Telecom equipment makers were once giants, today they often seem like afterthoughts. Last week both Nokia and Ericsson reported earnings , and investors were unimpressed with the stocks down ~10% in the aftermath. The fall off in their results is largely cyclical driven by the a big slowdown in telecom operators’ buying of 5G gear. The 5G buildout is largely complete in most markets, at least in terms of the big upfront capex spending which drives the equipment vendors’ results, but we cannot remember the last time either company reported anything to excite investors. Both companies face a bigger problem.

Zoom out to a five year look at their stocks and that problem becomes more apparent.

Ericsson had a bit of a run up in the heat of the pandemic 5G capex spend when operators actually pulled forward investment because the lockdowns allowed them easier access to many sites (i.e. no one in the office to complain about the construction noise on the roof). But other than that brief spurt, both companies have underperformed noticeably.

We chose a 5 year time horizon because that coincides with the US restrictions on Huawei, their most formidable competitor. If these companies could not outperform when their largest competitor was on its knees, how capable can they actually be?

Both companies face a severe identity crisis. In the 1990’s telecom Bubble they were a major force in building the Internet and then making that Internet mobile. But then the Internet took over everything, greatly reducing the need for the special-purpose networking gear the companies produce. This trend has worsened as spending on the ‘Cloud’ came to dominate technology capex. Note on the chart above that Cisco and Juniper, with their much more diversified customer bases have fared much better, or at least as not so bad. Not shown is Arista, with their deep exposure to data center builds, so their stock performance is literally off the chart.

Put simply, Ericsson and Nokia make equipment for a very special set of customers, the mobile operators, and while those customers still need what the companies offer, pretty much no one else does. Both companies have tried strategies to diversify this – partnering with the Internet giants, partnering with Cisco, partnering with integrators to go after the enterprise, building their own clouds, helping others build clouds, and a few more. Some of these strategies were just poorly thought out or implemented, see Ericsson’s recent write down of its $6.2 billion acquisition of Vonage. Other strategies never had a chance to be proven out, abandoned after a change in executive management which happened enough at both companies to induce vertigo among partners and customers.

At this stage, there are no easy solutions. The market is so concentrated between the two of them (even with Huawei now seemingly waking up) that a merger between the two would be blocked by regulators. Investors at both firms will be reluctant to sign on to some new strategy after so many others have been tried. True believers in the cult of shareholder value would argue that the companies should just buckle down and focus solely on their core competencies in mobile gear. This is probably the least bad idea out there. It comes with the drawback that both companies will essentially give up on growth until 6G which is many years away. Prune everything not directly related to serving telecom operators, take those savings and invest on R&D around telecom software, further entrench themselves on the service side, improve their licensing (both of software and IP). Taken all together, with a healthy dose of concentrated execution, and this might at least allow the companies to someday contemplate a return to growth. The benefit of this approach is that we have seen it already – this is essentially what Cisco has become – a software and service company built on top of hardware. This is not an easy path, but it is achievable and looks better than any other alliterative.