Why Nokia Should Keep The Telecom Network Business

As we have read from many sources Nokia (NOK) has decided to buy the Siemens 50% share of Nokia Siemens Networks (NSN). I believe this is an important decision both for Nokia itself and also for the long time investors relying in the recovery of Nokia company.

I have been following Nokia for 35 years first as an employee and now as an independent observer and I am happy to share my view on this important issue.

First, the integration of Nokia Telecommunications and Siemens Telecommunications has been a huge task and after 6 years of hard work there are clear indications that the work starts to bring results. The product port folio has been stream lined from many parallel products and systems into a clean and focused solutions around 3G/4G networks. The working processes are harmonized so that all the people understand how the organizations works throughout the whole value chain the company provides to its customers. Accordingly the overlapping organization has been adapted and optimized to serve the new solutions and markets. New solutions, like LTE, has been successfully launched to markets.

Second, from telecom operators´point of view the telecom network business needs genuine competition. In the competition there are now two camps; the Chinese camp with Huawei and ZTE and the western camp with Ericsson, Nokia Siemens Networks and Alcatel Lucent. It is obvious that there must be at least two strong players in the western camp to make a counter balance to growing Chinese players. I am quite confident that big western operators share this view. At the moment Ericsson is the market leader and has a strong and stable market position. Alcatel Lucent has some challenges to make the business profitable and has some challenges to overcome. Nokia Siemens Networks has turned its business profitable and in my understanding is number two in the western camp. The network operators would not like the situation that Nokia Siemens Networks would some how disappear from the markets. There is a clear initiative to continue.

Third, the mobile network business and mobile terminal business has some synergies that Nokia can deploy. The network operators and service provider are keen to constantly develop new services in the network. The services are implemented by the aid of new network functionality and by the aid on new functionality and new technology of mobile devices. So it is crucial to understand the network capabilities and mobile terminal possibilities in the important future service launches. E.g. some services may require a huge capacity enlargement in the network, before the service is really available to big amount of end users. A good example of this are the location based services, whose capacity demand was a surprice for many operators and service providers for some years ago. The more sophisticated the new service is the more capacity and resources the service requires. For a proper planning and implementation it is really important that operators have vendors who can manage both the network aspects and terminal aspects. In this respect Nokia is in a good position to provide the comprehensive service and support to its customers, network operators.

Fourth, Nokia has dramatically changed its distribution strategy for mobile devices by making distribution agreements with leading network operators, like AT&T, China Mobile, Verizon etc. Earlier the company focused on its own trademark Nokia by having its own distribution network, which is still the case in some markets. The new mode clearly strengthens the overall relationship between Nokia and its network customers. Some new Lumia models are also partly tailored for the operator customer to give them an opportunity to differentiate in the hard device competition.

Fifth, the entry barrier to network business is much higher than a barrier to enter the terminal business. Nokia and all the leading device makers will meet new competition in device markets as we have seen. In network segment the number of players has been reducing after the Chinese suppliers came to market and it seems that the competition is now on a healthy level.

So as we have seen above there are some industry level reasons and Nokia internal reasons why Nokia has decided to take the whole ownership on Nsn. In spite of recent heavy competition between Chinese camp and western camp my firm belief is that the network business is returning more profitable and providing value also for the investors of this segment. Networks will be a crucial part of Nokia future product and solutions portfolio.

Disclosure: I am long NOK.