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12 January 2021

Nokia will not stay in markets where it isn’t technology leader, says CEO

Just weeks after Nokia’s new CEO, Pekka Lundmark, killed off  ‘end-to-end’ as the company’s key differentiator in networks, he has added more detail to his roadmap for a turnaround in 2021. In November, Lundmark made his first statements about how he proposed to address Nokia’s challenges, particularly those caused by setbacks in 5G architectures and early roll-outs.

He effectively abandoned the strategy that was adopted when Nokia acquired Alcatel-Lucent, of focusing on end-to-end and converged wireline/wireless strengths to set against Ericsson’s more mobile-centric approach. That also saw some senior executives who had joined with the ALU deal, also depart, signalling a reversion to the mobile-first mantras Nokia adopted prior to ALU, but also a redoubled emphasis on areas where, despite 5G missteps, the Finnish firm has continued to make strong progress. Those include network software and, in particular, private and enterprise networks.

Just before the holiday season, Lundmark added further detail to his plan, though he was careful to stress that the turnaround would not be an overnight occurrence – his roadmap lasts for a full three years, until the end of 2023. It will be led by a streamlined executive team – down from 17 to 11 people – which will lead the new structure, based around four new business groups. This structure took effect on January 1.

The move away from an all-encompassing end-to-end message is likely to be motivated, at least in part, by the need to make it simpler to separate different elements of the business for sale or break-up. However, the new CEO said that decisions about potential divestments or spin-offs had been put on hold for the time being. He is currently providing no financial guidance but may share more investor details in a few months’ time when he has better visibility. Both these statements seem designed to arrest the buzz of speculation that has surrounded Nokia for the past year, and give Lundmark and his new senior team some breathing space to work out their plans, without the need to update the markets on a very regular basis.

Nokia confirmed the leaders of the four new business groups:

  • Tommi Uitto will serve as president of Mobile Networks, the largest unit and the most challenged. Nokia is still in the process of transitioning from its initial base station system-on-chip architecture – which proved too expensive and to have some performance hiccups – to a new platform. That has created unwelcome delays and additional costs at a time when the race is fully on for the first waves of 5G contracts. Lundmark said he was expecting “zero profitability” in 2021 in this unit and the next year would be challenging to margins, but he was confident of longer term significant improvement, especially driven by support for open and virtualized RAN architectures, and for enterprise cellular platforms.
  • Network Infrastructure includes the IP, optical, fixed and submarine networks activities and will be led by Federico Guillén.
  • Cloud and Network Services, which includes communications software, mobile core, enterprise, cognitive and managed services, will be led by Raghav Sahgal.
  • Nokia Technologies, which includes patent, technology, and brand licensing, will be led by Jenni Lukander.

Overall, Lundmark said the new structure would simplify internal operations and map them more effectively to the real way in which customers procure and behave. “In today’s model, even in a fairly straightforward mobile access deal, there are five management team members that are in a way partially responsible for that deal and that takes a lot of coordination and effort,” he said. With the new organization “it will be very simple, it will be in one business group, that whole part of the network, and the same logic follows to other parts of the network.”

There will be very limited cross-selling between the four units, said Lundmark, in line with the new thinking about end-to-end deals. Each unit will be judged on its own revenue and profits. “We have analyzed these four businesses and have concluded that deal overlap is going to be only 20%,” said the CEO, which he believes will speed up decision making for customers and help to prioritize R&D investments (which he said would be increased to regain 5G leadership, though that was not yet clear in the figures, with capex set to fall by 9% in 2020 compared to 2019).

The new model will “simplify the structure, make it easier for customers to do business with us and help investors assess the value of business groups better than today,” said Lundmark.

Lundmark may have shelved discussion of more radical restructuring for now, but he is clearly thinking about potential sell-offs to focus resources where success is most likely, and to cut cost. He said that, medium term, Nokia would only stay active in markets where it could achieve technology leadership, which is essential to have pricing power. “Technology leadership is paramount if you want to deliver economic value,” he said, adding that in most segments, there would be only two or perhaps three such leaders.

Where Nokia cannot realistically be a top three player in technology, it will not be able to command strong margins or market share, and he will expect to exit such markets.  “A very critical belief that we will apply is that in cases where we will not be able to establish or show a path to economic value creation, we will reassess our segment participation,” he said. “So we will not automatically be in all different segments in cases we cannot show economic value creation.”

Lundmark was generally reticent about sharing many firm details about Nokia’s 5G progress, but he did address ongoing speculation that the company had lost a major 5G deal with Verizon last autumn, when the US operator awarded $6.6bn in 5G deals to Ericsson and Samsung. “When it comes to Verizon, we have to remember that they will continue to be among our top three customers, also going forward,” said Lundmark. “There are a lot of opportunities. We actually published a dynamic spectrum sharing software deal with them. We continue to work with them in many segments. We also recently published a 5G private wireless deal with them as well. We are also very strong on the software side with the core network.”

As the restructuring unfolds, it may put Nokia in a better position to win selected portions of networks deals with large operators like Verizon, as they push to implement best-of-breed and multivendor platforms. But there are clear risks in what Lundmark is throwing away. Influential new entrants like Rakuten may be thinking best-of-breed rather than wanting to rely on one or two large vendors throughout the network, but they are certainly thinking end-to-end in another way – not buying all the elements from one supplier, which is the old-fashioned definition of the phrase, but procuring them all in a unified way around a common platform.

Much of the opportunity for large vendors like Nokia is to be able to offer products in every part of the network, but also to provide the integration services to help an operator achieve a multivendor end-to-end deployment. As telcos start to be serious about network slicing, as an essential way to support new 5G and converged services in an agile and affordable way, end-to-end integration will become an even more important differentiator and revenue source.

It is critical that Lundmark restores Nokia’s reputation in 5G RAN, its cornerstone, and this is already being attempted with strategies such as seizing the lead in open RAN and vRAN platforms – a move which has forced Ericsson, to some extent, to follow suit.

But the network-as-a-service strategy is perhaps the most interesting and important aspect of the new approach. One of the legacies of previous CEO Rajeev Suri will certainly be the push into enterprise markets – providing services with or without operator involvement, which has given Nokia a leadership position in 4G and 5G private networks, and a strong position to take advantage of trends such as shared spectrum (for instance, the USA’s CBRS).

It has multiple platforms to make it easy for operators to deliver services to enterprises, or for enterprises to use them directly, with its Cloud Packet Core, WiNG IoT platform and others. In supporting the trend for organizations to want their own 5G connectivity, and to move connectivity and applications to the edge cloud and to hosted services, Nokia is right on the money, and well ahead of its rivals.