Just as we had wearily resigned ourselves to a two-way contest in the smartphone market, the sector may be thrown into seismic upheaval once again. If its stock value is anything to go by, Samsung may be joining Apple (and Nokia) in the category of dominant leaders which have passed their peak. Either of these is more than capable of pulling a rabbit out of a hat, of course, and stock market analysts do tend to focus on their most visible products and ignore other key weapons like supply chain control. However, there may, after all, be room for a shake-up, not just among the newer mobile device form factors, but in the smartphones themselves. Huawei has not only made its best shot so far at a credible challenge to Samsung, but was even rumored to be interested in acquiring Nokia. It denied that, but such reports reflect the opportunities that still exist for dramatic change in the established order.
Indeed, Nokia would do well to consider seriously the option of selling its handset activities. In a game of ‘Fantasy M&A’, it would follow through on reported talks with Microsoft and offload the Lumia range to its Windows partner; sell the increasingly viable midrange Asha and low end handset ranges to a company like Huawei, and reinvent itself around services and infrastructure.
It is stepping up its activities in delivering data efficiently from the cloud to mobile devices, with the Navteq-based Nokia Here location platform, the Express browser and other projects. Like BlackBerry, it may be time to focus on the back end rather than the devices, and rescue something from the Microsoft alliance in the area of web services. It could move more decisively into the cloud via its Nokia Siemens (NSN) venture, which is itself gearing up for the commoditization of mobile network hardware, and is focusing much of its attention on the cloud-based services to make sense of all those base stations.
A couple of years ago, we would have expected Nokia to exit NSN as soon as possible, but the venture’s recent reorientation, and improved financial position, suggest that the Finnish firm should, as reported, try to buy out Siemens, and undergo a significant reinvention itself, one that does not involve handsets. Nokia has not always been synonymous with cellphones ‘ unlike Motorola, it had a long history before the mobile age, and was active in sectors from timber to rubber. Another big change may be in order to rescue the Nokia name and influence, even if its signature phones fall to a rival such as Huawei.
So it is not just credible, but possibly desirable, that Nokia should try to buy Siemens’ 50% stake in NSN. The ownership of the company has been the topic of speculation and failed deals for several years, but it now looks poised for turnaround. Siemens is in talks with private equity firms about the possibility of selling either its 50% stake in the company, or preferably the whole venture, according to The Wall Street Journal. The German company has made no secret, in recent years, of its desire to exit the venture, which no longer bears much relation to its core businesses in segments like transport and power stations. And it could get a better price now that the impact of NSN’s dramatic reorganization, streamlining all its processes around mobile broadband and divesting many non-core units, is starting to be seen in improved finances.
Citing unnamed ‘people familiar with the matter’, the WSJ said Siemens has been in negotiations with various PE firms, such as TPG, Blackstone Group and KKR. Its preferred option is said to be the sale of the whole JV, which analysts estimate would be worth up to $9.36bn (£6bn) if it were a public company. That, of course, would require the agreement of Nokia, which has reportedly been trying to raise the funding to buy out its German partner, including engaging in talks with Solidium, the sovereign wealth fund in its native Finland.
NSN has helped Nokia, in the past few quarters, in its own process of stabilizing its finances. Earlier this year, Nokia officials said it had improved its cash position by more than $1bn, $866m of which was attributed to NSN. If a Nokia buy-out ‘ or the Finnish giant’s agreement to sell its stake too ‘ proves difficult, less likely fallbacks would be for Siemens to sell its 50% stake alone, or to mount an IPO to generate cash from the six-year old venture. The renewal of the NSN venture agreement on April 3 included a clause that allows either partner to weigh up their options for the joint venture without the danger of the other one exercising a veto.
Regardless of its infrastructure decisions, Nokia’s falling value and surviving strengths (in engineering, supplier relationships, emerging market brand and so on) may well attract acquirers for the handset business. The Finnish firm’s shares leapt on reports that Huawei was interested ‘ and stabilized when the Chinese vendor denied this ‘ but few would rule out this eventuality. Richard Yu, CEO of Huawei’s consumer business group, said at the launch of the firm’s high impact Ascend P6 smartphone this week: ‘We are considering these sorts of acquisitions; maybe the combination has some synergies but depends on the willingness of Nokia. We are open-minded.’
Of course, there would be all kinds of obstacles, not least from the Finnish government, at the prospect of seeing its greatest economic asset falling into Chinese hands. But there would be areas of strategic fit too. Nokia remains powerful, if declining, in emerging markets like Huawei’s homeland and India, and it has created a very credible ‘smart featurephone’ platform in Asha, which brings many of its old engineering powers to a low cost device family. Importantly, it has strong channels and brand in bases like India, which Huawei needs ‘ the OEM said this week that it planned to spend $30m on branding and retail presence in India this year, and is targeting sales of 1m smartphones there before the end of 2013.
The two vendors could combine their midmarket products to achieve major economies of scale, arguably a bigger attraction for Huawei than the smartphones, especially if Navteq were not included in a deal. A year ago, Nokia’s brand recognition and design skills, tarnished as they are in the age of Apple, might still have been important to the Chinese firm, but the Ascend P6 indicates that the company is starting to turn a corner in those respects, securing almost Samsung-like profile for its launch event and some strong reviews. And Huawei has shown only lackluster interest in Windows Phone, so Nokia would do little for it on the high end software front, though some of its hardware, notably its Pureview camera technology, would boost the Chinese firm’s armory.
Such technologies could help Huawei raise its game against Android leader Samsung, at a time when the Korean firm seems suddenly less invincible than it did at the start of the year. Like Apple, it has recently seen its shares drop amid investor fears that it is not innovating sufficiently quickly, and that its market share has peaked.
Meanwhile, Nokia could conceivably sell the smartphones to Microsoft, given Huawei’s hostility to Windows Phone. Of course, since the WP alliance, Microsoft has generally been tipped to be Nokia’s likely acquirer. Indeed, the two firms recently held ‘advanced talks’ about the software giant taking over its partner’s handset business outright, according to Wall Street Journal sources. However, the negotiations reportedly broke down over price and concerns about Nokia’s falling market share.
Microsoft has certainly been turning its attention to designing its own hardware ‘ devices whose user experience it can control and on which it can offer the integrated hardware/software platform on which Apple thrives. But it should learn from Google’s dilemmas ‘ and the fact Motorola scarcely figures in the search giant’s Nexus program ‘ and steer clear of outright ownership of that hardware. Alienating other OEMs and being stuck with a device unit which has yet to prove itself in smartphones and has no track record in post-PC products ‘ these are just two of the risks.
Some would question whether, if Microsoft really does want a hardware unit of its own, Nokia would be the right one anyway. Its biggest drawbacks would be its damaged brand and market share; and its lack of a broad device portfolio, since it lacks a tablet or other large-screened gadget.
Arguably, both these weaknesses are partly Microsoft’s fault anyway. Nokia was failing badly with Symbian, but its Lumia and PureView breakthroughs would have sparked a far faster turnaround without Windows Phone ‘ a fine OS and user interface, but one which has failed to capture user imagination (and with Windows RT faring hardly better). Rumors persist that WRT will be dropped amid falling OEM support, while Huawei’s Yu, in the same breath as hinting at interest in Nokia, made it fairly clear such a deal would involve dropping WP8. ‘Windows Phones are weak but still require a licence fee,’ he said. ‘That’s not good. Android is free.’
Nokia’s second downside for a putative Microsoft hardware business, the lack of a tablet, is partly, it seems, because Nokia wants to avoid competing directly with Microsoft’s Surface RT ‘ and perhaps that compromise has kept the Windows giant away from hitting Lumia with its own WP8 handset. If that type of gentleman’s agreement is in place, it indicates that Microsoft and Nokia could scarcely be closer even if they did merge, making the disruption, cost and risk of an acquisition pointless. And if Nokia’s turnaround is being hampered, not helped, by Windows Phone, it would hardly be in its interests to be firmly stuck with Microsoft ‘ unless it just offloads Lumia, and then, as outlined above, builds a new Nokia around its more promising activities beyond the smartphone.