Nokia Networks is taking a tough line on its product portfolio, with the company pumping their R&D budget only into sectors where the company can be a market leader and make money, says the vendor's CEO Simon Beresford-Wylie.

In giving a general update on the company's first 14 months of business at an analyst and media briefing in London Tuesday, the CEO noted that current market conditions means there is no room for inefficiencies, and that the company needs to focus on making money from products and services where it can be either market leader of the number two player.

Beresford-Wylie says the company will focus on generating profitable growth from its installed base of 1,400 customers and identifying money-making opportunities in the margin-crunching emerging markets. To achieve that, the company is relentlessly focused on its cost base and operational efficiencies while taking a new story to the market, one that is much more weighted than before towards software-based capabilities.

While Nokia Siemens still has a full portfolio of fixed and mobile infrastructure assets either in-house or with strategic partners such as Juniper Networks Inc. (NYSE: JNPR), Beresford-Wylie says that service management and charging -- operations support systems (OSS) and business support systems (BSS) -- "is a real focus for us now. We are the market leader in pre-paid billing systems," with more than 500 million mobile subscribers hooked up to its pre-paid customer systems, "and we believe we have the best OSS offering." (See Nokia Siemens Clings to Juniper.)

Nokia Siemens has already signified this focus by creating a standalone business unit, Operations and Business Software (OBS), headed up by Juhani Hintikka, specifically to tackle telecom software development and sales, and has acquired Apertio to give it a strong position in customer data management. (See Major Vendors Kiss OSS and Nokia Siemens Snaps Up IMS Vendor.)

The vendor's CTO, Stefan Scholz, stressed the importance of the Apertio deal: He said it's key for carriers to have a single customer database for optimum performance and reliability. "With Apertio we have a hugely important asset on our hands," added the CTO.

The particular challenge for Nokia Siemens in the telecom software market, noted the CEO, is how to work with, as well as compete against, the big IT companies such as HP Inc. (NYSE: HPQ), IBM Corp. (NYSE: IBM), and Oracle Corp. (Nasdaq: ORCL). "We need to build on our in-house assets by partnering with the IT leaders," he added.

But Beresford-Wylie isn't content just to be a player in the various specialist markets in telecom – he wants Nokia Siemens to be the number 1 or number 2 in each market while still being operationally efficient and effective.

So how is NSN going to do that? The CEO says the vendor's R&D strategy is very much driven by whether Nokia Siemens is a top two player, or can be with the right investment and strategy.

"We put a very critical eye on this. There are areas of our business that are in the early stages and where we already have some limited customer engagements, especially in applications development, and we can't walk away from those. But we have a very pragmatic view of where we can make money -- we will be prudent," said the CEO. "Our portfolio development will reflect our R&D focus, but I'm not going to identify any specific product areas today," added Beresford-Wylie.

But the CEO was prepared to comment on PBT: Siemens was one of the British carrier's named PBT suppliers that is now looking at a near-empty order book following BT's decision last week to switch its focus to MPLS. (See PBT Sidelined at BT.)

While Nortel Networks Ltd. is focusing on PBT opportunities with other carriers, Beresford-Wylie is unfazed by BT's decision. (See Nortel: There's More to PBT Than BT.)

"Some of my guys were saying a year ago that it wasn't worth pursuing, and it seems they were right." And Scholz added that it is no longer an area of R&D focus for NSN. "We considered it and decided to focus on MPLS," stated the CTO bluntly.

Impact of integration, competition
The tough focus on R&D is all part of NSN's ongoing focus on efficiencies. Beresford-Wylie says the company is still battling to complete its integration process after 14 months in business and is still butting up against intense competition from its main rivals.

He said there was "still a lot to do" in terms of the integration process that has been ongoing since the company opened its doors for business on April 1, 2007. (See Nokia Siemens Opens on a Downer.)

He noted that in 2006, as Nokia and Siemens prepared to merge their networks' businesses, the market was predicted to grow. But although the world's major operators have managed to increase their revenues and earnings in the past two years, the vendors haven't fared as well, with revenues growing only slightly at best, and profits and market valuations mostly on the slide. That led to some early financial disappointments and strategy revamps for NSN during 2007 and early 2008. (See NSN Hunkers Down, Nokia Siemens Suffers Merger Blues, and Instant Revamp for Nokia Siemens.)

That market pressure is due to a number of factors. First, three of the market's main players have suffered from integration issues to varying extents. Nokia Siemens, said the CEO, is still grappling with the "breathtaking complexity" of integrating the IT systems of two large companies, as well as bringing two corporate cultures together. Alcatel-Lucent (NYSE: ALU), and to some extent Ericsson AB (Nasdaq: ERIC), have also faced post-M&A issues.

Beresford-Wylie also noted that Nokia Siemens "got off to a bad start" in terms of business ethics. "We need to be a beacon of ethics, and we've taken a strong position on this," noted the CEO. That reference comes as more scandal is being unearthed in the telecom sector.

Second, the market is still experiencing severe competitive pressures. While Beresford-Wylie cited AlcaLu and Ericsson as his main rivals that have the same sort of breadth of capabilities and product portfolios, he also name-checked Chinese vendors Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), both of which are very competitive with their pricing, he noted. In addition, Huawei is also highly competitive in terms of the amount of customization it is prepared to do for its carrier customers.

Third, the "shifting profile of our business" has also impacted profitability, with growth and new deals coming mainly from the emerging markets, where the opportunities for profits are reduced.

The CEO said Nokia Siemens expects the number of people connected to telecom networks globally to grow from about 3.3 billion to about 5 billion in 2015, and that the vast majority of those additional 1.7 billion connections will come from high-growth, low-ARPU (average revenue per user) markets, especially China and India.

All of which means that, in this much more mature market for equipment vendors, companies such as Nokia Siemens can now only expect to manage gross margins of between 30 percent and 35 percent and earnings before interest and tax (EBIT) of between zero and 5 percent.

But, naturally, Beresford-Wylie is confident that Nokia Siemens, which has about 60,000 staff, can adjust to the new market conditions, and cites the company's large installed base of 1,400 customers as one its main strengths upon which it can build.

— Ray Le Maistre, International News Editor, Light Reading