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Musical Telecom Chairs

What does the big merger of Nokia Corp. (NYSE: NOK) and Siemens AG (NYSE: SI; Frankfurt: SIE)'s networking businesses mean for end users?

In the short run, not much. The deal will not be completed until end of year, and carriers using equipment from either of the two European infrastructure makers – and offering services to enterprise customers based on that equipment – will likely not see any changes until the first quarter of 2007.

In the long run, though, it's unlikely to be good news overall for enterprise IT managers. It's an axiom of business that consolidation of the sort we're seeing in the telecommunications industry right now is rarely good news for customers. While sourcing gets streamlined and product lines rationalized, prices generally rise as competition dwindles to two or three major players. (See "oil business, worldwide" for exhibit A.) The advent of Nokia Siemens Networks will mean added pressure on both Nortel Networks Ltd. and Motorola Inc. (NYSE: MOT), now relegated to also-ran status in a business dominated by three players – Ericsson AB (Nasdaq: ERIC), Nokia Siemens, and the combined Lucent Technologies Inc. (NYSE: LU) and Alcatel (NYSE: ALA; Paris: CGEP:PA) – to find partners of their own or be acquired.

"We believe the top three wireless infrastructure vendors will now own 75 percent of the overall wireless market," wrote Prudential Equity Group LLC analyst Inder Singh in a research note following the news, "which could make it harder for the smaller players to remain competitive."

Reduced competition means less price cutting, less aggressive sales tactics, less differentiation among offerings from enterprise network suppliers, and, potentially, less innovation. None of that is good news for enterprise users.

There is some good news, though. For one thing, a consolidated telecom industry is, at least in theory, a stable industry – something we haven't seen since the bubble days of the late 1990s.

Also, it's worth noting that this is primarily a wireless play. According to reporting by Light Reading's Ray Le Maistre, the units that will become Nokia Siemens Networks generate 78 percent of their revenues from infrastructure and services for mobile operators. Like many analysts, Tim Luke and Stuart Jeffries at Lehman Brothers believe that the Nokia-Siemens consolidation could hasten the long-anticipated convergence of fixed and mobile networks – something many enterprise IT departments feel is long overdue.

"From a Nokia perspective," write Luke and Jeffries, "this deal clearly addresses its weakness in the wireline part of the market and thus gives a better positioning as operators push fixed/mobile convergence."

Finally, it will be interesting to see what becomes of efforts by both Siemens and Nokia to sell packages of equipment and services directly to corporations. Siemens has already said it is in talks to sell a majority stake in its enterprise unit, while Nokia has aggressively touted its enterprise solutions unit to customers and to the press.

Opportunities in the mobile infrastructure business should be ripe over the next 12 to 18 months as companies execute their wireless strategies. Here's hoping a consolidated telecom industry can take advantage of those opportunities – at reasonable prices.

— Richard Martin, Senior Editor, Unstrung

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