Nokia continues on its switchback ride towards reinvention, and increasingly the high points seem far from the original vision ‘ or experience ‘ of CEO Stephen Elop. Elop brought with him the alliance with his former employer Microsoft, and many of that company’s assumptions about how software giants and OEMs work together. His ultimate agenda, many believe, was to return to Redmond with a Nokia acquisition under his arm. But the Microsoft-Nokia relationship has been hit by deep changes in the software firm’s own approach, and reports indicate that the most recent M&A talks broke down, partly because the Finnish firm’s price was too high. That, in turn, suggests a company regaining sufficient confidence to resist any kind of fire sale ‘ a confidence which may no longer rest on Lumia and Microsoft, but may increasingly revolve around Nokia Siemens, back under full Helsinki control, plus web services and low end devices.
The Windows giant has become an unreliable godfather recently, with its own hardware activities and the uncertainty over the future of Windows Phone, and its impending reorganization may have interesting implications for the Nokia relationship ‘ one which has not delivered the starring role in the Microsoft drama which Elop had expected. Nokia was supposed to be to Microsoft what Motorola was to Google ‘ favorite courtier, key contributor to the platform, recipient of special access to technology, and eventually takeover target. But Windows Phone has not made sufficient impact to justify that special role for Nokia within the Microsoft ecosystem, and the Redmond giant’s attention has shifted to Windows 8 and RT. Some believe it will dump its ARM-based operating systems altogether and throw its energies into reinventing the old Wintel systems for mobile. Certainly, Windows Phone is unlikely to have a significant identity of its own for very long, and meanwhile, Nokia is not playing in larger-screened WRT devices.
It is time for the company to play in areas where it can differentiate and control, and defocus on Lumia, which for all its strengths, is not going to gain sufficient share to give Nokia a major smartphone comeback, or to make it critical to Microsoft once again. Where it can still work closely with Microsoft is on web services. The software giant has been evolving a web content and services offering over the past few years, centered on Bing and Xbox and ‘ rather tortuously ‘ developing into a cross-platform experience for all the Windows and Xbox products. Nokia already has a key role there, via its mapping technology, which is the most coveted and innovative technology in its collection. Further work on the former Navteq platform, now converted into the cloud-oriented Nokia Here, could significantly strengthen Microsoft’s ‘Bing as a platform’ ambitions and give the Finnish firm a strategic role ‘ and one which extends across all Microsoft offerings, rather than confining Nokia to the smartphone backwater.
It is an often neglected aspect of the Nokia-Microsoft agreement that they would combine web offerings to create a converged mobile and multiscreen platform. Slow though results have been, they should stick to that aspect of their alliance, whatever happens in handsets. Meanwhile, the experience with Navteq – whose mapping technology Nokia has licensed to several key partners and opened up to developers ‘ should give the Finnish company confidence that it could create a platform of its own, rather than being forced to rely on Windows.
It has the makings of a full mobile web experience in the midmarket where it has always been strongest. Its Asha ‘smart featurephones’ are as tightly integrated with their optimized Xpress browsers, email, imaging and other services as iPhones are with their higher end software. Asha and its software platform meet the rising need for cloud-oriented services that do not need resource-heavy handsets or even superfast connections. Firefox Mobile, propelled by Telefonica, and the other Linux-based challengers are addressing the same requirement, and Samsung clearly has its eyes on the entry level smart device as a market it could naturally dominate, either with Android or its own OS, Tizen. But Nokia is already established; it still has significant brand power and market share in key markets such as India; and its software platform is more mature than those of any alternative except, of course, Android.
But operators and some vendors are looking for alternatives and Nokia could be in contention here, given its strengths in popular areas of the mobile experience like mapping and imaging. One option for Elop must be to build up the midrange ‘smart’ experience to sufficient scale and maturity that it is saleable in its own right to one of the firms, such as Huawei, which is looking to be the new Nokia ‘ king of the mass market branded handset.
Nokia could even teach the Chinese company a thing or two about supply chain control and making profits at the low end, well below the Asha level. This week it unveiled its ‘most affordable 3G devices yet’, priced from $68. And analysis from IHS iSuppli indicated the money that can still be made even on simple featurephones priced around $20. The Nokia 105, according to the IHS teardown, yields 29% gross margin ‘ the parts cost $13.50, thanks to Nokia’s still-strong grip on its supply chain at the lower end, and it costs 70 cents to assemble. Such economics are enabled by emerging chip technologies ‘ Qualcomm has been chasing the mass market with reference designs, while the Nokia 105 uses an Intel ‘phone on a chip’, the PMB7900 (formerly from Infineon), which combines the GSM/GPRS modem and radio transceiver. There are only two further chips, a Skyworks transmit module and a Micron NOR flash memory, plus a few passive components. The color display adds a further $2.25 and is sourced from China’s Tianma Microelectronics. An older phone, the Nokia 1110, targeted the same market but contained six chips and was three times more expensive in its bill of materials. The new model allows Nokia to reduce the retail price to one of the lowest points ever, and boost its margin ‘ and there are still plenty of users who have no 3G or Wi-Fi access, and limited electricity (the phone has very long battery life).
Ironically, the logical conclusion of this game of ‘fantasy turnaround’ for Nokia is that it sells off its devices to Huawei and its web services to Microsoft (or Yahoo, or Amazon) ‘ and ends up with the unit it tried for some years to exit, Nokia Siemens. That would see 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 like BlackBerry, as its star fades in that field, it still has significant assets in the carrier network.
It now has full control of those assets, paying a bargain price of €1.7bn ($2.2bn) to buy Siemens out of their wireless infrastructure joint venture. After six years, the Finnish firm will achieve full control of the 50:50 venture, which has, after a troubled financial history, started to generate cash and to stabilize its finances by focusing more sharply on mobile broadband.
Nokia will pay €1.2bn with the remainder as a secured loan from Siemens, due a year after the deal is completed. However, while NSN has been a positive contributor to its Finnish parent’s results in recent quarters, it is still in a challenging business where Ericsson and Huawei are grabbing many of the economies of scale. That could mean Nokia still needs a new partner or investor to make NSN work long term ‘ CEO Stephen Elop told the analyst call that the equipment unit would not be fully integrated into the main company, and that he might still decide to seek partners.
‘There’s a range of options that could exist for NSN over time,’ he said during the call. ‘All of those options remain open.’
The price, lower than many had expected, values NSN at €3.4bn, less than the €5bn estimated by some Helsinki analysts. Many were baffled over the valuation, despite Siemens’ evident urgency to exit. Some analysts had assessed the sum of NSN’s parts to be worth up to €8bn, though the lower valuation could take account of Nokia’s ownership of many of NSN’s patents, and the imminent sale of production facilities to third parties.
The price could prove to be a bargain, as the equipment firm regains profitability and could even provide a more viable future for Nokia than the smartphone business ‘ the infrastructure business is tough, but there are still opportunities to lead and add value in emerging areas like software defined networking, while the Lumia Windows Phone strategy has limited opportunity to make a dent on the Android/iOS axis.
Pierre Ferragu, an analyst at Sanford Bernstein, told Bloomberg: ‘With this transaction, Nokia buys itself a future, whatever happens in smartphones and featurephones. Nokia Siemens has a future in the network equipment world, with a streamlined operation and a number two position in a now concentrated and stable market.’
Nokia Siemens’s headquarters will stay in Espoo, Finland, where Nokia itself is based, and Rajeev Suri will continue in his role as CEO. The deal should be completed in the current quarter, subject to regulatory approval.
Although NSN is further along with its massive reorganization program than rival Alcatel-Lucent, it still has work to do. For instance, internal sources say it is evaluating the sale of more manufacturing plants ‘ in Finland, China and India ‘ to raise about €600m and outsource production. Cost cutting activities so far led to a trebling of operating profit last year. However, there are several elements of its new strategy which suggest it could prove a growth engine for Nokia again, rather than the drain it has been through most years of the JV.
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.
Chris Nicoll, principal analyst at Analysys Mason, commented: ‘Nokia is taking advantage of the opportunity to re-establish the company’s mobile market leadership in the growing LTE market, particularly in the European markets where NSN is an incumbent network supplier in many networks. Nokia needs to make some significant investments in NSN to address concerns in three areas: NSN’s overall loss of market share has created concerns regarding NSN’s long term viability; delays with their LTE roadmap (specifically EPC) causes concerns; and the need for further radio developments for the Single RAN solution need to be addressed to strengthen the core LTE roadmap.’
But progress is being made, and 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.
This thinking has seen Suri backing away from prospects, and even customers, with severely limited profit potential; a heavy focus on services rather than just equipment, especially in low margin markets like India; and high investment in innovative architectures which will appeal to carriers on a different level from Ericsson’s and Huawei’s platforms. 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. Eventually, the extension of the Liquid thinking is that all functions will be virtualized and run as software on a chain of standard routers and servers ‘ putting NSN’s framework firmly in the move towards SDN, but also potentially transforming it from a hardware provider to a company differentiated by software. Indeed, NSN has acknowledged that Liquid Apps and other elements could theoretically run on other vendors’ base stations, though they would be optimized for NSN FlexiRAN hardware for as long as it makes that.
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.
In terms of technology and vision, then, NSN is belatedly ticking the right boxes, as well as generating cash for its parent. It could be that Elop ‘ who will have no expertise or instinct for this business, and should remain very hands-off in regards to Suri ‘ just wants to polish it up some more and sell it on for a profit. But this would be shortsighted, unless real progress in the device strategy can be achieved this year. NSN is close to the end of its cost-cutting, and has a credible platform in place to build real growth on top of that narrower expense base. It would be worth Nokia’s while to consider another of the dramatic reinventions which have characterized its long history and turn itself into an infrastructure provider again ‘ and then, perhaps, a carrier software vendor.