

See also: Nvidia Throws the Kitchen Sink at 5G with New “Supercomputer for the Edge”

*nb. Ray was, of course, advocating a mix of 5G technologies over straight mmWave, rather than saying 5G “won’t work”… 

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