Nokia Siemens Networks Day One

| April 3, 2007 | Competitive Update | Client Access |


Event Summary

On April 2nd Nokia Siemens Networks (NSN) started operations as anticipated following delay brought on by an on-going investigation of Siemens Communications. NSN is a 50/50 joint venture, combining the telecom operator networks businesses of Nokia Networks and Siemens Communications. With approximately 60,000 employees and EUR 17.1 billion in annual revenues (2006), NSN maintains an organizational headquarters in Espoo, Finland and a regional headquarters in Munich, Germany.

Analytical Summary

• Current Perspective: Very positive on the official start of the joint venture between Nokia and Siemens, because it heralds the birth of a significant new telecommunications infrastructure company composed of two leading telecommunications equipment manufacturers (TEMs), producing potential scale advantages to drive sales and profits. Well-documented mobile and fixed portfolio synergies put the new company in good position to attack the number one industry player. Unfortunately, however, a three-month delay for day one translates into a head start for prime contender Alcatel-Lucent. Ultimately, effective execution determines NSN’s success and the effort must begin in earnest with a merging of its considerable resources into a unified force capable of seizing opportunities. Done well, the three-month delay will mean little.

• Vendor Importance: High to Nokia Siemens Networks, because the merger was important to address new competition, including newly merged companies such as Alcatel-Lucent and emerging contenders such as Huawei. Closing the deal was essential to move to the next step: execution.

Market Impact

Market Impact:  Moderate

• Broadband Infrastructure: Moderate on the broadband infrastructure market, as NSN's broadband wireline assets are relatively modest compared to NSN's mobile/wireless assets. NSN will command DSLAM assets with respectable market share, but it lacks cable access assets and its efforts to combine broadband wireline and mobile/wireless assets effectively into more tightly integrated solutions has already been anticipated by its major telecom infrastructure rivals.

Market Impact:  Moderate

• Carrier Infrastructure: Moderate on the carrier infrastructure market, because the formation of a major new TEM changes the vendor landscape. NSN has articulated a strong strategy for carrier Ethernet networking at the edge of the service provider network in conjunction with its new generation of access gear. The “second mile” components of the platform are formidable competitors in the Ethernet edge aggregation area, and it is providing leadership in emerging technology areas such as provider backbone transport (PBT). NSN can offer end-to-end capability where needed, but it can also play in a multi-vendor network through standards-based implementations and via leveraging its global services organization.

Market Impact:  High

• Carrier IP Telephony: High on the carrier IP telephony market, because the joint venture brings strong fixed-line solutions with large and growing market share from Siemens together with mobility components at the application layer from Nokia’s IMS portfolio (plus handsets, of course). Competitors are not likely to be caught off guard, inasmuch as the two companies had previously publicized plans to rely on Siemens for core IMS components (e.g., CSCF, HSS, and policy management) and Nokia for its mobility components. However, the now-official NSN combines strong, yet complementary, market positions and requires proactive, aggressive competitor response.

Market Impact:  Low/Moderate

• Optical Infrastructure: Low to moderate on the optical infrastructure market, because the combination of Nokia Networks and Siemens does not result in any new optical capabilities (i.e., NSN’s optical portfolio consists entirely of former Siemens products). At the same time, the formation of NSN undeniably changes the vendor landscape. NSN has a broader set of sales channels, particularly with mobile wireless operators – a service provider segment that is becoming increasingly aggressive at deploying their own optical aggregation and transport facilities. Toward that end, NSN can now begin leveraging Nokia accounts to push new sales for the Siemens optical gear.

Market Impact:  High

• Wireless Infrastructure: High on the wireless infrastructure market, because the formation of a major new TEM changes the vendor landscape, creating a strong number-two player in GSM/WCDMA, with the potential for growth towards the number-one position. Following many months of uncertainty due to allegations of impropriety at Siemens, actual formation of the new company eliminates uncertainty lurking around the two competitors prior to close. Yet, customers and competitors both knew “day one” was coming and the finality of the event comes as a surprise to few.

Market Impact:  High

• Telecom Infrastructure Services: High on the telecom infrastructure services market, because the combination of two already major players forms a new Top 2 competitor. In services, scale matters, as do cumulative track records of experience. With a new organization numbering over 20,000 professionals in 150 countries, NSN joins a very exclusive Tier 1 club with Ericsson and Alcatel-Lucent, guaranteeing itself invitations to all major professional and managed services bids.

Competitive Positives

• Commencement of Day One means that product portfolio rationalization can begin in earnest. While both Nokia and Siemens developed extensive portfolio messaging prior to 3GSM Barcelona, closing the deal signals the start of making the adjustments real. Elimination of non-essential product lines is a key driver for research and development efficiencies. More importantly, communication of the decisions to the installed customer base settles worries about long-term product support while unlocking purchase decisions held in suspense pending Day One.

• While the start of the new company moved from its original date of January 1, the two companies moved vigorously to match Alcatel-Lucent’s strong start by getting permission to jointly display at both 3GSM Barcelona (February 2007) and CTIA (March 2007). The plan to delay the start of the company made sense given fiscal integrity issues at Siemens. Presenting a unified front with a comprehensive portfolio description was equally important for signaling that the new company has been in operation in all but name.

• The proposed NSN product rationalization decisions are logical. Maintaining both companies’ GSM and UMTS RAN portfolios puts NSN in the best position to please existing customers. Plans to develop a joint RNC and joint radio access products going forward yield scale efficiencies. Likewise, where one company’s product line will be the lead offer – Mobile Softswitch (Nokia), Mobile WiMAX (Nokia), IMS (Siemens), Network Management (Nokia), TD-SCDMA (Siemens) – the decisions were largely based on market momentum…again putting NSN in a position to meet most market demands with credible kit.

• Beyond the balance sheet, companies are societies influenced by employees’ attitudes. Nokia and Siemens enjoy close alignment of work ethic, social mores, technology focus, and time zones. Though a daunting and disruptive process is underway, close cultural alignment can provide social lubrication limiting long-term damage to internal relationships.

Competitive Concerns

• Core capabilities of the new company have not changed. Yes, NSN can start working on deals. Yes, NSN can start actually merging portfolios. Yet, basic assets remain the same and the new company does not enter into any new markets. When all is said and done, not much is different this week than last.

• Celebrating day one is easy, but the core tasks needed to demonstrate execution excellence have not changed. Integrating product portfolios takes time and energy and melding disparate, highly competitive sales and marketing teams requires strong leadership and sustained effort. As the inevitable downside of rationalization hits, momentum can falter – potentially endangering customer relationships. The Goldman Sachs removal of Alcatel-Lucent from its Pan-Europe Buy List cited reorganization impacts, customer hesitation and deliberate targeting by stable competitors as key factors in the downgrade. A comparable scenario may await NSN.

• Historically, Nokia Networks and Siemens Com aggressively pursued the market. Blending leadership teams is likely to stimulate internal rivalries given the high professional stakes. With substantial overlap, executives and product teams will fight for supremacy. What’s more, having competed fiercely in the past, employees from Nokia and Siemens will have strong, sometime differing opinions on appropriate market and product strategies – creating further friction with those employees “on the outside.”

• Combining two complex organizations and portfolios into a single effective organism is a big job. When it comes to execution of these tasks, a three-month delay in reaching closure of the deal surrenders a three-month lead to Alcatel-Lucent.

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