Nokia Has Multiple Avenues To Profit From 5G

 11:04 AM ET 9/4/18 | TREFIS

Wireless behemoth Nokia (NYSE:NOK) is betting on next-generation 5G technology to drive growth, after posting mixed results over the last few years amid intense competition from Chinese equipment manufacturers and weaker infrastructure spending by telecom companies. Although 5G investments are not expected to match investments in the peak of the 4G cycle in the near term, the uptake of the technology is likely to remain crucial to the industry over the long run. Below we take a look at how Nokia is poised to benefit from 5G going forward.

Our interactive dashboard on what Nokia's outlook is like details our expectations for the company over the next two years.

Upswing In Networks Spending

Operators across the world have been outlining plans for their 5G upgrades, with U.S. carriers planning for commercial deployments of the technology as early as the end of this year, Other regions including South Korea, China, Japan and the Middle East are expected to commence their build-outs from 2019. Market research firm the Dell'Oro Group has projected that the radio access network (RAN) market will post a positive five-year compound annual growth rate (CAGR), marking the first time it has forecast an increase in the metric over the last seven years. Scoring early wins is crucial for equipment providers, as the technology is expected to have a relatively long life cycle, and Nokia has been executing fairly well in this front. For instance, the company bagged a $3.5 billion deal with T-Mobile to provide end-to-end 5G solutions including technology, software and services. Moreover, being a European company, it could also have a leg up over Chinese players such as Huawei and ZTE, which face regulatory hurdles in Western markets amid fears that they could give backdoor access to the Chinese government. For instance, there have been reports that Huawei could be banned from supplying equipment for Australia's 5G buildout.

Licensing And Services Business Should Also See Improvements

Besides core RAN sales, the company is also likely to have other avenues to bolster its profitability via 5G. Firstly, licensing could be a meaningful revenue driver, as Nokia holds a significant amount of IP related to 5G technology (as do Ericsson, Huawei and Qualcomm). Nokia has indicated that it would charge a maximum of 3 euros (about $3.50) per handset in royalties for 5G phones. Separately, there is a possibility that 5G could help transform the Services businesses, which has traditionally been a relatively high revenue, low-margin play due to the high manpower costs involved. Over the first half of this year, global services accounted for 29% of Nokia's total network division sales at about EUR 2.57 billion (about $3 billion), although operating margins barely broke even. With 5G, it's possible that the faster network speeds coupled with advances in software could allow companies to better manage networks remotely, without having to send an engineer on site.