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Nokia moves closer to being a software-only vendor

Finnish company sets up standalone software business to target enterprise and IoT, and offset five-year decline in core networking sales

Nokia has been the most advanced of the major OEMs in embracing software-driven networks – even before ‘software-defined networking’ (SDN) entered carriers’ daily conversations, it had Liquid Net and Liquid Apps, and back in 2011, it was acknowledging that Nokia’s software could be decoupled from its hardware in future and run on third party platforms.

The Finnish firm is taking a step closer to life as a software-only vendor, a path which has already been signposted by its work with Intel on virtualized networks, and on bolstering its cloud-based OSS/BSS business. Now it says it will create a “significant” standalone software business, particularly targeting vertical markets.

Nokia said it wanted to expand beyond its “product-attached software model” and establish a unit with the flexibility to operate purely as a software business, focusing on enterprise and IoT platforms in particular.

This will bring some of its core software technologies to selected industries, together with services, though details are very sparse so far. It can be assumed that initial efforts will focus on applications, services and BSS, but to deliver its full potential results, Nokia will need to include the network itself, as that becomes a software platform itself, with developments like Cloud-RAN and Mobile Edge Computing.

CEO Rajeev Suri hinted at this, telling investors: “We aim to target superior returns through focused growth into more attractive adjacent markets, where high performance, end-to-end networks are increasingly in demand.”

However, the idea is wise. Many vertical sectors are keen to use 5G networks, not just for better mobile access but to enable new processes and transform their businesses. But this will require very different network behaviors, particularly in the Internet of Things (IoT), and different approaches from operators, which Nokia could help to drive more aggressively if it detaches its vertical industry activities from the established norms of its MNO mobile broadband efforts.

By going after new vertical markets which it says will be worth €18bn ($19.4bn) a year, Nokia hopes to offset the expected decline in network equipment revenues, which will not be reversed even by 5G. Nokia is pointing to a possible uptick in core mobile network business after 2021, presumably driven by the start of mass adoption of 5G, but by then, if its strategy succeeds, it will be a very different company, with its revenue mix weighted towards new customers, IoT and software. And that will be essential, because with major MNOs like NTT Docomo stating that they expect 5G capex to be many leagues lower than 3G or 4G, this is not the best hope for a turnaround in the 2020s.

Nokia currently generates about €1bn ($1.1bn) a year from enterprises, with about three-quarters of that coming from the former Alcatel-Lucent businesses, which Nokia acquired earlier this year. This is a very small percentage of the total Networks sales, which were €15.7bn ($17bn) for the first nine months of this year. A more coordinated effort will bring the company into conflict with key rivals Ericsson and Huawei, in areas beyond the network itself. Huawei has a significant enterprise business, while Ericsson is marking the one-year anniversary of its landmark deal with Cisco.

“We have an enterprise business that we want to scale beyond where it is today,” said Igor Leprince, Nokia’s EVP of global services, during the briefing. “We want to focus on key enterprises so you will see us talking to webscale players and banks – people spending billions in capex.”

All this change was, of course, designed to retain investor and customer confidence against a daunting backdrop of revenue and margins decline, and competition from Huawei, the company which, despite being excluded from major US business, is so far apparently immune to the changes in the networks industry.

Nokia said it expects 2017 net sales of networks to fall at the same rate as its overall global telecoms networking business, by about 2%. It blamed “competitive industry dynamics,” and the “timing of major network deployments”, as it faces the difficult hiatus period between completion of major 4G roll-outs, and the start of 5G.

Over the next five years, it said the networks sector, worth about €113bn ($122bn) this year , will decline at a compound annual growth rate (CAGR) of about 1%.

Last month, Nokia reported a third quarter net loss and 12% year-on-year decline in networking sales.

Suri said the plan to save €1.2bn ($1.3bn) a year by 2018 is on target, but added that restructuring and other charges related to it are expected to cost €1.7bn, more than the previous estimate of €1.2bn.

Nokia said it expects to increase the Networks unit’s operating margin next year to between 8% and 10%, from an estimated margin of 7% to 9% for 2016. It is targeting a long term operating margin for its whole business of between 10% and 15%. This will be boosted by the new focus on software and the Nokia Technologies R&D and licensing business.

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