Is the network business ready for disruption?

Written by on May 9, 2016 in Guest Blog with 0 Comments

Idea Light Bulb Conceptual Work on BlackboardEricsson’s net sales declined in Q1 and the company started to re-organize its management. Nokia finalized the Alcatel-Lucent acquisition and laid off thousands of employees. Network vendors are waiting for the 5G building boom and are also planning new business lines. But it is hard to tell if they are really able to change their business; they will stay in the cyclical infrastructure business. Can someone really disrupt this business?

The market is now very much dominated by three players: Ericsson, Nokia, and Huawei. It’s gone through a huge change in 20 years. For several years already the business has focused on getting bigger volumes, better efficiency and lower prices. The 4G adoption cycle has been a good business for the leading players, but we haven’t seen anything that really represents a business, technological or operational disruption in the market.

After the Q1 results Ericsson unveiled its new organization. The company aims to maintain its core business in Network Products and Networks Services units. At the same time it aims to build new business with IT & Cloud Products and IT & Cloud Services units. It has also Industry & Society and IPR & Licensing units. Ericsson has talked about new growth areas like Cloud, IP Networks, TV & Media, OSS/BSS and Industry & Society.

Nokia is looking for better efficiency after the acquisition by cutting its global head count by 14%. The move concentrates the head office operations in Finland and more R&D activities in France. Nokia has also made significant reductions in R&D in Finland. The reductions have especially an impact on wireless product development, when French operations are more on the core networks and IP solutions.

Huawei is different from Nokia and Ericsson, when it has also handset and enterprise business. Huawei’s network business has grown quite nicely and it has been based mainly on 4G networks. It probably can grow better with lower prices than Ericsson and Nokia in the mature 4G markets. Last year Huawei passed Ericsson in revenue. But it is hard to see any exceptional growth numbers at Huawei either.

So, what could be the new significant growth areas? The vendors talk, for example, about clouds – or should we say distributed clouds – IP based media solutions, IoT solutions and cyber security. The problem is that these vendors focus very much on the lowest level hardware and software, not to real value added components and smart applications. They are operating near the commodity level.

Let’s take, for example, cloud services and IoT. The Internet giants, like Amazon and Google, already dominate the cloud business and the IT vendors make solutions for them. Network vendors might be able to offer some more distributed clouds and cache solutions, but is it significant business? In IoT they can offer connectivity solutions and, of course, network capacity is needed. But the real disruption in the IoT will most probably be in software applications, data analytics, and smart internet services. An additional problem is that network vendors must keep carriers happy, not make solutions the carriers don’t like, and the carriers lack a great track record to make successful new innovations.

Nokia, Motorola and other handset companies thought for years that the market has become mature and it is only about better efficiency, volume and keeping carriers happy. And it stopped them innovating. Now, we all know how Apple and Google changed the game. Could the same happen in the network business that someone really changes the paradigm?

What if Apple and Google really started to offer mobile subscriptions to end-users? Or if someone really starts to offer open API network equipment and network services allowing anyone to develop applications to networks? Or if the 5G really enables all small WiFI type terminals to work like a base station for networks? What if all these cheap terminals open APIs, smart software done by anyone, and billions of devices really become like an open platform to build all kinds of network services, services and applications by millions of companies and people?

With the current course it is hard to see any significant changes in network vendors business. Their stock price is quite stable with some peaks and dips depending on network building cycles and 5G timetables. The track record and their customer structure don’t support expectations to see significant growth from new areas. The question is, whether someone can really disrupt the network business and technology. It can also change vendor’s business, to create totally new growth or kill some of them. But it needs totally new thinking and challenging the old models.

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About the Author

About the Author: Jouko Ahvenainen is a serial-entrepreneur and Co-Founder of Grow VC Group, a holding entity including over 10 companies, a pioneer in digital finance, fintech and data analytics solutions. Jouko started his work with digital finance and fintech models in 2008 and listed world-class influencer. He participated in changing US finance regulation, getting the Senate and President to allow JOBS Act and has worked with EU and Asian finance regulation. .

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