Nokia is weighing strategic options, reads the Bloomberg story this week, citing sources close to the matter. The real surprise would be if Nokia were not weighing strategic options.
Shares in the Finnish equipment vendor have lost nearly a third of their value in the last year amid 5G product difficulties and signs of weakness in China. CEO Rajeev Suri has become increasingly bearish, too. Might a bet on disruptive network technologies, encouraged by Europe's biggest operator, provide some answer?
Unfortunately, there is not a more obvious solution to the firm's problems. Asset sales would either weaken Nokia's capabilities in specific areas or reverse previous efforts to broaden the product portfolio. Unlike rival Ericsson, which was always a mobile equipment maker with a few incongruous bolt-on parts, Nokia has based its entire service provider strategy – following its challenging integration of the Alcatel-Lucent business it acquired in 2016 – on being able to serve any customer's fixed, mobile and core network needs. Which bit would it sacrifice? And how would it explain this after all its earlier noise about "end-to-end" strength?
A merger with Ericsson might appeal to certain US officials, keen to build a Western vendor with the heft of China's Huawei, but it would surely elicit groans from competition authorities – not to mention the service provider community. After years of consolidation in the equipment market, operators and many governments are demanding more supplier diversity, and would balk at even less of it. A merger between the Nordic giants would leave two companies – the new-look Ericsson-Nokia and Huawei – with about 80% of the world's mobile infrastructure market, according to some estimates.
Consolidation would not be the only concern, either. Mega-mergers and takeovers do not have a great track record in the telecom industry, and Nokia provides much of the evidence. When Nokia confirmed its intention to buy Alcatel-Lucent in April 2015, its share price stood at €7.38 ($8.11) in Helsinki. Today, nearly five years later, it closed at €3.65 ($4.01). The earlier tie-up between Alcatel and Lucent was beset by cultural and business challenges. More recently, Nokia has blamed its 5G product setbacks partly on the difficulty of absorbing Alcatel-Lucent. An upset at Ericsson-Nokia, as it wrestled with the integration of two even larger mobile infrastructure units, would give Chinese vendors free rein.
Appetite for destruction
Nokia's best option, perhaps, is to view its comparatively weak 5G position as an opportunity for disruption. In Germany, it was booted out of Deutsche Telekom's radio access network (RAN) in 2017, when Ericsson snatched its business. Since then, the German operator has sounded increasingly enthusiastic about open RAN, an alternative way of building networks that promises greater interoperability and more competition. During a call about earnings this month, CEO Timotheus Höttges said open RAN could be one answer to security concerns surrounding Huawei and the lack of strong contenders.
The equipment incumbents have shown limited interest in open RAN. Both Ericsson and Huawei insist the general-purpose processors it uses are a poor substitute for their own more customized chips. Yet this disadvantage could be offset in other areas, says Alex Choi, Deutsche Telekom's senior vice president of strategy and technology innovation, pointing to recent trial success. The real reason for the incumbents' apathy is that open RAN would introduce competition and threaten their existing business, say open RAN companies such as Mavenir.
Choi is more sympathetic. "The big vendors have to chase two rabbits," he tells Light Reading. "One is their delivery schedules for the immediate market demand. Introducing open interfaces and implementing these could bother their current progress."
Nevertheless, he is courting these bigger firms as potentially important open RAN partners. "Definitely, if we have bigger vendors like Nokia and Ericsson on board, then everything can be accelerated," Choi said.
Nokia seems the likelier partner. "Ericsson is taking a more cautious approach," says Choi. The Finnish vendor, he adds, is active in both the O-RAN Alliance, a specifications group he serves as chief operating officer, and the Facebook-led Telecom Infra Project, which is developing open RAN technologies (the two groups announced an alliance this week). Ericsson is in the former but not the latter. Huawei is absent from both.
Choi wants the incumbents to view open RAN as an opportunity, not a threat. "They can reduce complexity and they can also find business and technology partners that will make their research and development speedier." A Nokia that embraces open RAN would be able to concentrate resources on complex areas like radio and baseband, relying on third-party specialists for other building blocks, he says.
A major commitment to open RAN would obviously not solve Nokia's immediate problems, but it could be a savvy long-term play, helping it wrest the initiative from its bigger mobile rivals. Sadly, the usual investor short-termism could obstruct any open RAN transformation. As CEOs at the world's largest service providers increasingly attach importance to open RAN, shareholders should bear in mind other companies that failed to adapt to emerging technologies. Nobody wants to be the next Kodak.
- Nokia hires advisers for possible asset sales or a merger – reports
- Deutsche Telekom, Intel breakthrough piles open RAN pressure onto big vendors
- Facebook-led TIP and O-RAN Alliance finally buddy up on 5G R&D
- ZTE eyes China gain from Nokia pain
- Nokia warns of possible China pullback as support for local vendors grows
- Nokia's 5G chip choice leaves it exposed
— Iain Morris, International Editor, Light Reading