Nokia buys NSN - has it picked a new long-term strategy?

Jul 1, 2013

It's hard to see how the move can be interpreted any other way - instead of hunkering down to ensure the 'inevitable' success of the Nokia/Microsoft alliance over Windows Phone, Elop's Nokia is now hedging its bets. If the smartphone market continues to fail, then the infrastructure business, represented by NSN, will take up the slack.

After all, in handsets not only has Nokia failed to maintain any sort of viable share of the smartphone market (a market it pioneered) but now - with the feature phone market also under pressure - it could hardly be blamed if it did not entertain (however fleetingly) the idea that the mobile handset market as a whole may not be worth the fight. That market is rapidly consolidating at the smartphone end with Apple and Samsung already sucking out nearly all the profit leaving little room for any other player as Sony, RIM, HTC and LG can all attest.

Could Nokia be looking to change course completely? That may seem unlikely right now, but if Plan B (a growing NSN owned by Nokia) proves a big success, it's an option.

So what's changed today to suddenly make Nokia an eager buyer?

According to Nokia CEO, Stephen Elop, NSN's business turnaround plan announced in late 2011 has done the trick. The company then announced plans to lay off around 17,000 employees and set itself to focus on the US and Asian markets and on mobile broadband, mobile software and customer experience management.

As a result NSN has enjoyed "underlying" profitability in the last three quarters and in doing so bankrolled all of Nokia -contributing $274 million to the group's coffers in the first quarter and lifting it out of loss.

For its part, Siemens has been looking for an 'out' from NSN for several years in its own attempt to focus: a partial floatation was mooted but dismissed and more recently a private equity investor was thought the most likely way for Siemens to cash out.

So the news that Nokia - mired in its own problems with the non-performing handset business - has apparently suddenly decided to buy Siemens is a shock.

According to Bengt Nordström of consultancy Northstream, the deal actually looks cheap, valuing NSN at €3.4 billon which, he points out, is around a tenth the current value of rival Ericsson.

But Bengt wonders what the deal covers. Is all the patent stash included? Is it really intended that the new entity would keep up all the expensive Munich facilities or only some of them? Bengt thinks there's more detail to come.

What has changed very recently is the competitive landscape in the global LTE market. First, there is the battering that Huawei has received in US over its ties (or not) to the Chinese military (ironic since the latest revelations over PRISM). The upshot is that the Chinese companies no longer remain a force in the US LTE market and possibly not in the European market either, leaving the way more clear for NSN and Ericsson.

Alcatel-Lucent has also announced that its focus is to be the IP network and "ultra" broadband. While LTE is still a focus, the move appears to signal a move away from wireless as a whole. More potential business for NSN?

Last week's apparent victory for Softbank in the battle to buy Sprint has done NSN's prospects no harm either since Softbank is already a big NSN customer in Japan and will likely be a big winner in the US.

Nokia says the NSN (or whatever the eventual name is to be) operational headquarters will remain in Espoo, Finland, but that it will continue to be present in Germany and will maintain its major hub in Munich.

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