HS Analysis | Information from HS: Nokia is not selling mobile phone networks

Network devices manufacturer Nokia is not giving up its mobile phone networks for the time being, three sources close to the matter tell HS.

According to the sources, breaking away from mobile phone networks would be too risky and the solution would rather weaken Nokia’s competitiveness. In addition, it would destroy the company’s “identity”, which Nokia has tried to nurture.

There have been various considerations about the future of mobile phone networks at Nokia, but according to those familiar with the matter, rather from the point of view of risk identification and business development. Professionally managed companies always prepare numerous plans for a bad day.

Rumors from disconnecting from mobile phone networks took off on Thursday.

Authoritative news agency Bloomberg told citing sources that Nokia has discussed the future of mobile networks with its advisers.

Based on the information obtained by Bloomberg, the options would be to sell mobile phone networks in whole, in part, or to transfer the business to a separate company. According to Bloomberg, the South Korean Samsung has initially announced that it is interested.

Nokia denied the news agency’s information on Thursday. The Bloomberg article also stated that the negotiations are in the early stages, and they may not lead to a merger.

Question about the future of mobile phone networks is nevertheless essential. How would it be possible to grow this business when the main Swedish competitor Ericsson is struggling with much the same problems?

Both Nokia’s board and CEO have considered this Pekka Lundmark and head of mobile networks Tommi Uitto for a long time. If there are no growth prospects over a long period of time, business restructuring may be inevitable.

There are rarely simple solutions to complex problems. Giving up mobile phone networks would be a relatively simple decision, but it would hardly serve Nokia’s long-term goals.

Fixed networks and mobile phone networks complement each other. In other words, it is about a whole that is more than the sum of its parts. At least some of the telecom operators want to buy fixed and wireless networks from one company.

Nokia would receive several billion euros from the sale of mobile phone networks. As a counterweight, it would roughly lose half of its turnover and a third of its operating profit.

At Nokia has four business groups. Last year, the largest of them in terms of revenue was mobile phone networks. Its turnover was 9.8 billion euros and operating profit was 723 million euros.

The network infrastructure, which mainly specializes in fixed networks, had a turnover of just over eight billion euros and an operating profit of 1.1 billion euros.

Clearly the most profitable business group is technology, which licenses inventions patented by Nokia. The turnover of this business was 1.1 billion euros and the operating profit was 734 million euros.

Last year, the turnover of cloud and online services was 3.2 billion euros and the operating profit was 255 million euros.

Ericsson and Nokia’s difficulties are largely the same.

Many telecom operators do not have an immediate need for large investments, because the performance of their networks is good enough so far. In addition, many have postponed their investments because the financing costs have increased.

As financial conditions ease, data transfer in networks increases and the demand for artificial intelligence and cloud services increases, investments in networks will probably start to increase over time. Artificial intelligence and cloud services increase the need to invest in fixed assets, but data transfer is also growing all the time in mobile phone networks.

Five a year ago, Nokia’s problem was the fifth generation (5g) mobile phone networks, where the company was lagging behind its competitors. Nokia largely transferred the development of important system circuits to Finland, straightened out its curly organization and operating method. Print began to emerge.

According to several research companies and telecom operators, Nokia’s 5g products are currently competitive. By playing for time, Nokia can get a better return on its 5g investments. On the other hand, the improvement in competitiveness may also increase the interest of competitors in its mobile phone networks.

Improving competitiveness is not enough, however, because the market is in hibernation. Neither Nokia nor Ericsson can market anything. Especially when the Chinese competitor Huawei is suppressing prices in Asia, Africa and Latin America.

Last times, Nokia emphasized the importance of fixed networks. At the end of June the company announced its purchase the American semiconductor company Infinera, which specializes in optical networks, for 2.3 billion dollars, or 2.1 billion euros.

Ericsson’s position in fixed networks is very weak. Instead, the company has focused heavily on mobile phone networks. In other words, Nokia has gained a competitive advantage with fixed networks compared to Ericsson, but the price has been high.

Nokia started investing in fixed networks almost ten years ago when it bought the French company Alcatel-Lucent for 15.6 billion euros. Without this deal, Nokia’s problems would probably be much worse now.

Nokia is still more profitable than Ericsson, and the stock has strengthened more than its Swedish competitor this year. Ericsson’s share has risen in price this year by 21 percent and Nokia’s by 30 percent.

The overall picture changes if you look at the share’s development over five years. Ericsson’s share has fallen by 0.4 percent and Nokia’s by 11 percent.

Last fall, Nokia faced a bad setback in the United States. The country’s largest telecom operator AT&T decided to continue developing the 5g mobile phone network exclusively with Ericsson.

The value of the five-year contract is 14 billion euros, and it will be a boost to Ericsson’s turnover. It is still unclear how profitable the contract will be for Ericsson in the end.

Possible buyers for Nokia mobile phone networks would be few in any case.

Too large a market share would be an obstacle for Ericsson, Huawei is a security risk claimed by many countries. Samsung has not done any M&A of this size in the telecommunications industry, and its online business is already in trouble.

Large mergers and acquisitions are often difficult. An example is the joint venture between Nokia and Siemens and the merger of Alcatel-Lucent with Nokia. Both caused major problems that took a long time to resolve.

US companies could in principle be interested, but they typically invest in growing companies, which Nokia is not now.

Instead, the company aims to improve its profitability with its considerable savings, but they do not solve the ultimate question: with what means can the business of mobile phone networks be taken off the rails.