TBR Perspective: Nokia’s Fixed Networks Business Unit

Nokia is the largest vendor of fixed network access infrastructure by revenue in the Western economic bloc, a position of strength that exposes the vendor to a range of opportunities that arise in the market. While Nokia remains focused on its fiber-based platform, the vendor is also supporting fixed-wireless access (FWA), which is a rapidly growing service offering in the telecom industry.
Though revenue in Nokia’s Fixed Networks business unit has been uneven over the past few years (primarily due to the disruptions caused by the COVID-19 pandemic), the unit is poised to be one of the biggest beneficiaries of government-supported broadband programs and ongoing internet service provider (ISP) investment in high-speed broadband access technologies, driving a positive revenue trend over at least the next three to five years.
 
Nokia is focused on expanding access to broadband (through fiber and/or FWA) and introducing a future-proof platform for ISPs to build upon. The company is trying to be everything to everyone in this domain by providing a near complete portfolio (only DOCSIS is missing).
 
Despite Nokia’s favorable market position and government-induced tailwinds for the broadband infrastructure domain, TBR notes that the supply-and-demand dynamics as well as the timing of investments are prone to be disjointed, lengthening the time required to meet infrastructure deployment objectives compared to what was originally expected by the government and the telecom industry.
 
Additionally, TBR remains steadfast in its belief that building fiber out to every household is not economically feasible (despite what the government and stakeholders in the market say they want) and that alternative broadband access technologies (such as FWA and satellite) are going to increase in the global mix to connect the unconnected and underserved peoples of the world.

Impact and Opportunities for Nokia

BEAD Program Will Likely Stretch to the Mid-2030s due to Challenges and Delays

Broadband Equity, Access, and Deployment (BEAD) Program-supported projects are now slated to begin deployments in 2025, more than a year later than originally planned. There is a long list of reasons (most of which are related to mapping integrity and political processes) why the program has been delayed thus far, and there is a growing list of reasons that suggest it will take longer for the program to fully ramp up and complete its objective (i.e., spend all of the $42.5 billion allocated to the program).
Among the biggest challenges that lie ahead for the BEAD Program is a shortage of skilled labor (e.g., fiber splicers and trenching machine operators) and industrial equipment, such as boring machines, that will be required to deploy fiber to an estimated 5.5 million households across the U.S. Shortages of products that meet the Build America Buy America (BABA) requirements associated with the BEAD Program could also cause a timing and supply issue.
 
Taken together, TBR now believes the deployments tied to the BEAD Program will begin next year and it could take as long as the mid-2030s for all the program’s funding to be disbursed, more than five years longer than the government and market ecosystem originally anticipated. Nokia is doing as much as it can to mitigate and alleviate these potential challenges in the market.
 
For example, Nokia is proactively educating stakeholders in the ecosystem and working with its partners to better match supply with demand for products and resources. This orchestration of the ecosystem will help align stakeholders and enable the industry to put its best foot forward in carrying out this infrastructure build-out program as well as position Nokia to maintain and grow its leading share in the broadband infrastructure market.

Do Not Forget About Non-BEAD Government Programs for Broadband

Though the telecom industry likes to focus on the BEAD Program (likely because it is the largest program by dollar amount in the broadband ecosystem in the U.S. market), there are a variety of other government-supported programs that also deal with broadband, including the American Rescue Plan Act (ARPA), the Rural Digital Opportunity Fund (RDOF), the U.S. Department of the Treasury’s Capital Projects Fund, the Tribal Broadband Connectivity Program, and the U.S. Department of Agriculture’s ReConnect Loan and Grant Program.
 
In aggregate, TBR estimates there is more than $80 billion in direct and indirect government stimulus allocated for broadband-related projects in the U.S. market alone, all of which is slated to be spent by the mid-2030s. There are also a few hundred billion dollars in aggregate in similar broadband-implicated programs in other regions, most notably in China, the European Union, the U.K. and Australia.

Fiber Access Technology Capabilities Exceed Usability, Creating a Conundrum for Vendors

Technological innovations pertaining to fiber access have become so advanced and the bandwidth available through fiber access so massive that the capabilities of the technology far exceed what most end customers could possibly need or use. This disconnect creates a conundrum for vendors such as Nokia that supply the broadband infrastructure market.
 
Though fiber broadband infrastructure is, and will remain, in high demand, most ISPs will be loath to adopt the most cutting-edge technologies because they far exceed what customers would need and put unnecessary additional cost burden on the operator.
 
There are exceptions, such as what Google Fiber and Frontier Communications are deploying (specifically 50G and 100G connections, respectively), but TBR believes most ISPs will focus on 10G or lower connections, which is more than enough bandwidth for the vast majority of households and businesses and are likely to be future-proof for many years to come.

Overbuilding and One-upmanship Risks New Price War for High-speed Internet Service

The government funding boost, coupled with technological advancements and new entrants into the ISP domain, is creating a situation that is ripe for a price war for broadband services. Specifically, many more markets across the U.S. are likely to have three or more (in some cases up to seven) providers of high-speed broadband service in a given area, including xDSL, FTTx, HFC (via DOCSIS) as well as FWA and satellite (mostly delivered via low Earth orbit [LEO] satellites).
 
Given that a provider typically needs to have more than 30% market share in a given area to achieve profitability in the broadband services market, an increasing number of options puts more power into the hands of end users, which historically suggests the pricing environment will be extremely competitive.
 
In response to the hotter competitive environment, providers that are multiservice-oriented are trying to attract and lock in market share by offering converged (aka bundled) solutions, usually giving end users a discount as an incentive to sign up and stay.
 
Additionally, TBR notes that ISPs are increasingly engaging in one-upmanship (which is also a symptom of the existence of too many options in a given market), meaning ISPs are marketing ever higher broadband speeds to customers to position their offerings as better than the competition while attempting to incrementally increase average revenue per user.
 
Though this strategy has been effective in years past, it is likely to lose efficacy after speeds surpass the level at which the benefits of faster speeds become imperceptible to end users. Therefore, in aggregate, TBR expects the pricing environment in the U.S. for broadband service to be increasingly competitive through at least the remainder of this decade.

Private Equity Comes into the Fixed Broadband Market

Private equity firms are entering the telecom infrastructure market in a big way, gobbling up assets and forging joint ventures with telcos that want to (or need to) raise capital and hedge their risks. Some private equity-sponsored entities are also now building out their own greenfield fiber-based networks (such as Brookfield Infrastructure Partners’ Intrepid Fiber Networks) and are even moving the market toward wholesale, shared and other forms of open-access models.
 
Though the inclusion of private equity into the broadband infrastructure domain is bringing large pools of fresh capital into the market, this trend also risks fueling overinvestment, price compression and disruption of incumbent ISPs’ business models. Regardless, expect private equity to remain attracted to assets that offer consistent cash flow over a long duration, and their inclusion in the telecom ecosystem is likely a net positive for overall market development and evolution.

Existing Government Stimulus May Still Not be Enough for FTTP; Alternatives Will Likely be Called on at Scale to Fill in the Gaps

Though governments (and most of the stakeholders in the telecom ecosystem) across the world want full fiber to each premises, this is still not economically feasible. For example, it is not uncommon for some locations in the U.S. to cost upward of $1 million per premise to connect with fiber, a price that will be politically difficult to justify and that is not supported by normal market conditions. In these extreme situations, it is highly likely that governments will allow and embrace alternatives, such as FWA and satellite-based connectivity.
 
TBR notes that FWA and LEO constellations can easily deliver sustained speeds in excess of 100Mbps at a fraction of what it would cost to deploy fiber to the premises (FTTP). With that said, of the estimated 5.5 million households that the government has identified as needing broadband connection in the U.S., TBR would not be surprised if up to 25% of that number of households is ultimately connected via FWA or satellite (enhancements to DOCSIS and xDSL are also potential options to close the underserved gap). In other countries, that percentage could be even higher.

New Business Models Hold Promise to Connect Low-income Households in Emerging Markets

Upstart ISPs, such as fibertime and Vulacoin in South Africa, have established innovative solutions to cost-effectively provide high-speed broadband services to low-income areas. The architecture of the network emphasizes leveraging FWA and Wi-Fi with a relatively low amount of fiber and the business model is focused on selling units of time (in minutes), which is more affordable for lower-income end users.
 
TBR notes this model requires scale and high time of use to achieve profitability, meaning it is best suited for dense areas, especially impoverished neighborhoods. TBR also notes that obtaining access to high-speed internet is a key avenue in which areas can strengthen their local economies and help reduce levels of poverty.
 
In addition to South Africa, Brazil is also exploring the use of this model. This approach is also likely to be leveraged in other parts of Africa as well as in parts of India and Southeast Asia.

Conclusion

Government and private equity involvement in the broadband market may prove to be a mixed blessing. Though there are concerning indicators suggesting there are too many broadband providers in some key markets (especially the U.S.) and that broadband access businesses are becoming overvalued, these market dynamics actually represent tailwinds for Nokia, which is best positioned to garner a disproportionate amount of investment slated for broadband infrastructure in the Western economic bloc, which includes North America, Europe, developed APAC and select developing markets such as India.
 
Nokia’s outsized and unique position in the broadband infrastructure ecosystem enables the company to play a key role in orchestrating partners and customers to achieve their objectives in the most optimal way possible. Fiber will remain the coveted access medium for high-speed broadband, but the world will also employ other broadband access mediums to a large extent.
 
New ISP and hyperscaler business models, coupled with sustained investments by incumbent ISPs and supported by government stimulus, create an environment ripe for moving the world closer to full broadband coverage for all people.

GenAI requires massive investment now for a chance at massive long-term returns

For most new technologies and trends in the IT space, actual business momentum and revenue generation typically take years to develop. In fact, in many cases, particularly with new technologies available to consumers, monetization may never develop, as the expectation of free trials or advertising-led revenue streams never leads to sustainable business models.

 

The history around monetizing new technologies is what makes the rise of generative AI (GenAI) over the past 18 months so notable. In such a short period of time, we have tangible evidence from some of the largest IT vendors that billions of dollars in revenue have already been generated in the space, with the expectation that even more opportunity will develop in the coming years.

 

AI and GenAI revenue streams have not come without investment, however, as the infrastructure required to enable the new technology has been significant. The three major hyperscale cloud providers have borne the brunt of this required investment, outlaying billions of dollars to build out data centers, upgrade networking and install high-performance GPU-based servers. Amazon Web Services (AWS), Microsoft, Google and other cloud platform providers were already spending tens of billions annually to maintain and expand their cloud service offerings, and GenAI adds significantly to that investment burden.

 

The early revenue growth resulting from GenAI offerings has been promising, but put in the context of the increased investment required, it becomes clear that the business impacts of the technology will play out over an extended time period. Most public companies execute quarterly, plan annually and, as a stretch, project their expectations out over three to five years.
 
The impact of GenAI extends even further, as Microsoft CFO Amy Hood stated on the company’s fiscal 4Q24 earnings call: “Cloud and AI-related spend represents nearly all of our total capital expenditures. Within that, roughly half is for infrastructure needs where we continue to build and lease data centers that will support monetization over the next 15 years and beyond.” That means not only that Microsoft spent $19 billion on capital expenditures during a single quarter to support cloud and AI but also that the time horizon for the returns on that investment stretches beyond a decade.

 

Microsoft is, in this way, representative of all cloud platform peers, investing huge sums of capital expenditures now to realize modest new streams of revenue in the short term and anticipating significant revenue opportunity over the next 20 years.

AI-related revenue is already considerable, with growth expected to persist

TBR estimates the four leading cloud platform vendors generated more than $12 billion in revenue from AI and GenAI services in 2023, which is in and of itself a sizable market. On top of that, we expect revenue from those four vendors to increase by 71% during 2024.

 

Below are examples from some of the largest monetizers of GenAI so far, with estimates on the current size of their respective businesses and the strategies they use. A market of that scale and growth trajectory is notable in an IT environment where much more modest growth is the norm. While we expect growth to gradually slow and normalize over the coming years, the AI and GenAI markets remain attractive nonetheless. Insights follow about how some of the current leaders in this space are monetizing.

 

Microsoft (estimated $1 0 billion in GenAI revenue annually): While Microsoft did not quite meet Wall Street’s lofty expectations for AI-related revenue growth, the company posted a solid quarter in 2Q24. In TBR’s opinion, Microsoft’s GenAI strategy is on the right track, and its financial results align closely with our expectations. In 2Q24 Azure AI services contributed 8% of Azure’s 29% year-to-year growth, while Copilot was cited as a growth driver for Office 365.

 

Nevertheless, with Office 365 revenue growth decelerating compared to past quarters, it is clear the monetization of GenAI will take time to materialize. Still, given Microsoft’s current capex spend and capex forecast, the company is committed to its AI strategy. Management stated nearly all $19 billion of capital expenditures this quarter was focused on the cloud business, with roughly half going toward data center construction and the other half used to procure infrastructure components like GPUs.

 

This hefty commitment indicates that GenAI will remain at the forefront of Microsoft’s product development, go-to-market and partner strategies for years to come as the company looks to turn an early lead into an established position atop the AI and GenAI market.

 

AWS (estimated $2.5 billion in GenAI revenue annually): During AWS’ New York City Summit event in July, Matt Wood, the company’s VP of AI Products, noted that GenAI had already become a multibillion-dollar business for the company. Amazon CEO Andy Jassy has also spoken confidently about the future of AI, publicly proclaiming the company’s belief that GenAI would grow to generate tens of billions in revenue in the coming years.

 

The fact that AWS has been playing in AI infrastructure, with custom chip lines for both training and inference, well before the GenAI hype cycle is notable. Customers are not likely to go through the daunting task of moving off industry standard hardware, so these custom offerings can still be a more cost-effective source for net-new workloads, which is one of the reasons they signify a lot of potential for GenAI.

 

AWS’ custom offerings, coupled with tools that customers use to build and fine-tune models, such as Bedrock and SageMaker, will continue to spin the EC2 meter. AWS does have other GenAI monetization plans with a two-tiered pricing model for Amazon Q Business and Q Developer. However, it is still early days for these offerings, and Microsoft Copilot entering the mix, at least from the line-of-business (LOB) perspective, clearly indicates AWS faces an uphill battle.

 

Google Cloud (estimated $2 billion in GenAI revenue annually): Unlike some of its peers in the industry, Alphabet has not clearly quantified the impact that GenAI is having on Google Cloud’s top line. However, on Alphabet’s recent earnings call, executives said that GenAI solutions have generated billions of dollars year to date and are used by “the majority” of Google Cloud’s top 100 customers.

 

These results, coupled with a 40-basis-point acceleration in Google Cloud’s 2Q24 revenue growth rate, to 28.8%, signal that while GenAI is having an impact on Google Cloud Platform (GCP) revenue growth, it is very early days. Steps Google Cloud is taking to boost developer mindshare — with over 2 million developers using its GenAI solutions — and align with global systems integrator (GSI) partners to unlock new use cases, leave us confident Google Cloud can more aggressively vie for GenAI spend through 2025.

 

ServiceNow (less than $100 million in GenAI revenue annually): With Now Assist net-new annual contract value (NNACV) doubling from last quarter, ServiceNow’s steady momentum selling GenAI to the enterprise continues. Now Assist was included in 11 deals over $1 million in annual contract value (ACV) in 2Q24, showing positive early signs that the strategy of packaging premium digital workflow products based on domain-specific large language models (LLMs) is resonating.

 

At 45%, ServiceNow’s Pro SKU penetration rate, which represents the percentage of customer accounts on Pro or Enterprise editions of IT Service Management (ITSM), HR Service Delivery (HRSD) and CSM products, is already very strong. Upgrading these already premium customers to Pro Plus SKUs with GenAI, for which ServiceNow has already realized a 30% price uplift, could signify an opportunity for ServiceNow valued at well over $1 billion. Naturally, a big focus is expanding the availability of Pro Plus outside the core workflow products.

 

IBM (less than $2 billion in GenAI revenue annually): Approximately 75% of IBM’s reported $2 billion in GenAI book of business to date stems from services signings, and IBM lands nearly all watsonx deals thorough Consulting. Companies need help getting started with GenAI in the cloud, and IBM’s ability to lead with Consulting and go to market as both a technology and consulting organization will continue to prove unique in the GenAI wave.

 

On the software side, overcoming challenges with the Watson brand and deciding how much it wants to compete with peers have been obstacles, but IBM is now strategically pivoting around the middleware layer, hoping to act as a GenAI orchestrator that helps customers build and run AI models in a hybrid fashion. This pivot has resulted in a series of close-to-the-box investments, including Red Hat’s InstructLab project, which allows customers to fine-tune and customize Granite models, and IBM Concert for application management.

 

According to IBM, these types of GenAI assets have contributed roughly $0.5 billion to IBM’s AI book of business. By adopting a strategy to embed its AI infrastructure software into the cloud ecosystem of GenAI tools and copilots already widely accepted by customers, IBM ensures it stays relevant with these cutting-edge workloads.

 

Oracle (less than $100 million in GenAI revenue annually): With the Oracle Cloud Infrastructure (OCI) GenAI Service hitting general availability in January and a code assist tool only recently launched into preview, Oracle has been late to the GenAI game. But the company has highlighted several multibillion-dollar contracts for AI training on OCI, which speaks to its tight relationship with NVIDIA and ample supply of GPUs.

 

As an API-based service providing out-of-the-box access to LLMs for generic use cases, the OCI GenAI Service on its own does not necessarily differ from what other hyperscalers are doing. What does stand out is that Oracle offers the entire SaaS suite. Given that all Fusion SaaS instances are hosted on OCI, where the GenAI service was built, Oracle can deliver GenAI capabilities to SaaS customers at no added cost.

 

This means Oracle’s GenAI monetization will be purely from an infrastructure perspective. GPU supply and the cost efficacy of OCI will help Oracle bring new workloads into the pipeline, and we will see a bigger impact to growth in 2025. For context, Oracle’s remaining performance obligations balance (though some includes Cerner) is $98 billion.
 

Dive Into the Future of GenAI with TBR Analysts Patrick Heffernan, Bozhidar Hristov and Kelly Lesiczka

Beyond revenue generation, cost savings is part of the value proposition for cloud vendors and customers alike

Many of the leading IT vendors’ GenAI strategies have centered on investing in solutions for customers. However, vendors have also been serving as customer zero for the technology by implementing it internally. The results from their early implementations seem very much like end-customer use cases, which focus on cost savings and efficiency as the easiest benefits to realize. While many IT vendors have seen operating expenses and headcount level off over the past couple of quarters, implying that AI has had some impact on company efficiency, IBM and SAP have both explicitly stated AI’s impact on their operating models.

 

IBM was one of the earliest vocal proponents for the labor-saving benefits AI could bring to its business. In mid-2023 CEO Arvind Krishna announced a hiring freeze and shared an expectation that AI would replace 8,000 jobs. IBM remains focused on driving productivity gains, which it is largely doing by lowering the internal cost of IT and rebalancing the global workforce. This includes using AI to automate back-office functions. Such efforts have IBM on track to deliver a minimum of $3 billion in annual run-rate savings by the end of 2024.

 

Meanwhile, SAP’s decision to increase its planned FTE reallocation from a previous target of 8,000 to a new range of between 9,000 and 10,000 FTEs shows the company is committed to improving operating efficiency. While the bulk of the restructuring will consist of reallocating FTEs into lower-cost geographies and strategically important business units, taking a customer-zero approach with GenAI is also a component. SAP is leveraging business AI tools focused on areas like finance & accounting and human resources to reduce the labor intensity within the respective business units.

Just like end customers, vendors are investing significantly now in hopes of generating long-term GenAI returns

As seen in TBR’s Cloud Customer Research streams, customers have been investing in GenAI solutions with some haste, forgoing clear ROI measurements or typical budgeting procedures. Customers, as well as the major vendors we cover, have a sense of urgency around GenAI and share the feeling that if they do not embrace these new solutions now, it could place them at a long-term competitive disadvantage. If customers are not making full use of GenAI capabilities, their competitors will be more efficient and productive and capture more growth opportunities. For vendors, the ability to not only deliver GenAI capabilities but also do so at scale will be a competitive necessity for decades to come.

 

In this regard, customers and vendors find themselves in a similar situation, investing in GenAI now just for the possibility of a future advantage, but the scale of investments required are quite different. Customers have the good fortune of leveraging scalable, subscription-based services for many of these GenAI technologies. Customers are still extending their IT budgets and paying more to incorporate GenAI, but they do not have large fixed costs and long-term commitments at this point.

 

Vendors, on the other hand, need to make significant investments, even beyond the already huge levels of investment to support cloud services, to capitalize on the GenAI opportunity. The scale of investment cannot be understated for the largest cloud platform providers like AWS, Microsoft, Google and Oracle. All of these vendors were already investing tens of billions of dollars annually to support data center and infrastructure build-outs.

 

The unique data center and infrastructure requirements to deliver GenAI solutions, including the GPU-based systems, are driving double-digit to triple-digit increases in capex spending for leading vendors. Not only is the level of spending noticeable, the time periods for the returns are also lengthy. In communicating those increased expenses to investors and Wall Street analysts, vendors like Microsoft messaged the returns from these investments playing out over the next 15 years, a time horizon seldom mentioned previously.