Verticals and a device comeback: Nokia fights to return to growth in 2017
Three years ago, end-of-year analyses heavily featured Microsoft’s decision to acquire Nokia’s devices business. As we picked over the corpse of Nokia’s smartphone failure, there was wistfulness for a world-beating business gone wrong, but also a recognition that the Finnish company had lived up to its century-old reputation for agility, getting out of a sector where it was failing, and leaving its rump company better equipped to be a mobile powerhouse still – in infrastructure and intellectual property if not in handsets.
Nokia, we now know, certainly gambled more astutely than Microsoft. By mid-2015, a year after the deal was finalized, the US company had accepted the folly of former CEO Steve Ballmer’s handset adventure, and written off the acquisition to the tune of $7.6bn and almost 5,000 jobs. By contrast, Nokia used its Microsoft windfall to make its own acquisition, of Alcatel-Lucent. The jury remains out on the effects of that deal. The transition appears to have been well-managed, with none of the nightmares that accompanied the merger of Alcatel and Lucent themselves, or of Nokia’s joint venture with Siemens; and CEO Rajeev Suri is on track to meet most of his short term targets.
However, Nokia remains in third place in a telecoms equipment business which is living with negative growth, falling prices and a high risk transition as the network is transformed into an IT platform. Nokia has some real jewels in the areas of network virtualization, cloud platforms and the mobile edge – both its own and the ALU dowry – but it has significant challenges in trying to close the gap with Ericsson (especially if the ailing Swedish company makes its Cisco alliance work in 2017), and of course Huawei, which is increasingly combining its economies of scale with a palpable lead in innovation in the 4.5G network.
Earlier this month, at its Capital Markets Day, Nokia’s head of mobile networks, Samih Elhage, set out its strategy to improve the firm’s position against its two giant competitors – as well as fending off new challengers from the data center space. This is all about “strategic adjacencies” – moving into new areas which can harness existing Nokia strengths but provide better growth potential than traditional IP and mobile broadband nteworks.
And the year is ending with two pieces of news from Nokia, which offer pointers to the way that strategy will play out in 2017. One is a small but significant acquisition, of analytics specialist Deepfield, which will bolster Nokia’s strategic push deep into software-defined networks (SDN) and the cloud.
The other is the return of the Nokia handset, via a previously announced licensing deal with a purpose-built Finnish start-up, HMD. This please those who shed sentimental tears, in 2013, at the disappearance of the iconic Nokia handset – the first result of the HMD agreement is not the widely speculated smartphone, but a good old candybar featurephone which evokes the heyday of the company, before Apple burst on the scene to spoil its party.
More importantly, the HMD agreement, like an earlier one with Foxconn for tablets, shows how Nokia aims to exploit its considerable assets in design, intellectual property and brand to create an additional revenue stream to accompany its equipment business. Like Ericsson, it needs to take a more Qualcomm-like approach to these jewels, turning them into an independent revenue stream rather than just supporting the main products business – and improving its profit margins into the bargain, since Nokia is no longer saddled with the actual manufacturing of devices.
Licensing and SDN will be hallmarks of the 2017 strategy, along with some of the “adjacencies”, which focus heavily on selected vertical markets, managed services and the Industrial Internet of Things (IIoT). And not to forget that Nokia remains, at heart, a radio vendor, so 2017 will see considerable enhancement of its 4.5G platform and the introduction of ‘4.9G’ – its stepping stone to 5G.
Deepfield acquisition highlights the challenges of turning networks to software
Once an operator entrusts its network to software, it needs to be sure that software will make better decisions than humans. Increasingly, software-defined networks (SDN) technology is being coupled with very complex analytics capabilities supported by artificial intelligence (AI), in order to reassure carriers that they have done the right thing by automating their precious networks.
Many of the advantages of virtualization and SDN – flexibility, cost-effectiveness, intelligent allocation of resources on-demand – rely on automating the process of allocating those resources, on a real time basis, and tapping into deep knowledge of the condition of the network and the behavior of users. Th is where Nokia hopes to steal a march with the acquisition of Deepfield, for an undisclosed sum.
Deepfield’s algorithms, says Nokia, can provide its SDN systems with te deep analysis of what is happening in the network at any given time or place, and so can help it make better decisions. Combined with Nokia’s own systems, Deepfield’s products will form a “cognitive brain”, the acquirer said. This will make real time, automated changes to wide area and data center networks “so they can quickly adapt to changes in application demand, flow and traffic patterns”.
The five-year-old firm has developed a software-only network analytics system called Singularity, driven by application programming interfaces (APIs). It draws on data from “hundreds of sources” – such as probes, sensors, network elements, OSS platforms – in real time using standard protocols like SNMP and DNS. An important additional feed is Deepfield’s other platform, Genome, which the company claims “continually maps every single Internet end point on the global service supply chain”.
Using Genome, Deepfield can fingerprint traffic from about 30,000 popular cloud applications and services, looking for changes in traffic patterns in order to address bottlenecks or detect DDoS (distributed denial of service) attacks. It can also allow the operator to control application performance and quality of service on a per-subscriber basis.
All the data collected from these various sources is analysed and fed into applications for service assurance, network management and security. The existing user base is heavily focused on the US cable operators, with Comcast and Time Warner Cable (now part of Charter) being customers, along with European research network GÉANT.
The Singularity and Genome tools will now be integrated into Nokia’s key SDN offerings. Network Services Platform (NSP) and the Nuage Virtualized Services Platform (VSP). It will retain Deepfield’s 65-strong team in Michigan. The start-up has raised just over $3m in funding from investors such as Mercury Fund, Resonant Venture Partners and RPM Ventures.
Its technology should not only improve Nokia’s SDN proposition for its core MNO and telco customer base, but also help with its push to become a core supplier for organizations operating large-scale data centers and cloud services platforms. These companies might traditionally have dealt with IT giants like IBM and HPE, but just as those suppliers can now move deep into the network as it virtualizes, so Nokia hopes that it can make the reverse move, and bring its carrier-grade skills to bear in the data center network.
Nokia eyes “adjacencies” in vertical sectors and IoT, to restore its revenues
Of course, cloud services providers are one of the adjacencies identified by Nokia in its recent strategy briefing, along with selected vertical markets and the IoT. The key areas of growth are expected to be:
- Professional and cloud services in the core telco market
- New IoT services
- IT services where these are tied to the network, but often with partners
- Disrupting rivals with extreme automation via SDN
- Managed and cloud services for key verticals – public safety, energy, transport, government, manufacturing – often linked to the IoT
In a nutshell, Nokia’s Mobile Networks wants to build professional services in its primary market; develop new IoT services (of course); play selectively in IT services, disrupt through extreme automation (in terms of software control of networks); and expand into those new verticals.
Here, it will certainly look to sell its own SDN platforms, but it is likely to gain better growth from managed services. These account for about one-third of revenues, but the outsourcing services are targeted mainly at the traditional telco base.
Nokia now hopes to deploy and manage networks for vertical industries too – these increasingly need to be connected and digital, linking up large numbers of items, such as machinery and vehicles, which have not needed mobile connectivity before. Unlike telcos, organizations such as utilities, manufacturers and banks are rarely expert in networks, and should be open to entrusting this to a third party. This is especially true when it comes to mobile enterprises or wireless-centric IoT strategies – however virtualized these networks may become, they will always need actual radios and antennas, and radio skills remain precious and rarefied.
Low hanging fruit might include public safety agencies, said Nokia, or sectors with very remote or specialized connectivity requirements such as mining or oil and gas. In other words, private networks will live on, despite the dreams of many governments that vertical markets could all be served by a high bandwidth, flexible public network. With 5G, and the promises of a fully virtualized platform supporting slicing, this dream might be more achievable, but the timing is out of step with the growth of the Industrial IoT.
Network slicing requires considerable development from suppliers and standards bodies, not to mention real world business models, so is unlikely to be fully commercial in most countries until the mid-2020s or later. But the verticals which Nokia is targeting need to connect their machinery and sensors long before that. LTE may work for them – especially now that it has specialized strands for low power wide area networks and for public safety – but the public network will not. They require optimized network behaviour and guarantees on security and availability, which only a private network can provide.
Nokia has recently been very active in this space – for instance, in its agreement to build and manage a private network for a mining company in Australia – so it is no surprise it counts as a critical adjacency. “Many enterprises don’t want the burden of managing these networks themselves,” said Elhage, during the London event. “They just want the applications the networks deliver.”
Overall, Nokia is calculating that, in the mobile space, the targeted adjacencies represented an addressable market of €2bn ($2.2bn) in 2016. This is small compared to its total mobile addressable market of €64bn ($69bn, but the new areas will grow at a compound annual rate (CAGR) of 23.2% over the next five years, it estimates, compared to just 0.4% for the mobile sector as a whole.
Of course, new markets bring dilemmas too. Nokia will have to work more closely with IT suppliers which might also be competitors, as Ericsson is doing with Cisco. And appealing directly to vertical industries could clash with its core customers, since many telcos are also trying to boost growth and profits by providing managed cloud and network services, especially linked to the IoT. Ericsson has already been trying to strike this difficult balance, especially in the connected car area, where it has deals to manage devices and IoT services for Volvo and others – deals which could also have been won by telcos. But Elhage insists it will more commonly partner with its telco customers – who still have the trump card of spectrum – in contracts with government and safety agencies, and others.
Addressable mobile market revenues (€bn)
For instance, Nokia might provide cross-border services for an international enterprise, on top of networks deals which were struck on a country-by-country basis by one or more MNOs. But the potential conflicts of interest seem larger than the opportunities to partner, especially as more open sources of spectrum emerge for the IoT. The web-scale giants like Google and Amazon are obvious targets for managed networks assistance, yet they will seek to undermine some of Nokia’s core customers. “With new requirements they can compete in an agile way with operators, and we can generate solutions to respond to particular needs,” said Elhage.
But of course, the traditional business, on which Nokia has built its empire in the mobile stage of its long life, is far from dead. Despite the pressures on the mobile networks business, operators will always need good old radio expertise. Last week, Nokia boasted that it had signed contracts for ‘4.5G’ networks with 110 service providers round the world. The labelling of 4.5G has become confused since Huawei first coined the term a couple of years ago. The Chinese firm was making the point that most operators will not be thinking about a wide-scale 5G radio upgrade for a significant number of years, but they will want to continue to evolve their LTE networks, and put new architecture elements, such as virtualization and low power WANs, in place, to make their systems 5G-ready at least.
That trend holds true, although in the market itself, 4.5.G mainly now refers to LTE-Advanced or LTE-Advanced Pro technologies – the newer waves of the LTE standards, 3GPP Releases 13 and 14, which are appearing in commercial kit between now and 2018. Nokia muddied the waters further earlier this year by introducing the marketing terms ‘4.5G Pro’ and ‘4.9G’, roughly to correspond with LTE-A Pro.
At Mobile World Congress this year, Nokia emerged as the most aggressively ‘5G-ready’ of the big vendors, though arguably Huawei has usurped that crown as the year has progressed – still stressing its 4.5G message of LTE enhancement and long term continuity, but also showing off genuine breakthroughs in areas that will be critical to 5G too, such as active antennas. Both vendors, and Ericsson, are battling to strike that difficult balance
As a new generation of standards approaches, vendors have a difficult balance to strike, between driving new sales of the current generation of kit, and trying to make customers invest in the next one at an early stage, in order to seize market share. Nokia’s roadmap promises that 4.5G Pro – coming to market at the turn of the year, and based on its AirScale platform – will deliver “10 times the speeds of initial 4G networks”, and a seamless upgrade for current customers of Nokia 4.5G (LTE-A).
At the time of the ‘4.9G’ launch, in early September, Nokia said it had 90 LTE-A customers, a number that has clearly swelled by 20 in the intervening quarter. Meanwhile, ‘4.9G’ is being billed as a parallel technology to early 5G, allowing operators to continue to enhance their LTE networks even as they start to deploy the next generation standards.
According to Nokia, 4.9G will appear in its commercial products in about a year’s time and will bring “significant capacity and data rate enhancements and network latency reductions to let users maintain a continuous 5G service experience complementing 5G radio coverage”. It will boost speeds to “several gigabits per second”, by aggregating even larger numbers of carriers and using highly directional antennas which will “allow signals sent via multiple transmit / receive paths to be added together”. It also promises to enable cloud-based RANS, with significant intelligence at the edge to reduce latency to below 10ms.
This is an area where Nokia has been a pioneer among the network OEMs, particularly via its work on Mobile Edge Computing (MEC) with Intel – although 2017 may see it forefeiting some of its advantage, with signs that ETSI MEC is losing ground to ‘fog computing’, a more IT-oriented approach driven initially by Cisco, as the most favored way to shift network functions to the edge.
The iconic brand returns, as HMD unveils an old-style Nokia featurephone
Last month, when Nokia confirmed its licensing deal with HMD Global – a start-up created specifically to make handsets under the Finnish firm’s brand – there was considerable speculation that a smartphone would quickly follow, an Android device which might even, finally, bring the Nokia name a winning product in the iPhone era.
These suppositions proved very wrong. The first devices from the new entity, which will be manufactured by Foxconn, return right to Nokia’s roots. Rather than bursting on the scene with the premium smartphone Nokia never quite managed, HMD has produced the sort of handsets for which the Finnish giant was loved in the pre-iPhone world, and which it continued to sell in huge numbers almost until the sale to Microsoft.
The new products are the Nokia 150 and Nokia 150 Dual SIM, candybar plastic handsets which will sell for $26 and will be sold in all regions except the Americas from early 2017. Both models have 2.4-inch color screens, standard dial-pads and a choice of black or white colorway. They do not support apps or Internet access but they do include an FM radio players and boast 22 hours of talk time or 31 days of battery life in idle mode.
Presumably HMD will get more ambitious as it exploits the 10-year agreement it struck in May. Created by former Nokia executives, it has a partnership with Foxconn, and the pair paid $350m to Microsoft for the right to manufacture the devices. There are additional payments to Nokia for brand rights. The non-compete clause of Nokia’s sale of its devices division to Microsoft expires at the start of 2017.
The HMD deal is the biggest agreement Nokia has done to license its brand and some design and technology elements for mobile devices. Its Technologies unit has also been designing new devices inhouse, though not handsets, but other connected products such as the Ozo virtual reality cameras and a smartwatch from recently acquired smart healthcare firm Withings.
In handsets, Nokia’s activities are likely to follow the pattern set by the Foxconn Nokia N1, with the Finnish firm licensing a design and its venerable brand, but staying out of the cut-throat business of manufacturing and selling the products itself.
HMD is one of a series of Finnish start-ups which have risen from the ashes of Nokia’s handset sale (Jolla being another), and was established specifically to license and sell new Nokia-branded phones. It is the result of an intricate four-way arrangement.
Foxconn’s FIH unit paid $350m for Microsoft’s featurephone business and Vietnam handset factory, but some of the 4,500 Microsoft employees which were transferred as a result of the deal have gone to HMD (the rest to Foxconn). FIH will not only have its own featurephones but will manufacture those of HMD.
HMD will be in charge of designing, making and selling the devices, said Ramzi Haidamus, president of Nokia’s IP licensing business, when the deal was first announced in May, but will follow Nokia’s broad product guidelines. The Finnish start-up is committing over $500m over three years to develop and market “a full range of Nokia-branded feature phones, smartphones and tablets” – and every dollar will be needed to remain competitive in a hugely pressurized market in which it has entered late, relying heavily on an abiding love for a brand which was severely weakened by the rise of Apple, and which has been virtually absent from the market for two years.
The funding which will enable that bold marketing plan does not come from Foxconn, Microsoft or Nokia – theirs are purely commercial arrangements, while HMD’s backers include a private equity fund called Smart Connect plus industry executives. HMD’s CEO, Arto Nummela, was previously a Nokia executive and currently runs the global featurephone business at Microsoft and the software giant’s mobile devices business in Asia, Middle East and Africa. He will resign those roles once the deals are finalized.
Meanwhile, SmartConnect’s principal, Jean-Francois Baril, was formerly an SVP at Nokia, and Nokia Technologies will have a seat on the new company’s five-person board.
Analysts at IHS, in a client note in May, wrote that the HMD arrangement reflects “the extent of Nokia’s ambition to remain a consumer brand and its continued ability to reinvent its business with a modern mobile phone business operating structure. It also completes a slick series of corporate manoeuvers to offload a mature mobile phone business in need of restructuring, using proceeds to buy out Siemens from the NSN joint venture, while allowing room for this 2016 return to the smartphone market.”
Nokia is making a comeback with relatively low risk and capital investment – a trick which has been tried before by companies which could no longer stand the heat in the handset market. It indicates some of the old Nokia ability to respond to change with brave decisions, including the one to ditch all its diverse businesses and concentrate only on mobile, back in 1992; and the one to exit the handset market it had dominated so entirely – but then thrown away – with the Microsoft sale.