Nokia put some flesh on its strategy announcement made this morning. First off, it said that it had six principles guiding its strategy, which sees it create four operating business units – Mobile Networks, Network Infrastructure, Cloud & Services, and Technologies.
Core to Nokia’s new thinking is that the challenges the world is facing will put a focus on Critical Networks. These networks will be deployed by a variety of actors, including enterprises, webscalers, traditional CSPs and new types of CSP. That increases Nokia’s addressable market for its network products. Expect to hear a lot more about critical networks in Nokia strategy briefings from now on. The company has added the word to its “About Us” boilerplate statement, and its strategy release used the word 10 times in a few paragraphs.
A simultaneous trend will see networks become less monolithic in their design and supply. Disaggregated, best of breed networks will come to dominate.
Both of these trends enable new as-a-service business models, in networks and in software delivery.
In pure technology terms, Pekka Lundmark, CEO, said that that the company has understood that where it has clear technical leadership, especially in silicon SoC solutions, then it can create value. He named the optical and fibre units as examples. Where it does not, such as in its FPGA-based 5G solutions, then it needs to decide if it has a path to leadership. If it does not, then it will exit that segment. In Mobile Networks, the company has made a commitment to continue to increase R&D, even at the short term cost that will have on profitability. But the company is clear that it can compete and create value with products based on its home-branded Reef Shark SoC.
Here’s what Pekka Lundmark, CEO, Nokia, said in today’s strategy update.
“This is going to be a three year journey. We have said next year will be challenging. 7-10% expected comparable operating margin is not a bad starting point but of course our longer term ambition is higher than that. Expect to achieve that despite the fact we are investing a lot in Mobile Networks, and that we expect that group to [only] break even.”
“Pressure on the planet, productivity slowing, inequality in society. Technologies are vital to dealing with climate and the other problems I have mentioned and we do believe Nokia will have the opportunity to play a strategic role in all of this.”
6 strategic beliefs
- Networks play an increasingly important role in society. Will be able to extend focus in critical networks beyond CSPs we are currently serving.
“Critical networks deliver carrier grade performance, high availability and resilience. Elastic and self defined to offer tailor made performance on demand. These type of networks will be in very high demand in the future: driven by applications such as precision manufacturing, automated driving, transportation, logistics, energy, high frequency trading, even in the longer term remote surgery and new healthcare apps.
“Over the years to come critical networks will extend to all corners of society and it does mean that Nokia’s addressable market will extend beyond what today is known as the CSP market. Some critical networks will be run by enterprises and industries, but very often by their partners, current CSPs and new types of CSPs we expect to emerge on the network. These are challenging networks to run and very often industries will opt not to run these networks themselves but to rely on a partner. This will create many interesting opportunities for us going forward.”
2. Networks are built on a best of breed approach, [customers] will select different network elements and parts of the network based on very careful and competitive analysis on TCO in relation to expected performance parameters. There can and will be cases where the customer buys the whole network, but we believe this will be in a clear minority of such cases.
3. Technology leadership underpins momentum in Critical Networks. We can see that in the portfolio today – where we clearly have technology leadership then we do well. Paramount if want to deliver economic value.
4. Reestablishing technology leadership in some segments requires us to anticipate, shape and invest in the next technology leadership and where there is no path we will reassess segment participation. We will not automatically be in all segments, in cases where we cannot show segment value creation
5. We do believe that over the longer term, value in Critical Networks will migrate to silicon on one hand, and then software and services on the other. You can choose different strategies in each segment, but you have to be really strong in some of these sub-segments, because that is where the value is shifting to. If you look at network architectures there are a lot of moves to disaggregation and that means there will be opportunities to capture this value through new types of business models. As-a-service types of business will be increasingly visible.
6. Long term technology research to secure leadership.
Where to play (and where not to)
“What we can say already today is that our focus area will be to become a trusted partner for critical networks for our customers. And once we do that, the ultimate goal will be to deliver value to shareholders. We will have a pretty rigid and systematic approach to selecting where to play and not to play. In many cases we are seeing a connection between our ability to deliver custom silicon and our competitiveness, in cases like IP Routing and fixed access where we are getting it right, that gives us pricing power. But we are also making a strong pivot to cloud and software. We will continue to strengthen our long standing research.
The business is structured into four operating groups that will each be responsible for their own P&L and deals. There will be some umbrella functions, such as ensuring that technology and silicon development is aligned. 14,000 staff that currently have a central corporate role will be allocated to a specific unit. This will make the company “leaner” and streamline decision making. It will also reduce cross-departmental responsibility or confusion when working on deals, Lundmark said.
“For the last 12 months ending 3Q this year this business was approximately 10 million euros in size and here our main objective is to repeat our 4G success in 5G.
“This total addressable market is 43 billion Euros and is expected to grow 1% per year, with growth pockets inside. For example enterprise wireless is expected to grow much faster than the overall market, and Open RAN and vRAN will also be growth drivers. If you exclude China, Nokia has a 27% combined 4-5G market share for last 12 months. And in fact the same 27% applies just to 5G outside of China. Also, in addition we are #2 in rollout services globally, and as an organisational move when we are putting together this Mobile Networks segment we will include not only the mobile access products, but also the related network management software and deployment services.
“The expected operating margin of the group is zero.
“On turnaround I have to say that I am really optimistic about how things are going. I look at recent developments – 133 commercial 5G deals, 65 public and 42 live 5G networks. And in addition a strong position in private 5G-based wireless networks.
“Really recently we have increased R&D activity and velocity. Our 5G R&D capacity has increased 40% since January 2019. We have tripled the number of SoC engineers and doubled the number within certain segments of software development such as beam forming.
“Feedback from customers is growingly encouraging. Our delivery target for products based on Reef Shark chips this year is over 30% and the target for the end of 2021 continues to be 70%. So for those parts of the feature set where there have been gaps that is now narrowing. And there area quite a lot of areas where we are ahead. It will take until 2022 until 100% of new shipments will be Reef Shark based, and that’s when the entire cost challenge we have had because of the FPGA chipsets will have been solved.”