Two months ago, we wrote a piece in which we played ‘fantasy M&A’ with Nokia’s various businesses. Our conclusion was that the company should sell its devices to Huawei, its web services and mapping to Microsoft and hang onto NSN (over which it had just taken full control from Siemens). The real outcome shows some of the same thinking ‘ keeping infrastructure as the core business and offloading handsets. However, instead of selling the devices to a firm with expertise in the mass gadget space, it has sold them to a company with no track record in this low margin game ‘ and it has hung onto the mapping platform.
Nokia loses half its revenues and its most famous products (though Microsoft will continue to use the brand for handsets); most of its losses; a CEO who had limited turnaround impact and was too blindfolded by his Microsoft ties to think radically; and a mountain of looming challenges in the smartphone and featurephone spaces.
The rump of the firm, assuming the Microsoft deal is approved, will consist of NSN and the Nokia Here mapping unit (for which, ironically enough, Nokia paid more, in its purchase of Navteq, than Microsoft is for its famous phones), plus a new Advanced Technologies unit, which will handle R&D, concept products and the patent portfolio.
They have no synergies with one another, but each is, in its way, more sustainable than the cellphones, and a good chance of reinventing a smaller, stronger Nokia. Each unit will be free of the drag-down effect of the handset unit’s losses, and of Elop, who showed no real understanding of the infrastructure business.
Advanced Technologies is the smallest but potentially the most profitable and will have a major patent store even after the Microsoft deal. One aspect of the deal where Nokia has played cleverly is to get an additional $2bn from Microsoft for patents and the rights to its brand name as well as a four-year licence for Nokia Here. And, in contrast with Google’s Motorola purchase, this is mainly money for patent licences not ownership. That significantly increases the value and revenue potential of the rump company, since it can still pursue other licensees for its patent portfolio, one of the largest in the world. (It is not clear whether the Windows firm will also get a cut of such deals in future). Microsoft’s deal includes rights to third party IPR, including the patents included in Nokia’s landmark deal with Qualcomm. However, it is not expected to shift the balance of power in the law courts, where the Windows firm has been fighting various infringement battles, since it has worked hand-in-hand with Nokia in this respect anyway.
Nokia has always been a big believer in concept R&D, and has come up with some interesting ideas, though it will now have to shift its focus away from handsets. Down the track, the division could add to the mountain of patents and contribute to the next generation of wireless technologies, and even come up with ideas to take Nokia into new hardware or software markets. But short term, its main concern will be, like the other great IPR owners of the mobile space, to milk those assets as effectively as possible.
The largest remaining business, of course, is NSN (now neatly renamed Nokia Solutions and Networks after the Siemens buy-out), which already went though one upheaval earlier this year when Nokia took full control. For NSN, shedding the handset business will certainly prove a positive. It has recently moved from being a problematic and increasingly non-core business for Nokia, to something with the potential to be a crown jewel, and it should be able to build on recent progress more effectively with greater independence and freedom of action.
The Microsoft deal sees Nokia, by an incredibly circuitous route, emulating Ericsson and Alcatel in divorcing infrastructure and devices and choosing to offload the latter. Unlike the others, of course, Nokia has been predominantly a device company for many years now, but it still has significant assets in the carrier network ‘even though it may still need a new partner or investor to reap the full rewards of its $2.2bn bargain buy-out of Siemens.
NSN is regaining sustainable profitability and has real opportunities to lead and add value in emerging areas like software defined networking and HetNet. It still has more work to do on its turnaround program, but cost cutting activities so far have led to a trebling of operating profit last year.
And there are several elements of its new strategy which suggest it could prove a growth engine for Nokia again. The most recent in a series of reorganizations focused NSN entirely on mobile broadband, and unlike Alcatel-Lucent, it has been quite ruthless in offloading divisions which did not fit that description. Unlike ALU, NSN has been far stronger in mobile than in other telco markets, so it made sense to build on that advantage to turn itself into a clear third player after Ericsson and Huawei ‘ and then to distance itself from them.
It has, indeed, been making market share gains in mobile infrastructure over ALU, despite early faltering in LTE, and other challengers like ZTE. There are still hurdles to overcome to secure that unchallenged third place however.
The next step will be to provide something that is clearly different from the offerings of the big two, to avoid, where possible, going head-to-head with them, or engaging in price wars where NSN’s smaller scale will be hopelessly disadvantaged. In particular, with the Liquid portfolio, NSN is grasping the nettle of software driven infrastructure.
All equipment vendors would like to stay in the cosy world of proprietary networks and expensive hardware-based functionality, but the carriers will not allow that, with their rising interest in software-based functions and intelligence, running on commoditized hardware. Full software defined networking may be years away in the mobile carrier space, but operators are already taking steps in that general direction, and NSN is in the vanguard with Liquid Net. This aims to use software to distribute network resources ‘ core, backhaul, RAN and IT ‘ wherever they are needed on a dynamic basis.
By working with partners like Intel and IBM on Liquid Apps ‘ which brings full processing capabilities to the base station itself rather than leaving them in the data center ‘ NSN is also embracing another key telco trend, IT/network convergence. This will give it useful alliances and an escape route should the days of specialized networking gear come to an end.
Meanwhile, Nokia Here has real potential to develop as a successful business in its own right, though it is likely to separate from NSN. Based on the Navteq platform, it has evolved into a broad cloud platform which can target all kinds of devices and operating systems, and is increasingly aggressive in the automotive space. Having broken the ties with its own handsets, Nokia has licensed the mapping technology to several key partners, including Microsoft itself, Amazon and others, since it does not bring the same conflicts of interest as Google may. The Amazon example shows how it may even be used by an Android OEM to dilute the influence of the search giant.
An interesting, and under-exploited, aspect of the 2011 Microsoft/Nokia deal was their collaboration on building a broad mobile web platform, converging their respective offerings including Navteq and Bing. Some of Nokia’s contributions are now part of Microsoft, including the Express browser and music services, but it will continue to license its maps software and the remains of the collaboration between the two firms is likely to center on that application.
Overall, we may wax sentimental about the decline of the Nokia cellphone and the end of an era the Microsoft sale represents ‘ while forgetting that the Finnish firm has been through several radical reinventions before, and those have enabled it to survive. Nokia will be 150 years old in 2015, yet it has been purely a mobile company for only 21 of those years, and for its first century relied mainly on rubber products. Nokia watchers will hope that another reinvention, around infrastructure, will see the firm not just still alive, but rejuvenated, for its 150th anniversary.