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Reincarnation at Nokia - Planning the next bounceback

2013-11-25 07:13:02

After the sale of its devices division to Microsoft, what was once the world s

biggest mobile-phone maker is reinventing itself. Again

SAMULI SIMOJOKI knew the outcome was a formality, but he still wanted his say,

not so much as a Nokia shareholder, but as a Finn. Mr Simojoki, a lawyer from

Helsinki, was one of the 3,200 who attended the company s extraordinary general

meeting on November 19th. He voted against the only motion, the proposed sale

of Nokia s mobile-phone division to Microsoft for 3.8 billion ($5.4 billion)

in cash. More than 99% of votes were cast in favour. When the deal is sealed

early in 2014, Nokia, once the world s biggest maker of mobile phones, and

still its second-biggest, will be out of the business.

Nokia has reinvented itself before. It began in pulp, in 1865. It switched into

power generation, stretched into rubber goods and cables, and tuned in to

televisions that in the 1980s were among Europe s best sellers. But its

consumer-electronics division fizzled, made deep losses and was sold, as were

rubber and cables, in the 1990s. Mobile phones were Nokia s future then. Soon

they will be its past, and 32,000 Nokians including the former chief executive,

Stephen Elop will be Microserfs. Mr Elop, an ex-Microsoft man, declared Nokia s

own mobile-phone platform to be burning in 2011 and leapt onto Microsoft s

instead. He may soon be his old firm s new boss.

The next incarnation of Nokia, though much shrunken after parting company with

its lossmaking devices division, will be no minnow. It will still have 56,000

employees, more than 6,000 of them in Finland. Thanks to the proceeds of the

sale, plus 1.65 billion from a ten-year patent-licensing deal with Microsoft

and a 1.5 billion loan from the American firm, Nokia will have a stronger

balance-sheet and plenty of cash to finance a fresh start although Third Point,

a hedge fund with a stake, has said it wants much to be paid to shareholders.

Since the sale was announced in early September, Nokia s share price has

doubled to nearly 6.

Unfinnished business

The new Nokia will have three parts. By far the biggest will be Nokia Solutions

and Networks (NSN), which sells equipment, software and services to telecoms

operators in competition with Ericsson of Sweden, Huawei and ZTE of China and

Alcatel-Lucent of France (see chart). NSN accounts for about 90% of the new

Nokia s revenue. Under Rajeev Suri, its boss, it has been turned from a

lossmaking joint venture with Germany s Siemens into a profitable, wholly owned

subsidiary. Its sales in the first nine months of the year, at 8.2 billion

(just over half of this from services), were almost as big as those of the

handset business, though that largely reflected the phone division s troubles.

NSN s revenue has been falling too but partly out of choice, as it has got out

of unprofitable lines of business.

Mr Suri says that networks are a less volatile business than handsets, because

you don t just sell to the customer and get out, but build sticky

relationships with telecoms operators. However, he expects only flat to modest

growth in the industry. So he has made NSN leaner and has specialised in one

area, mobile broadband, in which carriers have to invest if they want to serve

a data-hungry world. NSN has sealed deals in America, China, Japan, South Korea

and elsewhere. NSN has cut 26,000 jobs and more than 1.5 billion of annual

costs in two years.

The carrier-networks industry has already undergone painful consolidation.

There may be more. Alcatel-Lucent, the product of a Franco-American merger in

2006, has consistently lost money. In June it unveiled its umpteenth

restructuring plan. If Alcatel-Lucent becomes prey, NSN could devour at least

part of it.

Pierre Ferragu, an analyst at Sanford C. Bernstein, reckons that Ericsson and

Alcatel-Lucent each have about 40% of the American wireless-infrastructure

market, making the Swedes improbable buyers. Huawei is frozen out of American

networks on political grounds. So Mr Ferragu thinks a sale to NSN is quite

likely , but he considers it likelier that Alcatel-Lucent will survive for some

years. St phane T ral of Infonetics Research says that a purchase would build

NSN s market share in America and China, taking it past Huawei and close to

Ericsson. But he cautions that the integration will be very difficult and any

deal will be a distraction .

Nokia is also keen to talk up its other two businesses. The larger is HERE, its

highly regarded maps division, which has most of the market for navigation

systems built into cars. The smaller, Advanced Technologies, will have the job

of licensing Nokia s thousands of patents and coming up with more bright ideas.

Risto Siilasmaa, the chairman and acting chief executive, calls it our

innovation engine . Most of the uncertainty about Nokia s future has to do with

how well this engine fires.

The combined patent-licensing revenues of Advanced Technologies and HERE are

currently around 500m a year. (NSN runs its own portfolio.) The vast majority

of this, says Paul Melin, Nokia s chief intellectual-property officer, comes

from licensing standard-essential patents, or SEPs. These are ones covering

technology that any phone, from any maker, must incorporate in order to

function. Since these patents are spread across lots of companies,

cross-licensing agreements are common, and the firms end up paying each other

lots of fees. Nokia, once it stops making handsets, will no longer have to pay

such licensing fees, but will keep receiving them on its own SEPs. Furthermore,

it has other patents that it has so far kept back for its own devices, and it

will be able to earn money on these by licensing them out.

By the time the Microsoft deal closes, the board must set a corporate

structure, outline a strategy and choose a chief executive. Mr Suri, having

knocked NSN into shape, may look the obvious choice, but Timo Ihamuotila, the

chief financial officer, is also said to be in the running.

Mr Siilasmaa enthuses about the possibilities for the new Nokia in a world

packed with connected devices even though it will not be making any of them. He

hints that the company might even return, one day, to making consumer goods.

That may seem an odd thing to say right now, but for a firm that has gone from

pulp to power to cables to televisions to handsets to telecoms equipment, maps

and patent-licensing, anything seems possible.

Correction: HERE is bigger than Advanced Technologies, not smaller as we

suggested in the original version of this article. This was corrected on

November 22nd 2013.