According to Bloomberg, Ericsson secured a $14 billion contract to upgrade AT&T's wireless network. The deal involves building an open network, allowing AT&T to choose from various vendors for its antennas and infrastructure. It is described as a "strategic industry shift" to break away from a single-vendor relationship. The funds will be paid over five years, focusing on enhancing AT&T's infrastructure for 5G technology. Nokia, holding one-third of shares, will delay its plan to reach double-digit operating margins by two years, as shares tumbled at 5.9% after losing the bid. Nokia holds one-third of Stockholm trading, while Ericson's rose 6.1%, supplying two-thirds of the AT&T network.
Ericsson's decision to adopt open radio access network (RAN) technology is paying off with a lucrative contract from AT&T, potentially valued at nearly $14 billion over five years. This victory over Nokia could address Ericson's concerns about slow sales. However, the deal's multi-vendor aspect may pressure profit margins.
Open RAN (ORAN)
Open RAN (ORAN) offers significant cost reductions for telecom operators using cloud-based software and equipment from various suppliers. Although this approach might not be mutually compatible with proprietary equipment from particular companies such as Ericsson, Huawei, and Nokia, this technology has not been widely adopted despite the experiments of telecom providers such as Telefonica and Vodafone. New networks established by Dish and Japan's Rakuten are already using Open RAN.
AT&T has spent six months analyzing Open RAN with a team of hundreds, considering various vendors and proposals. Chris Sambar, AT&T's Executive Vice President of Network, mentioned that all new equipment they deploy will be capable of Open RAN. The spending by AT&T on this could reach around $14 billion over the five-year duration of the contract with Ericsson.
Nokia Losing Bid
Securing the Open RAN deal will position Ericsson as AT&T's largest supplier, gradually taking over Nokia's share. Nokia anticipates a decline in revenue from AT&T, which currently contributes 5-8% to its mobile networks unit, over the next 2-3 years. While Nokia expects the team to remain profitable, achieving a double-digit operating margin may be delayed by up to 2 years. Despite losing the contract, Nokia will still have sales to AT&T in other areas, maintaining a connection, as noted by Mads Lindegaard Rosendal, an analyst at Danske Bank Credit Research.
The contract highlights the contrasting situations in an industry facing low returns and a telecom sector hesitant to invest significantly in its networks. Nokia's shares fell to 7.9%, following a 6.5% decline on Monday, while Ericsson's rose by 5.6%. Both companies vied for an AT&T contract for an open radio access network, a more cloud-friendly and flexible solution than the previous integrated ones. AT&T's investment aligns with a global decline in 5G spending among telecom operators.
Western interest in OpenRAN grew as governments banned Huawei Technologies Co, aiming to foster a more competitive mobile technology ecosystem beyond Scandinavian firms. Ericsson's role in the shift to OpenRAN reflects its market-leading technology, noted Cevian Capital AB's Christer Gardell, emphasizing its importance for long-term growth.
Nokia's Final Comment On AT&T
Nokia's CEO, Pekka Lundmark, found AT&T's decision disappointing, given that AT&T contributed 5% to 8% of Nokia's Mobile Networks net sales this year. AT&T's move to OpenRAN provides flexibility in the network, allowing for more creativity, according to Chris Sambar, AT&T Network's executive vice president. US officials say embracing multiple suppliers enhances flexibility, reduces costs, and avoids dependence on non-US vendors flagged as security risks, such as Huawei. AT&T, the third-largest mobile provider in the US, anticipates benefits like lower-power, sustainable networks with higher performance from the new network.
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