Future Holds Lean Times, Maybe IT Mergers for Nokia, Ericsson

  • Industry consultant Nordstrom says 5G won’t be savior
  • Wireless business has been ‘very, very profitable’: Nordstrom

Nokia Oyj and Ericsson AB need to get used to lean times as their phone carrier customers hold back on network investments while next-generation 5G wireless technology offers scant hope of a material spending boost, according to industry consultant Bengt Nordstrom.

“Operator revenue trends are flat or negative, while many forecasters are still too optimistic,” Nordstrom, chief executive officer of Stockholm-based Northstream AB, said in an interview in London. “The industry overall has a very hard time accepting that basic fact.”

Vodafone Group Plc, one of a just a few truly global carriers, on Tuesday reported a first-half sales decline of 3.9 percent. Second-quarter earnings margins were boosted by “good cost control and efficiencies,” according analysts at Raymond James. With its large geographic operational reach, Vodafone is a good bellwether for the industry, according to Nordstrom.

Nokia slid 3.8 percent on Tuesday after forecasting profitability that raised doubts among some analysts about its ability to raise long-term margins. The Finnish company and Ericsson from neighboring Sweden are locked in a three-way battle with Huawei Technologies Co. for dwindling carrier spending as large investments in the U.S. and China in fourth-generation wireless gear are mostly done. Rajeev Suri, Nokia’s CEO, touted investments in 5G as the company’s next big opportunity, but Nordstrom says those hopes may be unfounded.

“I can’t see 5G as a savior, something to bring an enormous boost to revenues,” Nordstrom said. “It doesn’t approach the revenue boost the industry got when it migrated from 3G to 4G.”

Nokia’s network business is likely to deliver “flat-ish” earnings next year, Bank of America Merrill Lynch analysts said in a note to clients Tuesday as they downgraded the stock to neutral from buy. The company’s investor day wasn’t the “positive catalyst that we were hoping for,” the analysts said. Nokia may struggle to improve network margins much above 10 percent, they said, in contrast to the company’s own long-term target of 10 percent to 15 percent.

“We’re an industry that has been very, very profitable,” Nordstrom said. “Our habits, our behavior, our big conferences, everything is on a high cost level. We need to find a new lower cost structure for the industry.”

As cost discipline intensifies, vendors may find a safety valve of sorts in easing pricing pressure, as operators could become concerned about diminishing options through further consolidation in the vendor market, according to Nordstrom.

“I wouldn’t rule out that the next wave of mergers can be between IT and telecom companies,” Nordstrom said. “When you look at IBM, HP, Cisco -- they are facing at large the same challenges the telecom vendors do. It might be that they seek further scale by merging. I’m not sure it will solve any problems, but it might happen anyway.”

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