Nokia's share price fell by almost 25% at one point today – the biggest daily decline since at least 1991 – after the Finnish telecommunications equipment provider announced a sudden and acute shrinkage of profits in the last quarter. As profits surged through 2020, Nokia said it would set the dividend over the next six months.
At the time of writing, Nokia's shares were down 20% on the day and hit a six-year low.
to blame? 5G, for one.
Creating fancy new equipment for 5G installations is expensive, CEO Rajeev Suri said in published comments (pdf). He also cited problems in raising prices – especially in China, where sales have fallen – and the cost of absorbing Alcatel-Lucent, the French telecommunications giant Nokia bought in 2016.
The beginnings of 5G – as this latest generation of wireless technology Mobile networks are known – should be a bonanza for Nokia. What gives?
Nokia's challenges with 5G and Alcatel-Lucent are telling, as is the crater of the network's R&D, which fell 7% against the same quarter a year ago. The struggles embrace the internal disproportion to the company's oligopoly and innovation.
Although it is difficult to tell from the glum revenue, Nokia is literally dominating the telecommunications equipment market. It has only two major competitors: Stockholm-based Ericsson, and Huawei, which is headquartered in Shenzhen.
Remember that Huawei sells the equipment for much cheaper. And to gain market shares, Ericsson has also discounted too late.
Unlike Ericsson, Nokia boasts an end-to-end package of equipment and services. And, of course, Huawei has been sidelined from many important markets by authorities suspicious of possible ties to the Chinese government, and turned off by US policy that threatens to block the use of US technology as components of its systems.
Scale, captive customers, minimal competition – it should be a recipe for profits galore.
Dominance, however, is ultimately a curse. The dynamics that at first ensure easy market share and steady income make it difficult in the end to remain profitable.
The telecommunications equipment industry illustrates this well. The oligopolistic structure – reinforced by how standardization bodies regulate licenses – takes pressure from suppliers to invest in expanding their technology base to compete. This is useful since, after all, innovation is incredibly expensive and risky.
Regardless of the short term. Because technological advances often make things cheaper to produce – and therefore more appealing to customers, who in Nokia's case are telecommunications operators – it is ultimately unwise to investigate investments.
Of course, Nokia and its two main rivals have invested heavily in spiffy new 5G network technology, developing radically new and innovative network architecture that replaces hardware with software. But equipment is still so expensive that it threatens the telecom operators' already strained profitability, leaving them dependent on a single supplier (which can pose security, as well as commercial, risk). It is likely why 5G development has gone slower than expected.
It is not the case that equipment suppliers are lazy or stingy; rather, the nature of the business means that they are stuck and spend a lot in unproductive ways.
Decades of consolidating what is to be a globalized supply chain make it difficult for the telecom industry to dispose of old technologies. Basically, the whole world still runs over older generations – 4G, 3G and even 2G. Telephone companies can not only dive consumers, or turn them into buying more fancy smartphones.
That means Nokia and others can't leave them either. Because they are the only remaining infrastructure providers in the world to support older networks, providers must continue to invest in upgrading the old networks, even though the technology is outdated and these businesses are ultimately dead ends. All of these costs are money that is not being spent on developing new, more efficient technologies.
The competitive pressure that hit Nokia's latest earnings should ease by 2021, Suri said. But it is unlikely to lift completely in the longer term. Already, operators are operating to diversify the vendor base away from the vendor oligopoly, utilizing the "software ization" of new network architecture to collaborate with smaller suppliers. Nokia's peculiar strategy of leveraging its end-to-end offer by selling directly to businesses – a division that grew 30% last year – could help isolate it from increased supplier competition. It can also create another base of old customers to stay happy.