& cplSiteName &

Nokia's New Software Unit to 'Redesign' Company

Iain Morris
11/15/2016
100%
0%

Nokia's plans to create a standalone software business, announced at its Capital Markets Day this week, have profound implications for the Finnish vendor's entire business model and modus operandi. (See Nokia to Create Standalone Software Biz, Target New Verticals.)

The move is a clear response to the arrival of cloud-based technologies that pose a huge threat to the traditional vendor approach of selling hardware and software together.

By taking advantage of technologies such as SDN and NFV, service providers expect to be able to run network functions as software programs on any cheap server in the future. Vendors that continue to produce expensive boxes supporting particular functions may quickly lose out.

Since acquiring Alcatel-Lucent (NYSE: ALU) earlier this year, Nokia Corp. (NYSE: NOK) has substantially beefed up its capabilities in the software field. But its applications and analytics division, which accounts for the bulk of the software expertise and currently forms part of the IP networks and applications division, made just 372 million ($399 million) in sales in the recent July-to-September quarter -- or about 6% of total network sales.

It also reported a disappointing 12% decline in revenues for that quarter, compared with the year-earlier period.

The aim, however, is to grow this business substantially in the next few years, ultimately spinning it out as a unit in its own right.

Nokia is currently being coy about the details. It will not say how big the software unit could be, or when it might eventually take shape outside the IP networks and applications division.

A few things are clear, however. First, the software business will cater both to existing service provider customers and to a range of new vertical sectors that together represent an addressable market worth about 18 billion ($19.3 billion) annually.

The verticals that make up this opportunity include energy, transportation, the public sector, so-called "technological extra-large enterprises" and the web-scale players.

While Nokia's mainstream addressable market -- worth about 113 billion ($121.3 billion) annually -- is expected to grow at a compound annual growth rate (CAGR) of just 1% over the next five years, this "adjacent" opportunity is expected to have a five-year CAGR of about 13%.

Perhaps more importantly, Nokia aims to make the software division responsible for transformation efforts throughout the entire business.

"It could be responsible for defining what we do around DevOps and open source," says Kathrin Buvac, Nokia's chief strategy officer, in a conversation with Light Reading. "That includes how we redesign the business model for those parts of the business that get virtualized and move from being on-premise to as-a-service type operations."

The software business is also expected to generate operating margins that are comparable to those of existing large software companies.

What does that mean, exactly? Again, Buvac would not shed further light on the specific targets, but a long-term objective for the overall networks business is to generate an operating margin of 10-15%, up from one of about 8% today.

In the short term, focus areas for the new business will include enterprise software and IoT platforms, Nokia has revealed.

"Enterprise software could include PBX replacement technologies -- Skype-type solutions," says Buvac. "In IoT, we already have a platform that gives us device management capabilities for things like telematics in the automotive sector, and we could think about transporting this to other verticals and growing that business."


Want to know more about cloud services? Check out our dedicated cloud services content channel here on Light Reading.


Nokia is not planning any kind of recruitment drive to gain more software expertise, arguing that it already has the engineering talent it needs to build software products.

However, it does intend to put more investment toward the development of new sales channels, Buvac revealed, without disclosing actual figures. "As you can imagine, selling an independent software business is different from selling hardware together with software," she says. "We have taken some measures this year but we'll put more focus into building the right channels for software selling."

Other vendors that have thrived on selling hardware and software together are coming under similar pressure to adapt.

During a recent event in China organized by Huawei Technologies Co. Ltd. , a number of big service providers told the Chinese vendor it needs to think about the role it wants to play in the future as hardware and software become "disaggregated." (See Virtualization Frustration Sees Telcos Rebel.)

Nevertheless, while Huawei has continued to report healthy growth in sales to service provider customers, Western rivals including Nokia have recently struggled amid tough operating conditions.

Nokia is not expecting those conditions to improve next year. Its main addressable market will decline by 2.2% in 2017, it told investors earlier today, and its own network revenues are forecast to fall at roughly the same rate.

The projection comes just days after Sweden's Ericsson AB (Nasdaq: ERIC) said the mobile infrastructure market -- in which it generates the bulk of its sales -- would decline by 2-6% in 2017, after shrinking 10-15% this year. (See Is Ekholm Ericsson's Savior or Seller?)

Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

(1)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
iainmorris
100%
0%
iainmorris,
User Rank: Blogger
11/15/2016 | 7:30:47 PM
Details of verticals and correction
Story has been updated since it was first published to include details of the new vertical markets Nokia aims to address and to correct details of the long-term growth rate in Nokia's main market, which was originally down as -1%. The correct figure is 1%.
Featured Video
From The Founder
Light Reading is spending much of this year digging into the details of how automation technology will impact the comms market, but let's take a moment to also look at how automation is set to overturn the current world order by the middle of the century.
Flash Poll
Upcoming Live Events
November 30, 2017, The Westin Times Square
March 20-22, 2018, Denver Marriott Tech Center
May 14-17, 2018, Austin Convention Center
All Upcoming Live Events
Infographics
SmartNICs aren't just about achieving scale. They also have a major impact in reducing CAPEX and OPEX requirements.
Hot Topics
Nokia Bell Labs & Verizon Stretch Fixed 5G to the Home
Dan Jones, Mobile Editor, 11/13/2017
OEMs: Reliance Jio Wants Only Your Software
Craig Matsumoto, Editor-in-Chief, Light Reading, 11/10/2017
Broadband Fee Fight Gets Messy at the FCC
Mari Silbey, Senior Editor, Cable/Video, 11/10/2017
Animals with Phones
Why Cats Don't Run Tech Support Click Here
Live Digital Audio

Understanding the full experience of women in technology requires starting at the collegiate level (or sooner) and studying the technologies women are involved with, company cultures they're part of and personal experiences of individuals.

During this WiC radio show, we will talk with Nicole Engelbert, the director of Research & Analysis for Ovum Technology and a 23-year telecom industry veteran, about her experiences and perspectives on women in tech. Engelbert covers infrastructure, applications and industries for Ovum, but she is also involved in the research firm's higher education team and has helped colleges and universities globally leverage technology as a strategy for improving recruitment, retention and graduation performance.

She will share her unique insight into the collegiate level, where women pursuing engineering and STEM-related degrees is dwindling. Engelbert will also reveal new, original Ovum research on the topics of artificial intelligence, the Internet of Things, security and augmented reality, as well as discuss what each of those technologies might mean for women in our field. As always, we'll also leave plenty of time to answer all your questions live on the air and chat board.

Like Us on Facebook
Twitter Feed
Partner Perspectives - content from our sponsors
The Mobile Broadband Road Ahead
By Kevin Taylor, for Huawei
All Partner Perspectives