Microsoft’s Loss is Networking’s Gain

This morning, Microsoft announced that it was shutting down what was left of Nokia. There has been a ton written today about the strategic, personal, historical and branding implications of all this for the handset industry. But I think everyone is missing a key part of the story, a silver lining of sorts. In the process of burning through $7.6 billion of shareholders’ money, Microsoft helped save the US and European wireless networking industry.

Many people forget that Nokia still exists. The consumer brand is now dead (or in deep hibernation), but the network infrastructure side of the company still exists as Nokia Networks. And Nokia Networks is doing pretty well. They got $7.2 billion from Microsoft for their handset business and then turned around and bought Alcatel-Lucent one of their bigger competitors.

A bit of history is in order. Ten years ago, the wireless infrastructure business hit hard times. The build-out for 3G networks had been largely completed, so there were no easy sources of revenue growth left. At the same time, the Chinese networking companies were starting to emerge on the scene. In 2005, Huawei and ZTE were not well known outside of China, but in the ensuing years they became giants. And in the early years of that transformation they sparked a massive wave of price compression, just as volume growth dried up at the end of 3G build-out.

This was the end of the Glory Days for the cellular infrastructure companies. They had been reeling since the dot.com bubble burst in 2001, but the demand for 3G networks had kept things going for a while. At this stage there were nine vendors of 3G base station systems:

  • Alcatel
  • Ericsson
  • Huawei
  • Lucent
  • Nokia
  • Motorola
  • Nortel
  • Siemens
  • ZTE

Then, things began to change.

The first to fall was the American giant Lucent. April, 2006 Alcatel announced they would acquire them. In June, Nokia began a joint venture with Siemens, which effectively marked Siemens exit from wireless infrastructure. In January of 2009 Nortel declared bankruptcy, and by July had sold their cellular assets to Ericsson. In 2010, Nokia Siemens acquired Motorola’s base station business, and then in July 2013, Nokia bought out Siemens stake in their JV. In April of 2014, Nokia sold their handset business to Microsoft. And just this April, Nokia Networks announced that they plan to acquire Alcatel-Lucent

In nine years, we have gone from nine vendors down to five:

  • Ericsson
  • Huawei
  • Nokia Networks
  • Samsung
  • ZTE

The only newcomer to the list is Samsung. They have been selling networking gear all along, but this year they have reached sufficient size that I think they should be included on the list of global players.

I find this level of consolidation, in an immensely conservative industry, to be staggering.  I would argue that even this number is not stable, and we will likely see another round of consolidation somewhere down the line. But that is a topic for a different post.

Returning to Nokia. If you had asked me two years ago what I thought would happen to Nokia Networks, I would have never guessed that they would end up as one of the last remaining vendors in this space. My guess was that they would have sold off multiple businesses and shrunk to a much smaller entity. For the better part of a decade, they were the sub-scale vendor, lacking Ericsson’s or Huawei’s market power. Instead, Microsoft overpaid them for the handset business. Like winning the lottery, Nokia Networks got a new lease on life. Someone there should seriously send Steve Ballmer a really nice fruit basket.

With the winnings from their handset sale, Nokia Networks became the consolidator. Next time you hear someone complain that software companies are sucking up all the profits from the hardware industry, remember to raise a glass to Microsoft for sharing some of the wealth back the other direction.

Wireless Infrastructure Timeline

  • Alcatel announces acquisition of Lucent, April 2006
  • Nokia forms JV with Siemens, June 19, 2006
  • Nortel declares bankruptcy, January 14, 2009
  • Ericsson announces acquisition of Nortel’s mobile infrastructure assets, July 25, 2009
  • Motorola sells networking business to Nokia Siemens, July 19, 2010
  • Nokia buys out Siemens share of JV,  July 1, 2103
  • Microsoft acquires Nokia Handsets, April 25, 1014
  • Nokia acquires Alcatel-Lucent, April 15, 2015
  • Microsoft shuts down Nokia, July 8, 2015

Post-script

I have been meaning to write about wireless infrastructure since Mobile World Congress. I touched on the subject briefly then, including a mention of Samsung’s small but growing weight. However, I did not really do the deep dive I intended. In part because writing about wireless infrastructure is the second most boring thing to do in tech blogging. (The first most boring, of course, is reading about wireless infrastructure.) This industry moves glacially. The wireless operators have to be very conservative and very bureaucratic, and their big vendors take that cue.

Another reason that I did not write more on the subject is that I did not feel that I had enough to say about Nokia Networks at the time. I actually went to their analyst briefing. It was held in a far-away conference room late on the Sunday night prior to the show. I had just arrived early that morning and was feeling the effects of jet lag. I made it through the opening remarks, and then Nokia’s CEO got on stage. Ten minutes in he said that he was going to tell us about a very exciting industry. Wow. That piqued my interest. He then put up a slide of a mountain stream. That exciting industry was “Water”.

You will forgive me for deciding that there were better ways for me to spend a Sunday evening in Barcelona, and I made for the exits.

In all seriousness,the wireless infrastructure business is getting interesting again, because networking is changing. This business moves in very slow technology cycles, but a new wave is approaching. And, surprisingly, it looks like Nokia could be a big part of that change.

One response to “Microsoft’s Loss is Networking’s Gain

  1. Pingback: More Wirless Infrastructure – DIGITS to DOLLARS·

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