What Will Drive Growth For Nokia?

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Nokia has been operating in a struggling network infrastructure domain, thanks to sluggish carrier spending on network expansion and upgrades. The margins for this business are thin and the company has been losing share in the market to its strong competitors, Ericsson and Huawei. Amid this struggle, it is worthwhile to focus on factors that are likely to drive growth for the company in the future. The industry landscape is shifting towards software and Internet of Things, and that does provide a growth opportunity for Nokia. However, factors that provide the company with a competitive advantage are more likely to keep its growth afloat going forward. To this end, the Nokia-Alcatel Lucent merger, the re-entry into the smartphone domain and the development of narrow-band LTE devices can keep Nokia a step ahead of its competitors in terms of growth.

Nokia-Alcatel Lucent Merger

In 2015, Nokia announced the $16.6 billion merger with Alcatel-Lucent, and the deal has now closed. By merging with ALU, the Finnish company will be able to expand in the domain of optical transmission and IP routers and switches, which are important components for building a network. A comprehensive product line with advanced research capabilities for the development for future technologies such as SDN (software defined networking) and cloud computing will give Nokia an edge over Ericsson, which currently only offers wireless networking equipment and services.

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Also, the deal offers certain geographical benefits to Nokia, positioning it strongly in the U.S., China, and Europe. Alcatel-Lucent has long standing contracts with Verizon and AT&T in the U.S., and it even holds the second largest share in the global service provider router market after Cisco.  Both these factors bode well for Nokia. On the financial front, Nokia expects operating synergies of 900 million Euros by 2019 and 200 million Euros in expense reduction by 2017.

Re-Entry In The Smartphone Market

Earlier this year, Nokia announced that it has signed a strategic agreement with a newly formed Finland-based company called HMD to create Nokia branded mobile phones and tablets for the next ten years. HMD has been founded to provide a focused, independent home for a full range of Nokia branded feature phones, smartphones, and tablets. Nokia had sold its mobile phone business to Microsoft in 2014, and HMD will now acquire the right to use the Nokia brand on feature phones and certain related design rights from Microsoft. It also intends to invest over $500 million in the next three years to support the global marketing of Nokia branded mobile phones and tablets.

The move makes sense for two reasons: 1) the global growth in smartphone sales is strong; and, 2) strong customer response to its N1 tablet might have encouraged Nokia to reconsider its opportunities in the market. However, realizing that competition from leading smartphone vendors Apple and Samsung and low-cost manufacturers will not allow either easy entry or growth in the market, Nokia is letting its licensing partner do all the “heavy lifting.”

Narrow Band LTE

Nokia, along with Ericsson and Intel, is developing and launching pertinent products for the commercialization of NB-LTE (i.e., narrow band LTE) synchronized with the market demand. The company believes that NB-LTE technology is well suited to the IoT domain, since it is easy to use, power efficient, and has a low cost of implementation. NB-LTE networks allow data to be transmitted and received via the 200KHz channels, which means that reframed GSM bands can be used for the technology. However, it can even be used in shared spectrum with existing LTE networks. In fact, this feature gives Nokia’s NB-LTE an advantage over Huawei’s NB-CIoT technology. According to experts, NB-CIoT isn’t compatible with LTE networks older than Release 13, and they even require new chipsets. NB-LTE, on the other hand, does not require any overlay network and can be easily integrated with existing LTE networks. By utilizing the existing network infrastructure, NB-LTE can provide better economies of scale, which bodes well for Nokia’s future in IoT.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Nokia
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