SoftBank (OTC:SFTB.Y), the third-largest wireless carrier in Japan, recently chose Swedish communications equipment maker Ericsson's (NASDAQ:ERIC) 5G Core services -- which optimize network connections through cloud-based software -- to support its stand-alone 5G services.

The announcement wasn't surprising, since Ericsson has sold supplies to SoftBank since the 2G era. SoftBank also chose Ericsson as its primary radio access vendor for 5G networks last May; the addition of 5G Core services expands that partnership.

Ericsson also supplies 5G equipment and services for SoftBank's larger rivals NTT Docomo and KDDI. Ericsson splits those orders with Nokia (NYSE:NOK) and other vendors, but SoftBank and KDDI both call Ericsson their "primary" vendor.

Luca Orsini, the head of Ericsson Japan, declared its 5G Core services would help SoftBank "develop new business models toward consumers, enterprise, and industry partners" while improving the operational efficiency of its 5G network.

Ericsson plants another flag in the 5G race

Ericsson was the world's third-largest telecom equipment market last year, according to Dell'Oro Group, with a 14% market share. Chinese tech giant Huawei led the pack with a 28% share, followed by Nokia's 16% share.

All three companies are clashing over contracts for 5G network upgrades from regional telecom companies. The stakes are high, since the 5G services market could grow at a compound annual growth rate of nearly 44% from 2021 to 2027, according to Grand View Research.

The ongoing trade war, which led to Huawei being blacklisted in the U.S., is helping Ericsson and Nokia win over countries that are suspicious of Huawei's alleged ties to the Chinese government.

France's top telecom company Orange recently stated it would only award its 5G contracts to Ericsson and Nokia. Singapore also recently awarded its main 5G contracts to Ericsson and Nokia.

Ericsson has secured 99 commercial 5G agreements or contracts with carriers so far, and supports 54 live 5G networks worldwide. Nokia has secured 152 commercial 5G agreements and 79 commercial deals, but only operates 29 live 5G networks.

How will SoftBank and its peers help Ericsson?

Japan was the world's seventh-largest smartphone market last year with 72.6 million users. Winning contracts from the country's three top carriers and launching 5G networks for all those subscribers should significantly boost its revenue from the country.

Ericsson includes Japan in its Northeast Asia region, which generated 12% of its total revenue last year. The region's revenue grew 18%, fueled by new 5G deployments and services in South Korea, Japan, and China. By comparison, Nokia's Asia-Pacific revenue rose 12% last year, but that region excludes China, where its revenue declined 15%.

Ericsson didn't face comparable challenges in China, where it remained in China Mobile's good graces even after the state-backed telco booted Nokia from its second round of 5G upgrades. All three of China's top telcos still use Ericsson's equipment.

Ericsson expects Northeast Asia's 5G penetration rate to hit 56% by 2025 as it expands those connections beyond mobile services and into IoT (Internet of Things) applications across the industrial, transportation, and healthcare sectors.

The key takeaways

Ericsson's expanded deal with SoftBank tells us three things. First, it's gaining ground in Asia as its larger rival Nokia flounders. Second, Ericsson's 5G Core services will strengthen its software and services segments, which generated 21% and 41% of its revenue, respectively, last year. Lastly, strengthening that underlying ecosystem will likely stabilize its hardware sales, lock in customers, and widen its moat against Nokia, Huawei, and other rivals in the communications equipment space.

The deal won't move the needle for Ericsson or SoftBank right away, but it could benefit both companies over the long run. Ericsson will generate a stable stream of revenue from Japan to complement its strength in China and South Korea, and SoftBank will keep pace with NTT Docomo and KDDI in the 5G race.

This article originally appeared in the Motley Fool.

Leo Sun owns shares of China Mobile. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

SoftBank Group has become an investment and tech behemoth with stakes in some of Silicon Valley's hottest start-ups
SoftBank Group has become an investment and tech behemoth with stakes in some of Silicon Valley's hottest start-ups AFP / Behrouz MEHRI
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