Nokia’s quarterly numbers were, to say the least, disappointing, and while telecom equipment is generally a challenge these days (Juniper had its own problem with its quarterly results), Nokia seems to be more challenged than most. The reasons that’s the should be an indicator for others in the telecom equipment space, and also perhaps for the networking industry overall.
I just blogged about the problem of vendors stuck in “feature-neutral”, unable or unwilling to get beyond the old-line networking of the last decade. That’s not Nokia’s problem. They actually have very good technology, features well-advanced. They don’t seem to be able to make people care, to get their hands around a way to advance their strategy and turn it into a buyer’s strategy.
One problem that Nokia obviously has is “mongrelization”. Nokia is the union of the original Nokia company, and Alcatel-Lucent, which of course is itself the union of Alcatel and Lucent. Those of us who knew the latter two companies through the years and watched the merger progress probably agree that there was never a happy combination achieved. Given that, it’s no surprise that adding another company to the mix resulted in a certain amount of confusion and tension.
In the old ALU and the current Nokia, a lot of product line people have complained to me that they seem to spend more time competing with other units of their own company than they do with the real outside competitors. M&A always generates political battles as the combined staffs of two companies fight for positioning in the remaining organization. This is certainly true with Nokia and the old ALU, but in Nokia’s case there are also some other issues.
Both ALU and Nokia were notably providers of wireless infrastructure, which of course means a combination of the two created more directly competing product strategies. That in turn exacerbates the political tension associated with the merger, and also any other tensions that happen to be simmering inside either or both companies before they joined.
In addition to the M&A blues, Nokia also has to face the fact that European telecom companies have hardly been superstars in the marketing/positioning wars. Marketing and positioning are key if you plan to rely on feature differentiation in your market, because you need to grease the skids of the sales education process by getting prospects to value the messages you want to convey on a sales call. Cisco is a master of this, and Nokia is exactly the opposite.
If you’re not able to sustain feature differentiation because you don’t know how to sing, you’re stuck with price competition. That is a truly deadly place to be in the telecom equipment space because everyone knows there’s one and only one price leader, now and forever more—Huawei. Some people were surprised by the sharp drop Nokia had in gross margins on equipment. Why, if you assume they’re doing head-to-head price wars they cannot win without giving away the store?
I know from experience that ALU and Nokia always tended to look at competitive analysis in terms of pasting their features on a chart against those of others, including Huawei. Why, I asked at one point, would you assume that Huawei would accept your features as the competitive baseline? “Huawei is not a competitor,” I said at one meeting. “They’re who wins if you decide not to compete.” Not setting the feature agenda for a market when you depend on features, not price, is deciding not to compete.
Another problem that Nokia faces is a blind reliance on the “Field of Dreams” theory of telecom equipment sales. Stick a new ascending digit as a prefix on the letter “G” and you have a new wireless market, guaranteed. There are two problems with this thinking. First, standards groups take forever to do anything, which means that you have little near-term new opportunity generated by a standards-driven market change. Second, standards-driven market changes are great for the standards people and standards bodies, but the CFOs are getting increasingly wary of them.
You can see in the way that Nokia is positioning its RAN/NR assets that it’s recognizing that it needs to sell something before 5G is fully baked, and that even then it’s not clear just how much 5G adoption will drive the market overall. We read about all these new 5G announcements in the media, but they carefully submerge the fact that most of those new cities are getting 5G/FTTN hybrids using millimeter wave for home broadband delivery, and players like Nokia aren’t leading that particular 5G niche. Even the mobile 5G is really 5G New Radio (NR) rather than the full 5G spec.
Nokia has also proved to be just as remiss in promoting what’s probably their strongest strategic asset as Alcatel-Lucent (from which that asset was acquired) had been. Nuage has been and is the strongest network operator SDN product in the industry…and perhaps continually the worst-marketed. SDN was seen by router aficionados in ALU as a silly notion that just might impact router sales. The Nuage people were largely geeky, which meant they weren’t very good at promoting their own stuff. Both ALU and Nokia are also, as I’ve already noted, in the lower quarter of the space with respect to marketing/positioning skill. No wonder Nuage doesn’t get a break.
Consider all of this in conjunction with another interesting truth, which is that the only large vendor in the space who’s worse at marketing and positioning is Huawei. Their strategy has been to wait until a market develops, and then lead it in price. The best defense against Huawei isn’t to wait till their eating your lunch on pricing, then whine. It’s to force them to do what they are not good at, which is sing until buyers rush in tears to your door hoping you’ll deliver them feature redemption.
Consolidation is the only inevitable consequence of M&A, but all the things I’ve noted above are predicable, likely, consequences of consolidation. The problem is that the efficiency impact of consolidation is a long-term thing, and all the consequences of the consolidation whose benefits you’re waiting for are meanwhile eating you alive.
If you’re being defeated by price in the present, you make buyers look to the future for reasons to buy your stuff. Almost everything Nokia says about the network of the future, the 5G revolution, is so old and trite that an enthusiastic cheerleader could go comatose just hearing it. Gosh, guys, don’t you have anything new to say? How many generations of networking were supposed to be justified by things like “medical imaging”? The future doesn’t mean science-fiction, it means credible new opportunities linked to available Nokia features.
Which should be a key point to Nokia planners, because most vendors in the space are dragging their feet on generating features, and so don’t really have them available. Nokia has a lot of very strong assets, including the Labs it inherited with the merger with Alcatel-Lucent. No feature asset is helpful if buyers either don’t know about it or don’t understand it well enough to value it. That should be a much easier problem to fix, but I have to admit that it didn’t prove easy for any of the entities that combined to generate the Nokia of today. They have to work now to make the positioning of the whole a lot better than the positioning of the parts, and other vendors like Juniper should be doing the same.