While few will argue that, since its inception, the performance at Nokia Siemens Networks (NSN) has been lacklustre, it was also largely unexpected that the company would take such drastic steps as it announced recently. With almost a quarter of its workforce set to be given their marching orders, and its less appealing businesses “divested or managed for value,” it seems likely the NSN we will see twelve months from now will be a very different company from the one that exists today.
But the company has been drinking in the last-chance saloon for some time. While its failure to secure private equity investment was painted as a positive at the time, it came after reports that the company had failed to generate much interest from the investment community, amid differing opinions about valuation.
There had also been suggestions that its parents, Nokia and Siemens, had been too distracted by their other operations to provide the infrastructure business with the attention it needed – and that its size merited. With its board positions held by executives from these two companies, the impact of this was not insignificant.
And with reports that a recent cash injection from Finland and Germany was the last it would receive, clearly NSN needed to do something – quickly.
Shedding such a large portion of its staff will enable NSN to reduce its cash burn, although it will also see a fall in sales as it divests or sidelines its now unwanted businesses. It will also find less demand on its resources: as Rajeev Suri, its CEO, said: “in our industry, unless you are number one or two in a segment, it becomes extremely difficult to support the required investment in R&D.”
NSN is not the first company to look to strengthen its focus. Ten years ago, for example, Lucent Technologies spun-out its enterprise business to create Avaya, enabling it to focus on its high-value service provider customers rather than somewhat more pedestrian business buyers. And the creation of Sony Ericsson was intended to enable the Swedish company to focus on its core infrastructure businesses, removing the need to simultaneously function as a consumer electronics company.
But that was at a time when the infrastructure market was very different, and growth in demand for internet and mobile connectivity meant that there was plenty of cash to go around. As Suri said: “Let me be clear about one thing. Telecommunications infrastructure is no longer an industry that offers the jaw-dropping growth rates and high gross margins of the turn of the century. Overall, we expect only very modest growth across the industry in the coming years.”
Scale can have its benefits. Supporting a diversified product line can enable a business to ride-out short term blips in specific operating units. And with operators increasingly looking to offer a mix of fixed and mobile services, across voice, data and media, there are also benefits in being able to offer a product portfolio that can address all of these market segments.
In terms of the competition, NSN will still be fighting against Ericsson and Huawei, which offer broad product portfolios across fixed and mobile networks.
But the flipside is also true. Scale can have its drawbacks. A business that is too large can become unwieldy, with a significant amount of overhead in just keeping the organisation on-track. And focus can also suffer, with the need to support a wide range of activities meaning that resources can be spread too thinly in the more successful units.
While in recent years, NSN has had scale on its side, and a diversified portfolio, it has not been able to capitalise on this. As much as Suri boasts about “non-IFRS operating profits,” the truth of the matter is that the company has failed to deliver – with its mobile broadband activities standing out as something of an exception.
So, time for a change then. After all, which is more appealing: a big NSN which is reporting losses, or a smaller, more focused, profitable business?
The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members