Reincarnation at Nokia: Planning the next bounce back

After the sale of its devices division to Microsoft, what was once the world’s biggest mobile-phone maker is reinventing itself. Again
The Economist, November 23rd 2013, HELSINKI

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. Stéphane Téral 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.

  1. What caused the downfall of Nokia?
  2. In what ways did Nokia reinvent itself?
  3. What are the motivations for the new Nokia?
  4. How did Nokia develop its three-part business?
  5. If you were the CEO of Nokia, what would you do differently?
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