Nokia: Software Plan Already Boosting Profitability

Iain Morris

Skirting the pitfalls
The software transition would seem to hold numerous perils for any equipment maker. By taking advantage of "virtualization" technologies, customers of Nokia and Ericsson can run network functions as software programs on commodity hardware, dealing a blow to the old "black box" business of churning out dedicated equipment. Telco enthusiasm for open source technology is a further worry for suppliers that have profited from intellectual property. And generating sales on a recurring monthly basis, as software companies do, necessitates organizational transformation for suppliers that have previously collected revenues in lump sums. (See Orange, VCs Commit $113M to Network Startups as 'Black Box' Frustration Mounts and TIP Players Voice Open Source Misgivings.)

Gorti is relatively sanguine. "Customers are pushing this [virtualization] because they want flexibility and to reduce what is seen as vendor lock-in, but they are still looking for the SLAs [service level agreements] and for someone to take responsibility for those SLAs," he says.

While the mix of revenues from hardware and software will certainly change with virtualization, Gorti is also eyeing a further boost to margins and "predictability" from the shift to a software-as-a-service model. And he highlights the progress that Nokia has already made in phasing out purpose-built equipment: Between 80% and 90% of his own products now run on generic x86 servers, he says.

Moreover, Gorti sees a big opportunity to make R&D spending more "productive" by relying on open source technology for "basic non-differentiating things" and investing more heavily in areas where Nokia can still add value. "If anything, it increases our velocity for innovation and means we can focus R&D dollars on differentiating elements," he says.

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But innovation that comes from within is certainly not the only path that Gorti is taking. Earlier this year Nokia announced a €347 million ($410 million) takeover of long-standing partner Comptel, a Finnish developer of service orchestration and intelligent data products that complements its own business and operational support systems. (See Nokia's Buying Comptel: What the Analysts Say and Nokia Eyes Bigger Software Role With €347M Comptel Bid.)

That acquisition was finalized last month, giving Nokia a business that generates about €100 million ($118 million) in annual sales, and Nokia is now integrating Comptel's back-end systems with its own. It is also combining sales teams across the two organizations -- a process that hints at possible layoffs in Finland, Bangalore and Kuala Lumpur, where Nokia and Comptel already have "colocated" facilities.

Could other acquisitions be in the cards? "Absolutely," says Gorti. "If the best way to enhance our product strategy is through an asset from outside, we are actively looking." With Ericsson also considering takeovers to bolster its digital services business, the market could be ripe for some consolidation. (See Comptel Looks Like the Start of Nokia Software Spending Spree and Ericsson Eyes Takeovers to Bolster Digital Services Unit.)

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

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User Rank: Light Sabre
8/2/2017 | 12:58:39 PM
Re: Organic growth is what matters
I don't think Nokia's plan was a bad idea. 

Lots of companies are now focusing on software. There are still a lot of industrial and other infrastructure processes that could use software. Nokia's focus on this could save the company long-term. 
User Rank: Blogger
8/2/2017 | 3:28:59 AM
Re: Organic growth is what matters
'Tis a good point, so I've updated the story to provide a little more context there.
User Rank: Light Sabre
8/1/2017 | 4:49:38 PM
Re: Organic growth is what matters
Just my humble opinion: While indeed 2% is not earth shaking in the startup world, $NOK is a mature company trying to break into new markets. So maybe it is good enough if Comptel can carry its own and accretive. 

It took Blackberry $BBRY for a while to get its software going, considering that is not their core competency. And a heck better than behemeths like $IBM.

In conclusion, agreeing with you about the importance of organic growth but growth by acquisition is sometimes necessary. Its worthiness can only be validated from a longer term perspective depending on integration, synergy and future utilization
User Rank: Blogger
8/1/2017 | 4:32:02 PM
Organic growth is what matters
The organic growth of Application & Analytics was 2% when you strip out the contribution from Comptel (which wasn't in the prior year comparable figure). That's still impressive in comparison with Ericsson's 10% like-for-like decline in IT & Cloud. But not as impressive as 9% organic growth would have been. 
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