The “Strategy Paradox” in a 5G Era—Ericsson, Huawei, and Nokia Must Embrace “Options” Now to Have Options in the Future

The commercial prospects of high-tech telecoms strategy, value chains, and pertinent business economics (transactional or transitional) rest on an underlying pivot: the strategy paradox. If there is a single phrase that encompasses how the variety of strategic and commercial imperatives play out in the market, it is the elimination of strategic uncertainty. In other words, how infrastructure vendors can pursue new growth initiates by making the right (strategic) commitments today, and, equally importantly, align those commitments with tomorrow’s competitive circumstances. The path to the summit gets even steeper when we consider that decision makers do not know what the circumstances will be because the future is, unsurprisingly, unpredictable.

A strategy discussion around new growth would therefore need to be framed around two strands: one, the realities of the current telecoms marketplace and, two, the telecoms’ competitive dynamics relative to other industries now and in the future. The demand side in telecoms has for some time hit an impenetrable commercial wall. With full market penetration (connections and devices), new growth will be in either the B2B arena or what constitutes an alternative to subscribers. Efforts continue to be made regarding the former, as discussed in a previously published ABI Research Executive Foresight. The latter relies on growth coming from cellular-connected IoT sales. Though promising, the growth opportunity coming from IoT connections targeted at use cases such as autonomous vehicles and smart cities has yet to take off.

Growth stagnation on the demand side has a causal effect on the supply side, for it is sales in the former that fuel innovation and expansion in the latter. This account focuses on the supply side of the industry. More specifically, who will Ericsson, Huawei, Nokia, and ZTE sell to in a time horizon spanning the next 5 to 10 years?

Oftentimes evidence from the past can be a misleading guide to the future, and the only way to accurately see what the future will bring is to use theory. Such theory should revolve around what Ericsson, Huawei, Nokia, and ZTE do best today and what they will need to master in the future in order to excel on the trajectory of improvement that telco (and non-telco) customers define as important tomorrow. Senior executives are well attuned to the process of creating and capturing growth at present. Over a longer time period, typically spanning 10 or 20 years, the task is insurmountable. It is further exacerbated by the fact that the range of new-growth strategies expands proportionally as we lengthen the time horizon under consideration.

Thus far, the growth imperative for vendors has relied on one premise: extreme integration in specific value chains that produce reinforcing feedback loops and outsize profits. For example, on the radio side, Nokia, Ericsson, ZTE, and Huawei have been, and continue to be, providers of whole-stack, integrated RAN solutions. In the OSS/BSS space, Netcracker and Amdocs remain two key players in the market. Analogously, Webscale giants like Google (infrastructure, search, and advertisements), Amazon (wholesaling, distribution, and amazon.com), or even retailers like Walmart (wholesale, distribution, and stores) have benefited immensely from integrations in their own value chains to the point where their positions are arguably impregnable. Unlike Webscale giants, however, disaggregation (commoditization) is already at work in various parts of the telco value chain (e.g., White Boxes, CORD, and, most recently, O-RAN).

Building new businesses with different value chains, or horizontal growth, is one option, but despite the resources or similar technology at hand it remains a very challenging undertaking. Alternatively, there are two other options: one, forward and backward integration into other telecom value chains (Ciena’s acquisition of DonRiver is a case in point), and two, pursue an acquisition. The former is equivalent to capturing market share in the same value chain--telecoms. The latter brings not just new technology, but also a whole (new) business structure that inherently constitutes a foray into different value chains. The challenge, therefore, is how can vendors consciously shape a process that, if not successful, does not cannibalize existing business? The strategy paradox, first introduced by Michael Raynor, proposes the notion of an “options-based strategy” as a viable way to hedge the unhedgeable. An option is a type of a financial derivative that gives its holder the right, but not the obligation, to buy or sell something at a specific price on a specific date. Relative to a “commitment-based strategy,” options offer a lower commitment way to pursue promising growth ventures. Options require less commitment than buying equity outright, yet they generate the exposure to the “upside.”

If the industry is serious about an alternative to current corporate growth, it is ultimately going to need more than current initiatives. We are going to need an alternative source of revenue, and one that may need to extend beyond the telecoms market. Rakuten’s recent investment in Altiostar is a case in point. Rakuten bought options that they can exercise should Altiostar succeed. Alternatively, Rakuten can decide against exercising those options at a very small loss. It appears that Rakuten’s decision is to create a window on the opportunity that Altiostar presents but avoid acquisition premiums by taking only partial equity stakes. In other words, Rakuten is “buying the option” as opposed to “buying the stock.”

Infrastructure vendors should seek to create a bucket of assets that hedge real strategic risk by pursuing an optionlike structure. Attempting to enter new industries would be enormously difficult. An example of a company that successfully resolved the paradox is Microsoft. Broadly speaking, the reason Microsoft has been so successful is that it has followed a single-minded strategy: render Microsoft products the platform for personal and corporate computing. However, the uncertainty over which platform to pursue offers some insight on how the company tackled the paradox. Microsoft successfully pursued multiple options in parallel and only committed to Windows--the source of its current success--when it was clear that it was the winning bet. Specifically, Microsoft’s “options” included its current business at the time (DOS), next-generation business line (Windows), and a piece of other companies’ commercial endeavors. Namely, UNIX, OS/2, and Macintosh from IBM and Apple respectively.

Product differentiation in telecoms used to be about integrated technology stacks that optimized for performance. ABI Research thinks that, going forward, the growth of the future will be determined to a relatively higher degree by intangibles (e.g., software and services). Increasingly vendors’ points of differentiation are being modularized and driven to commodity competition. Profits in new value chains will flow to those vendors that successfully integrate different component of new value chains. Emerging technologies, such as 5G and AI, do offer growth opportunities, but vendors should hedge their bets in other value chains to have options in the future. Ericsson, Huawei, Nokia, and ZTE should emulate Microsoft’s strategy by pursuing multiple “options” in parallel without necessarily committing resources in large scale. Typically, that would entail buying options in small but promising companies in terms of commercial growth. Rakuten’s investment in Altiostar falls under that umbrella.