Is Nokia's 5G overrated?

As the dominant player in the cell phone industry back then, it has been seen as a mobile provider compared to Ericsson and Huawei after transforming into the 5...

Dec 24,2020 | SHELLEY

As the dominant player in the cell phone industry back then, it has been seen as a mobile provider compared to Ericsson and Huawei after transforming into the 5G field. However, after several years without much growth, the demand for 5G, although strong, always seems to lack a core support competitiveness.

After the third quarter earnings announcement, Nokia announced a new strategy to change its operating model. At first glance, Nokia seems to understand that investing in growth areas in the current state of restructuring is not an easy task.

This is because Nokia is focusing on investing in 5G networks and systems, but customers are not paying higher prices for equipment and services in the process. Nokia and 5G service providers need to convince mobile users to actually pay more for faster speeds and higher data consumption, but nothing is happening within the constraints of the current business model.

So, as Nokia fights for the 5G business, which seems to be seeing the light of day, it has encountered a problem in this area of user fees. After all, relying on customers will only transfer greater risks under their own door, which is not the kind of "responsibility" a giant company should have.

After the third quarter results were announced, the new CEO said: "The financial performance in 2021 is expected to be more challenging and Nokia needs to make more changes. Nokia will further increase investment in R&D to ensure its leadership in 5G."

According to the author's inquiry, the second quarter earnings report had discussed significant cost cuts. After the third quarter earnings report, Nokia plans to increase its investment layout in 5G, a decision made only after losing a major contract with Verizon worth $6.6 billion. So, from 2021 onwards, we could again see a situation where Nokia spends a lot but may gain almost nothing.

In this case, Nokia has reduced its operating margin target for 2021 from 1 point up or down from 9% in 2020 to about 7% now. So, in essence, operating margins could drop from about 8% this year to 7% next year. Although it is only a one-point fluctuation, it will have a profound impact on the market and on the company.

So the long-term goal of achieving a profit margin of 12% to 14% within a few years, which had been set earlier, will be postponed for at least two more years. Of course, this is still the case when the company's performance, such as more than expected performance.

According to another market survey, U.S. consumers do not want higher Internet speeds, and cable companies and ISPs are already investing in laying out 1G+ Internet speeds, but the average consumer is still using even 200M speeds. Is Nokia's 5G overrated?

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