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December 6, 2016
With its mainstream business stuttering, Nokia Corp. (NYSE: NOK) is looking elsewhere.
The Finnish vendor, part of a global equipment triumvirate that includes China's Huawei Technologies Co. Ltd. and Sweden's Ericsson AB (Nasdaq: ERIC), is steaming into a range of "adjacent" vertical markets poised for much faster growth than its long-standing telco business. (See Nokia to Create Standalone Software Biz, Target New Verticals and Nokia's New Software Unit to 'Redesign' Company.)
If all goes to plan, the strategy should fuel a sales increase at the company during the next five years. It could also make Nokia increasingly appear more like one of the telcos it currently serves.
Nokia is hardly a stranger to the network operator/service provider role. Through its services division, which accounts for about a third of total group sales, it already manages and operates networks for telcos that have seen value in outsourcing. Under its new strategy, those capabilities will become increasingly important as Nokia caters to the needs of large enterprise and public sector organizations: a mining company investing in its own private network, say, or a government deploying new public-safety systems.
"Many enterprises don't want the burden of managing these networks themselves," said Samih Elhage, the president of Nokia's mobile networks division, during a press briefing in London. "They just want the applications the networks deliver."
Figure 1: Taking Charge Samih Elhage, president of mobile networks for Nokia, is spearheading a strategic move into new vertical markets.
If Nokia's expectations prove accurate, the diversification should help Nokia to overcome a cyclical slump affecting its mainstream business. In the mobile sector, for example, Nokia reckons its addressable market is worth a meaty €64 billion ($69 billion) this year, but set to grow at a compound annual rate of just 0.4% over the next five. While its mobile "adjacencies" are valued at just €2 billion ($2.2 billion) in 2016, they will grow at a compound annual rate of 23.2% over the same period, says the company.
But the diversification could make Nokia a rival to some of its own telco customers. Operators such as the UK's BT Group plc (NYSE: BT; London: BTA) and Germany's Deutsche Telekom AG (NYSE: DT) have also been trying to address the network needs of the enterprise, providing similar services to those Nokia describes. In future, there is a possibility these telcos find themselves competing against the Finnish vendor for new business.
Figure 2: Addressable mobile market revenues ( euro B) Source: Nokia.
Elhage insists that Nokia has no intention of going head to head against its customers. Indeed, he believes the focus on new vertical markets gives telcos an opportunity to partner with Nokia on enterprise and public sector projects. In the government sector, for instance, Nokia could deploy and manage new public-safety systems on top of an operator's existing 4G network. That public-safety market will grow by 48% between now and 2020, reckons Elhage.
A sweet spot could be addressing the needs of enterprises with multinational needs. As Elhage points out, operators have traditionally struck network agreements with enterprise customers on a per-country basis. But as IT becomes more critical to company fortunes, those networks will need to be managed and developed across a range of geographies. "Operators can do that but at the same time they need us to help them with it," says Elhage.
Next page: Going solo
In other instances, however, Nokia is clearly going it alone. In Australia, it has built and is managing a private mobile network for one of the country's mining companies with no telco involvement. Elhage acknowledges that both approaches could hold appeal. "In Saudi Arabia, Aramco [an oil company] might ask STC [a telco] to provide a facility or it could offer a bid for the construction of a private network," he says.
Even if Nokia is not directly competing against the telcos, its "adjacencies" strategy could be a source of friction with long-standing customers. The verticals that have caught Nokia's attention include energy, transportation, the public sector and so-called "technological extra-large enterprises." But they also feature the web-scale players, such as Google (Nasdaq: GOOG) and Amazon.com Inc. (Nasdaq: AMZN), which telcos often see as a threat to their own interests. "With new requirements they can compete in an agile way with operators, and we can generate solutions to respond to particular needs," says Elhage.
Operators cannot prevent Nokia from serving their rivals, of course, and they will continue to need its products. The potential danger for the Finnish vendor is that, in helping out non-traditional players, it inadvertently hinders the growth of its biggest customers. With sales stagnant or in decline, telco spending could take a hit.
Want to know more about the Internet of Things? Check out our dedicated IoT content channel here on Light Reading.
Ultimately, the enterprise gambit points to a blurring of the lines between equipment providers and the telcos they serve. With 5G and the "Internet of Things" more relevant to enterprises than to smartphone-wielding consumers, vendors and operators are converging on the same space.
But if Nokia is becoming more like an operator, then the likes of AT&T Inc. (NYSE: T) and Deutsche Telekom aspire to have much greater influence over the network technologies now taking shape. For signs of that, look to ECOMP, AT&T's open source software project that has attracted Orange as a development partner, or Deutsche Telekom's involvement in the Telecom Infra Project, an initiative led by Facebook and designed to spur innovation in the network equipment area. (See Orange to Focus Polish ECOMP Trials on Residential vCPE .)
Useful labels in the past, the descriptors of "vendor" and "operator" are beginning to look anachronistic.
— Iain Morris, , News Editor, Light Reading
International Editor, Light Reading
Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).
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