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."
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.
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.
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