This week I want to touch on something that went on this week in the world of telecom.
This is the proposed merger of Nokia and Alcatel-Lucent. Nokia has come a long way on a changing road over the last couple of years. They had separated their communications equipment business and combined it with the similar business of Siemens to form Nokia-Siemens Networks or NSN. This made Nokia a handset maker primarily. They later sold the handset business to Microsoft and bought the totality of NSN to build a new Nokia. Now, there is a proposed merger of with Alcatel-Lucent (ALU). ALU came about as a merger between Alcatel and Lucent some time back.
All of these businesses have had a significant set of problems over the last few years and I want to provide some insight onto what is going on. The customers are going through a phase of taking control of purchasing power. There were many vendors supplying competitive equipment in the market. As things have standardized in implementation these vendors have become less differentiated. This is largely due to the huge cost to develop products, particularly if custom silicon is involved. To limit the possibilities of investing in equipment that does not become a big revenue winner, equipment companies have standardized their architectures. This means that a product from Cisco is not greatly different than a product from Nokia is not greatly different than a product from Huawei. This makes price the only factor.
On top of this, the customers have changed their buying behavior. In the past (say 10+ years ago), networks were relatively static and generations of equipment that did the same job were build and put into networks over time. Now networks are being changed rapidly and the winners at the start of the purchasing cycle win huge shares of the business and the rest are losers.
This is driving the vendors to be either huge, diversified vendors or smaller specialist vendors. The combined Nokia/Alcatel-Lucent will be one of those huge vendors. A company like Cyan Optics (who I will cover soon in my Q1 conference call review) is a specialist vendor. This is very similar to the way the passenger jet business is operating with two huge vendors (Boeing and Airbus) and some smaller vendors (Bombardier as an example).
What does this mean for the consumer and their broadband pipe? It means that innovation at the hardware level is very slow if not dead in the water. Any changes are going to come at a software level on top of more standardized hardware. This fits well into the Network Function Virtualization (NFV) model where applications are run on top of Commericial Off The Shelf (COTS) hardware. Today, that means x86 based servers. I suspect in the future that some kind of Ethernet Switching will be created as well for this model.
Have a great weekend!
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