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Nokia Faces Mobile Shakeout Post AlcaLu Deal

Iain Morris
10/8/2015

As this week's merger update showed, Nokia CEO Rajeev Suri is getting his hands on a lot of fresh expertise in the core and fixed network areas through his €15.6 billion (US$17.6 billion) takeover of Alcatel-Lucent, with executives at the French company set to lead three of four network-related business groups at the combined entity. But what should the companies do about the considerable overlap between their wireless product portfolios?

The mobile networks business looks like it will account for the lion's share of revenues at the new-look player. Most of what Nokia Corp. (NYSE: NOK) does these days falls into the "mobile networks" category, and Nokia has indicated that its entire global services unit will be lumped into the new business group bearing that moniker. The mobile networks group, then, could be generating about €16.2 billion ($18.2 billion) annually post merger, or roughly two thirds of overall network-related revenues.

That very rudimentary calculation is based on adding revenues from Alcatel-Lucent (NYSE: ALU)'s wireless access and managed services units to sales at Nokia's mobile broadband and global services divisions in 2014. But it shows just how much heft Nokia could have in the mobile market once the deal goes through. Sweden's Ericsson AB (Nasdaq: ERIC), the world's biggest vendor of mobile network equipment, made 215.2 billion Swedish kronor ($26.1 billion) from the sale of all network products and global services last year. (See Ericsson's Stock Rises on Q2 Margin Improvements.)

Table 1: Revenues (€M)

2014 2013
Nokia Networks 11,198 11,282
−mobile broadband 6,039 5,347
−global services 5,105 5,753
Alcatel-Lucent 13,178 13,813
−wireless access 4,685 4,510
−managed services 369 791
−core networking 5,966 6,151
−fixed access 2,048 2,069
−licensing 55 77
Source: companies

The question is whether Nokia can maintain the mobile market share of both companies following their integration. "Typically you would expect to see a decline in business due to a merger such as this, particularly as operators wait to see what becomes of the Alcatel-Lucent product line before committing new spending," says Gabriel Brown, a senior analyst at Heavy Reading. "This is a disruptive event and Nokia needs to contain the fallout -- inevitably there will be fallout -- from the acquisition as much as possible." (See Nokia + AlcaLu: What the Analysts Say.)

Just as Nokia's managers have prevailed over Alcatel-Lucent's where the Finnish player had any real choice -- taking ten of the 13 senior roles announced this week -- so its radio access network (RAN) products seem bound to be the survivors in cases where Alcatel-Lucent has alternatives. According to Brown, the chief danger of this portfolio cull is to be found in North America, where the big US operators have previously sustained Alcatel-Lucent's 4G RAN business. (See AlcaLu Execs Lose Out as Nokia Unveils New Top Team.)

"There's no guarantee Nokia will win the customers previously served by Alcatel-Lucent -- we saw that in Europe when Nokia merged with Siemens and didn't convert the combined 3G base to LTE on a one-to-one ratio," he says. "Uncertainty makes operators reluctant to commit."


For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.


Therein lies the opportunity for the mobile equipment heavyweights of Ericsson and Huawei Technologies Co. Ltd. , which will be looking to take advantage of any sign that service providers are reappraising their vendor relationships in the wake of the tie-up between Nokia and Alcatel-Lucent. Nokia, for its part, will be desperate to avoid a repeat of the fiasco that followed its Siemens AG (NYSE: SI; Frankfurt: SIE) marriage, when some customers decamped to other vendors for next-generation products.

But Nokia will obviously have learned from that experience. As it has been at pains to emphasize, the deal with Alcatel-Lucent is formally a "takeover," not a "merger," reducing the risk that a clash of personalities and different company cultures could derail its sales activities. The details of senior appointments unveiled this week indicate a decisiveness and resolve that was missing during earlier rounds of consolidation in the equipment market, with no awkward sharing of responsibilities or ambiguity about who is in charge of what (although there is some uncertainty about the status of several senior executives, including Hossein Moiin and Marcus Weldon, the chief technology officers of Nokia and Alcatel-Lucent respectively).

Importantly, says Heavy Reading's Brown, the new company will be one of a select number of equipment giants with the scale to influence the very way in which operators design, build and operate their networks. And as a top three vendor in a global market of converging fixed and mobile networks, Nokia will be a huge disappointment if it cannot grow its business profitably in the years ahead. "Suri and his team have talked up their abilities to execute this deal," says Brown. "Now it's time to walk the walk."

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

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Gabriel Brown
Gabriel Brown
10/9/2015 | 4:08:45 AM
Re: Nokia and Alcatel-Lucent
Adding to my previous comment:

Although I expect the Nokia RAN porfolio (which is due a refresh itself, btw) to prevail over time*, it is worth noting that in some areas the Alcatel-Lucent development appears more progressive: Virtual RAN is an example.

There will be a bunch other product areas to consider as well... IMS core, mobile packet core (EPC), CEM. All in all, there's a good amount of portfolio overlap to deal with.

 

* nothing official or semi-official on that so far
Gabriel Brown
Gabriel Brown
10/9/2015 | 3:59:17 AM
Nokia and Alcatel-Lucent
Perhaps worth adding some of my other comments on this acquisition:

Once it has consolidated product lines, roadmaps, R&D, and so on, the new company will be a global power house. It will be one of the elite vendors with the R&D resources, market presence, and volume to really influence how service providers design, build and operate their networks. In that sense, there's strong industrial logic for the deal.

Where else are operators going to look, particularly for RAN infrastructure? ZTE? Samsung?

Once the integration is complete, given the importance of networking to the modern world, a top 3 global vendor should be able to profitably grow its business. 

Anway, there will be much more to say on this as the plans for the potfolio become clearer, and we see customer reaction. 
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