Nokia-ALU Merger Sensible in New Era of Cloud, Says Gartner

 

• By Tiernan Ray

Shares of Nokia (NOK) today closed down 34 cents, or 4%, at $7.96, as the Street mulled the announcement this morning by Nokia that is talking with competitor Alcatel-Lucent (ALU) about a potential tie-up.

Alcatel stock rose on the news by 58 cents, over 13%, to close at $4.93.

Among those taking a look today at the prospects is Akshay Sharma, who follows carrier communications equipment for research firm Gartner.

Sharma thinks a tie-up would be a good thing for both, and for the industry.

The starting point for the analysis is the pecking order of telco equipment, as represented in the following table of 2014 vendor market share:

“CSP,” in this case, stands for “communications service providers.”

As Sharma explains the market,

Our market sizes includes all service providers offering telecommunication services or some combination of information and media services, content, entertainment and applications services over networks, leveraging the network infrastructure as a rich, functional platform. CSPs include the following categories: Telecommunications carrier, content and applications service provider (CASP), cable service provider, satellite broadcasting operator, and cloud communications service provider. We do not break out the individual segments by carrier type.

That means the stats above include base stations, small-cell networking, Internet protocol routing, and on and on.

Sharma has a couple of points to make.

Firstly, it makes sense for Nokia, with 8.2% overall share and fourth place, to combine with Alcatel’s 8.7% share, to achieve a combined 16.9% share, putting them in a solid number two behind Ericsson (ERIC) and ahead of China’s Huawei.

Consolidation makes sense because the two compliment each other in many areas and can win more business together than each can separately:

Nokia doesn’t have IP routing, they have had to go with Juniper [Networks (JNPR)] for that, and they don’t have an end-to-end story. Carriers like the one-stop-shop, to have one vendor that will stand up for the SLA [service level agreement] of the solution. Having two box vendors, the reality is that finger-pointing occurs. Having Alcatel’s Juniper-like IP routing all in house would be a big advantage. Now, Alcatel has cut back massively in recent years, they exited a lot of services contracts. But Nokia are very strong in services, and in the world market. Now, Nokia could offer the sales and support where Alcatel might not be as strong, and they can both get more business than if they were separate. What’s going to happen is there will be a go-to-market strategy that by joining forces, will lead to business you wouldn’t have gotten if you just didn’t get the scale. Nokia is not as strong in the U.S. market, for example, even though they bought Motorola‘s base station business. They are really  only in T-Mobile US (TMUS) and a bit of Sprint (S). Alcatel brings huge market share in both AT&T (T) and Verizon Communications (VZ). It’s opening up newer markets and also products. Nokia has a larger market presence with their small-cell portfolio, the Liquid Radio product, etc.

But innovation, says Sharma, also makes sense because the whole field of carrier equipment is moving to the cloud. The companies that have scale in the underlying physical infrastructure have a base from which to invest the R&D to develop newer things such as “network function virtualization,” or NFV, and software-defined networking (SDN), and other overlay services. If they don’t, they may be pushed aside by small, innovative startups, such as Genband, a privately-backed company I profiled recently on this blog.

Going to the cloud, you need to join forces for heavy iron, but there will be a lot of innovation among startups. In the camp of “Other” vendors, companies under a billion, their collective slicee of the equipment market is actually pretty big — they are combined 20% of the capital expenditures, which is bigger than the single share of Ericsson, Nokia, or Alcatel. They include some big companies such as Microsoft (MSFT),  but which have small businesses in this area; and they include small outfits such as Genband or Metaswitch. So, I think there’s an opportunity Still. The trend to cloud will also bring about newer innovations. The significance of smaller players is at end of day, Nokia, Alcatel and Juniper provide the plumbing but there will be telecom carriers embracing cloud-based data centers where software providers come in. Nokia and the rest can sell software. There will be a co-opetition. Alcatel has virtualized a lot of their platforms, including with voice-over-IP (VOIP) and cloud-RAN. Ericsson is doing this, Nokia is doing this. Juniper bought Contrail, Oracle (ORCL) bought Acme Packet and Tekelec. Everyone is trying to virtualize the old boxes and put them in the cloud. Cisco [Systems] has been making acquisitions. Juniper is partnering with IBM (IBM) in a big way for their “virtual MX” router. There is going to be an application layer in the cloud, but still a physical. What’s going to happen is there will be a go-to-market strategy by joining forces that will lead to business you wouldn’t have gotten if you just didn’t get the scale. 

Asked about divestments, Sharma opines Nokia might get rid of some areas of overlap, such as “voice over LTE,” or VoLTE, equipment which both they and Alcatel have been developing in competition.

“The real crown jewel [at Alcatel] is the IP routing division,” observes Sharma. “They would put that high on the list.”

“I would say probabaly if this merger were to happen, they would sell off an overlapping division that is not core, like VoLTE; I could see an IP PBX vendor wanting to go to the cloud and wanting to buy it rather than build it, perhaps someone such as Shoretel, or Avaya, or Cisco — none of them have a voice -over-LTE story, or even Oracle, which has pieces of the VoLTE IMS core.”