At the end of August Nokia dismissed rumours of an imminent 10 billion dollar sale of its Mobile Networks division to Samsung. Analysts nevertheless doubt that this was the last word, as the oligopolistic industry is heading for a profound upheaval – and this is against the backdrop of a current phase of weakness in the traditionally profitable but cyclical core business of mobile network technology. This has hit Nokia shares particularly hard, and they have lost almost a third of their value since their high of 5.63 euros at the end of 2022. There has also been speculation about the departure of CEO Pekka Lundmark.

After growth of 40% to 50% in the years 2017 to 2021, equipment sales for the so-called Radio Access Network (RAN) market have been declining since 2022, because many large telecommunications network operators, especially in the lucrative US market, have completed their initial investment cycle. Market researcher Dell'Oro is forecasting an average annual decline of 2% until 2028, with double-digit percentage declines in the last four quarters. Both Ericsson and Nokia are complaining of „enormously intensified competition“, in which they are at a disadvantage, according to Dell'Oro. Chinese industry leader Huawei has gained global market share despite geopolitical adversities that are slowing the company down in the Western world. In contrast, the two Scandinavian companies have lost a combined 3 to 4 percentage points.

„Market consolidation is an absolutely realistic scenario,“ says Marc Renner, TMT Partner at consulting firm Oliver Wyman, assessing the M&A prospects in the industry. In addition to cyclical fluctuations, established providers are confronted with new competitors as a result of technological change. „Asian companies in particular – and not just from China – are highly agile, very cost-efficient and innovative, partly because they are already further advanced in the use of AI in their internal processes.“

In the oligopoly of telecoms equipment suppliers that have emerged from earlier rounds of consolidation, they have also positioned themselves as full-service providers for telecoms infrastructure. This strategy is associated with very high development costs. "This naturally raises the question for individual companies as to whether they want to invest everywhere, whether they can be at the forefront everywhere, or whether they should focus more and perhaps also separate out areas,“ says Renner.

For Nokia, the question is even more pressing than for its Swedish rival. The Finns were far less able to capitalise on the previous growth cycle in mobile network technology – especially 5G – than Ericsson or Huawei. Over the years, Nokia has simply lacked the financial resources to keep pace technologically. Even after a race to catch up, Nokia is still lagging behind its competitors.

The company has recently felt pressure on sales in almost all areas, but most of all in Mobile Networks, where an operating margin of just 4% to 7% and up to a quarter less revenue are now expected for the year as a whole. In contrast, the Telecom Infrastructure division is developing much better, with a low expected drop in sales and a forecast margin of up to 14.5%. Nokia has also recently strengthened this division through the acquisition of Infinera. Mirko Maier, an analyst at Landesbank Baden-Württemberg, can imagine that a concentration on this business and the separation of mobile phone technology from the company was considered too risky. In the market, which is dominated by US companies such as Cisco and Juniper, „there is a very high pace of innovation, and the expenditure on research and development is enormous“, he notes.

There is a threat in the area of mobile networks that affects all established providers. The so-called Open RAN technology, which for years was more of a wish than a reality for telecoms network operators, is now gaining in importance. Open RAN makes it possible to combine and integrate various components of a mobile network system from different providers, thereby eliminating the fixed combination of hardware and software from a single provider. „Network operators are very interested in this, as they were previously dependent on a single provider when choosing a physical antenna network. Switching was difficult and the basis for negotiating a network upgrade was correspondingly weak,“ explains Renner.

Currently, the share of Open RAN in the networks of telecoms companies is still „less than 10%“, he estimates. However, Oliver Wyman expects it to grow to between 20% and 25% over the next few years. Some estimates go well beyond this. The increasing proportion of software in mobile networks, such as SDN (Software Defined Networking) and NFV (Network Function Virtualisation), which are being used in the wake of 5G, are paving the way for new technology. The global market volume, which was only estimated at 1.6 billion US dollars in 2023, is set to soar to 455 billion US dollars by 2036.

Many new players want a slice of this pie. Samsung, for example, has already established itself as the world's leading provider of Open RAN technology, while Asian companies have also climbed to second and third place. In addition, companies such as Mavenir, Parallel Wireless and Meta-Switch are among the leading newcomers on the scene. In the wake of the growing importance of cloud solutions and edge computing for 5G network expansion and the next generations of mobile technology, Maier points out that „the hyper scalers AWS, Microsoft Azure and Google Cloud are also penetrating the value chain“. This is both a blessing and a curse for the industry. Renner assumes that the established telecoms suppliers will have no choice but to enter into partnerships with the hyperscalers. „However, such alliances are not trivial, even given the financial strength of these partners. It's not a panacea,“ he emphasises.

Overall, the established telecoms equipment providers are unlikely to be able to do everything for their customers themselves in future. Accordingly, further portfolio streamlining, which Ericsson and Nokia have both initiated, is to be expected. At the same time, high pressure to innovate is „keeping the M&A wheel turning“, Maier at LBBW emphasises.