Size matters in mobile, but Nokia may find bigger isn't better

Nokia's plan to buy Alcatel-Lucent would create a huge mobile networks maker

Size is power in the mobile networks business, but it's only one of the reasons Nokia is acquiring Alcatel-Lucent.

Nokia estimates the company that will emerge from the planned buyout will be the second-largest vendor of carrier infrastructure by revenue, a bit smaller than Ericsson and slightly larger than Huawei Technologies. In a price-competitive industry where technology is constantly evolving, that matters, analysts say. But size alone isn't reason enough to justify the €15.6 billion (US$16.5 billion) deal.

As consumers watch more videos and use more apps on mobile devices, vendors are developing new technologies on multiple fronts to make sure networks can keep up with the demand. Putting up more conventional cells doesn't cut it anymore, so they're turning to exotic approaches like millimeter-wave beams and LTE networks that can use the same frequencies as Wi-Fi. Vendors are already jockeying for influence over 5G, the next generation of wireless specifications expected by 2020.

That kind of R&D requires a lot of smart people and higher revenue to fund their work, both of which Nokia stands to gain by buying Alcatel-Lucent and its legendary Bell Labs research division. The combined company would also have a valuable patent collection made up of complementary Nokia and Alcatel-Lucent technologies, analysts say.

The two companies are up against big rivals in innovation. Ericsson is already a giant in mobile R&D, and Huawei looks set to be a game-changer there, said analyst Peter Jarich of Current Analysis.

Visiting Huawei's headquarters in Shenzhen, China, reveals a huge number of young engineers at work on a wide range of problems, Jarich said. Huawei's lower cost to hire engineering talent in China is a big differentiator -- larger than its ability to do cheap manufacturing, he said.

Downward pricing pressure from Huawei and other Chinese manufacturers has helped to make economies of scale more crucial in the networking business, analysts say. It's one reason mobile equipment companies have been buying each other for a few years now. The consolidation has been brutal, as Rayno Report analyst Scott Raynovich wrote in a pessimistic blog post about the deal on Wednesday.

There are other reasons, too: As the carrier business itself consolidates, equipment makers have fewer potential buyers and the largest remaining carriers, giant service providers like AT&T, Telefonica and Deutsche Telekom, have more leverage to cut the prices they have to pay. And carriers care about potential suppliers' market share when they're deciding among suppliers in a changing industry, Tolaga Research analyst Phil Marshall said.

But size isn't everything, and it may even cause problems for the new, larger Nokia.

"You wouldn't do it just to get big, because you're inheriting a lot of headaches," Marshall said. Among the potential problems: deciding what to do with overlapping product lines, though those are relatively few, and dealing with potential layoffs in several countries with different regulations.

But looking at Alcatel-Lucent in particular, Nokia considered the deal worth it, Marshall said. For one thing, Nokia wants the company's big customers in the U.S., where Nokia hasn't had a big network presence. Alcatel-Lucent sells gear to both Verizon and AT&T.

The other prize it sees in the purchase is Alcatel-Lucent's extensive IP (Internet Protocol) routing portfolio, Marshall said. It may be a valuable asset in the future of wireless.

"The mobile network is becoming increasingly fixed," he said. As carriers roll out more and smaller cells to give users more capacity, they need bigger wired networks to connect those nodes. Huawei is a big player in those IP networks as well as in mobile, and Ericsson acquired an IP routing business with RedBack Networks several years ago.

Getting bigger might help Nokia compete in the long run, but it may not be worth the disruption, Jarich at Current Analysis said. From now until the deal closes, which isn't expected until the first half of next year, customers won't know quite how the various divisions and product lines will shake out, he said. Competitors will be merciless in taking advantage of that uncertainty.

The transition will follow years of disruptions at the two companies making the deal. Alcatel and Lucent's merger in 2006 was a long struggle with numerous executive changes and painful cuts. Nokia formed a joint venture with Siemens for wired and wireless networks in 2007, and the resulting Nokia Siemens Networks then cut thousands of jobs in the following years.

In the aftermath of those difficult combinations, both Nokia and Alcatel-Lucent sharpened their focus in recent years. Nokia sold off its wired broadband and optical businesses to concentrate on mobile broadband. Both improved their results by specializing, so the idea of forming a bigger, broader company flies in the face of that lesson, Jarich said.

"How do you balance the argument that you managed to do OK by focusing with the argument that you need scale?" he said.

Coming on the heels of so much disruption at both companies, the latest move might end up turning off customers.

"This stuff gets a little tiring," Jarich said.

Stephen Lawson covers mobile, storage and networking technologies for The IDG News Service. Follow Stephen on Twitter at @sdlawsonmedia. Stephen's e-mail address is

Join the Good Gear Guide newsletter!

Error: Please check your email address.

Tags business issuesHuawei TechnologiesEricssonalcatel-lucentNetworkingNokiamobileMergers and acquisitions

Our Back to Business guide highlights the best products for you to boost your productivity at home, on the road, at the office, or in the classroom.

Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Stephen Lawson

IDG News Service
Show Comments

Most Popular Reviews

Latest News Articles


GGG Evaluation Team

Kathy Cassidy


First impression on unpacking the Q702 test unit was the solid feel and clean, minimalist styling.

Anthony Grifoni


For work use, Microsoft Word and Excel programs pre-installed on the device are adequate for preparing short documents.

Steph Mundell


The Fujitsu LifeBook UH574 allowed for great mobility without being obnoxiously heavy or clunky. Its twelve hours of battery life did not disappoint.

Andrew Mitsi


The screen was particularly good. It is bright and visible from most angles, however heat is an issue, particularly around the Windows button on the front, and on the back where the battery housing is located.

Simon Harriott


My first impression after unboxing the Q702 is that it is a nice looking unit. Styling is somewhat minimalist but very effective. The tablet part, once detached, has a nice weight, and no buttons or switches are located in awkward or intrusive positions.

Featured Content

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?