The marriage of Nokia and Alcatel-Lucent is clearly a consolidation. The question is what the companies see as the end-game. Consolidation is usually a market response to commoditization, to the loss of pricing power that comes when no meaningful feature differentiation is possible. Consolidation can also be a step toward taking a leadership position in a new market phase, a way of cleaning up the financials and tidying product lines to align for a new future. Which is it here?
As a pure consolidation play, the combination of Nokia and Alcatel-Lucent is a reflection of the mobile market, and in particular the trends in 4G RAN. For a decade, wireless infrastructure capex has been able to sustain itself because wireless has been under less service price pressure than wireline. That’s changing, and it may change dramatically if regulatory trends in the US and Europe continue. Loss of roaming premiums and equal application of neutrality would likely be the last straw in making wireless and wireline equivalent in terms of return on infrastructure risk. Economy of scale would help a vendor in this situation.
But not for long. Nobody is going to out-price Huawei in the long term, and Ericsson (the other wireless infrastructure leader) is leveraging services and operations effectively to help sustain its position as well. I don’t think that simply consolidating is going to make the New Nokia a success in the space, much less a leader.
The only defense against commoditization is feature differentiation, and there’s precious little that can be done to differentiate what I’ll call “basic wireless” which means the RAN, IMS, and EPC. Standards and interoperability have narrowed the range of innovations that can be made in traditional infrastructure. Which means you have to get un-traditional to differentiate.
There are some basic symbiotic elements in play here. Nokia has a good agile RAN strategy and strong CSM elements to play with, and Alcatel-Lucent has WAN hardware for mobile networks as well as a good cloud-based IMS and EPC implementation. The question is whether these will be enough, given that gaining any economies of scale from the merger will surely demand consolidation in the product lines, and any dropping or changing of technologies could put current customers up for grabs. I think that Nokia will have to look beyond the obvious.
The most obvious opportunity for the New Nokia is to exploit NFV, SDN, and the cloud. Alcatel-Lucent has the best position in these three spaces of any network equipment vendor, though the company has been (not uncharacteristically) weak in positioning what it can do. If Nokia could leverage the Alcatel-Lucent assets in these three spaces it could be a player in the new mobile infrastructure revolution.
In a business-politics sense, that’s not going to be easy. Any big M&A tends to make everyone cautious, both within the companies involved and among the prospects for the companies’ products and services. This take-root tendency would be particularly destructive right now because of the fact that operators are looking for decisive responses to their own return on infrastructure crisis. Any approach that can’t be validated and initiated at scale within the next year is likely to be too late.
Another business-politics problem is that Nokia has been perhaps the only company to out-fumble Alcatel-Lucent in terms of marketing and positioning. No matter what the companies say now about how they’ll divide responsibility in the future, the combined business doesn’t have a great pool of serious song-and-dance types to draw from. And that at a time when singing and dancing are definitely going to be the order of the day, especially after a big M&A. And especially when the merger that created Alcatel-Lucent in the first place hadn’t really gelled even at the time of the Nokia deal.
The final issue is that Alcatel-Lucent just named (in January) a new head of the IP Platforms (Bhaskar Gorti), which would run the company’s critical NFV/SDN/cloud activity. You’d normally expect this sort of change to be accompanied by some substantive strategy/positioning shifts, and there’s been enough time for some of these to get going. What happens now? It’s hard to keep driving change without ever really getting it fully developed.
What does the New Nokia need to do? I think the first part of the answer is clear; they have to fully position themselves to be an operations integration giant for the age of virtualized infrastructure and as-a-service composition of retail offerings for operators. They cannot beat Huawei on equipment price anywhere that Huawei can sell, as I’ve said, and they have to compete with Ericsson who has the right tools but is also a vapid positioner of their own assets. Ericsson’s claim to fame for the future is OSS/BSS, but it’s also their weakness. Traditional operations isn’t enough for a virtual future. Alcatel-Lucent’s Gorti knows this, I think, because Oracle (where he came from) realized the ops value in NFV and was positioning to exploit it.
Operations integration for NFV has never been handled optimally by ETSI; they’ve considered it out of scope. The problem is that everything credible in terms of NFV benefits is derived in part (or totally) from operations efficiency gains. You can’t even save on capex with NFV if the inevitable increase in complexity that NFV creates eats up your savings.
Within operators, the operations integration issue has also created a face-off between those who think that the old-line OSS/BSS systems are dinosaurs and need to be made extinct so the next wave of technology mammals can emerge, and those who think that OSS/BSS is the base of mammals (hidden for millennia under the cover of dinosaur equipment policies and technologies) that must now emerge and become supreme. I’ve recounted in prior blogs that these two divergent OSS/BSS visions are often represented within the same operator, at the same meetings.
As it happens, it’s in expressing its operations integration strategy that Alcatel-Lucent has been the least successful in marketing/positioning its NFV story. It’s not clear that there’s a good approach behind the lack of positioning, so the first order of business for New Nokia should be to figure out what needs to be done and insure it’s happening. The second order is to do a lot of uncharacteristically strong singing and dancing around the story.
This new and good story has to be tied to mobile, of course, and it could be what unifies the troika of NFV, SDN, and cloud. What do these guys have in common? Virtualization of course, but more significantly they all have benefit cases that demand extraordinary operations efficiency. Getting operations, virtualization, and mobile all rolled into a common story won’t be easy, but I don’t see how the New Nokia can avoid pushing to make it work. Unless they want to watch commoditization continue to eat away at the combined company as quickly as it was eating at the two separately.
The possibility that the New Nokia might launch an effective campaign for SDN, NFV, and the cloud is a problem in itself for competitors, but perhaps a greater one is the fact that a mega M&A event in the industry would be driven largely by mobile considerations. Neither Cisco nor Juniper has a RAN, nor do they have a strong mobile position. They have to be wondering whether this M&A is a signal that you have to be in the mobile infrastructure game to be a contender even for M&A consolidation. Cisco may believe it can ride enterprise IT and carrier evolution even without mobile infrastructure specialization, and they may be right. Juniper? I doubt it, so they have to be even more effective in their own NFV/SDN/Cloud positioning than the New Nokia, and that’s going to be hard.
Hard, and ultimately not enough. A vendor, to have meaningful feature differentiation, has to be aligned with the features that drive the purchases. What do service providers sell? Services, obviously, and the most significant thing that’s changing here is the nature of services. Bits, as I’ve said, will never be really profitable. No matter what you do to make operations more efficient, you’re only band-aiding the wound that unlimited usage has already created and will almost certainly continue to create. You can’t make money selling something with a zero marginal price. So operators have to move upward, and so do vendors.
SDN and NFV are platforms to create the carrier cloud, and while Alcatel-Lucent has a cloud position (in CloudBand) it’s not ideal because they don’t make servers. Nokia has to realize that without the automatic seat at the cloud table that servers offer, they have to earn a place. SDN and NFV can create a fabric for applications and services, but both have to be extended to make that happen. Interestingly, Nuage has done a lot to provide for the SDN extensions so only NFV remains. The point is that the New Nokia may stand or fall on how well it exploits Nuage and addresses NFV, and it’s just getting those assets now. The challenge is obvious.