Our recent article on NSN (The future of NSN: a happy-end at last?) has been a blockbuster of sort. It has attracted more than 3,500 readers since publication at the end of April 2012, from Germany, Finland, Portugal, India as well as many other countries. We have been very surprised by the interest that the article has generated. There was nothing new in the article that was not in the public domain already, and the financial numbers were taken straight from the Nokia web site.

We have reasons to believe that many readers must have been NSN employees trying to decide what to do now, in the view of the various outplacement and redundancy programs set up by the company. Also a former NSN employee indicated that “the NSN management would never point out the series of multi-hundred-million annual loss so clearly”! If this means that the NSN management has lacked transparency towards its own employees in the past, then this is rather worrying.

Another thing that has been worrying us since last April is that there have been more and more signals on the market that NSN is cutting back its Managed Services offering. In particular:

  • Managed Services would become ‘product attached’ i.e. not be offered without NSN equipment;
  • Managed Services would not be offered when staff transfer from the service provider is requested;
  • Managed Services contracts with losses or low margin shall either be improved or terminated asap;
  • Field service and 3rd party management would not be offered any longer moving forward.

This is all very worrisome, as Managed Services has traditionally been a core strength of both Nokia and Siemens pre- as well as post-merger. Although the uncontested leader in that space is Ericsson, we believed that NSN was massively investing in Managed Services as a way to:

  • increase customer mind-share and create ‘stickiness’, also moving away from a ‘box-shipping’ business model to a high-value, consultative role towards it customers;
  • become more of a solution business, in particular with multi-vendor skills;
  • create recurrent revenue streams and decrease the volatility of revenues through business and product innovation cycles;
  • differentiate against Huawei and ZTE, traditionally weak in the service space.

NSN currently makes more than 50% of its revenues from the service business, and Managed Services, a growth segment in telecoms, is a major part of that. The share of the service business might have become too large in relation to the product business. Has NSN been a victim of its own success? If NSN cuts back its efforts in Managed Services, this will put additional pressure of the company top line, which is not good, as the company revenues have already been melted like ice-cream since 2007. Interestingly, ALU has also signalled that it would scale back its managed service business.

What does all of that mean? Our interpretation is the following:

  • NSN is short of cash and needs to focus on the product lines where it makes money right now, and stop the bleeding elsewhere;
  • NSN has been hungry to acquire Managed Services contracts in the last 5-8 years, but did not manage to develop a ‘multi-vendor’ skill DNA within the company – there was no ‘big-bang’ acquisition as IBM did with PwC consulting arm in 2002, and changing the DNA of a company endogenously takes more than 5 years, and certainly a lot of perseverance;
  • NSN has not been very good at turning unprofitable Managed Services contracts into profitable ones over the contract lifecycle (3-8 years). The synergies might have been there on paper, but they did not materialise.

The lack of appetite for Managed Services at NSN and ALU is opening the door for other companies to pick up the business. Ericsson, the current king of Managed Services, has demonstrated that it has the capability to execute in that space, so we can imagine how pleased they are right now. In addition, Huawei has an opportunity to strengthen its position in the service space. So do a bunch of other IT, mostly Indian-based companies, for example Tech Mahindra and Tata Services.

For now at least, it looks like the NSN strategy is becoming more and more like that of Cisco, focussing on what it can do best – its product business – and providing the maintenance and care services attached to its products. Except that Cisco has a gross margin of 60% with its bread and butter IP carrier-class router business; whereas the gross margin of NSN is less than half of that. That makes it a difference of 30% points!

Sadly enough for NSN, Ericsson has continued to increase the quality of its product and solution portfolio, in particular with the acquisition of Belair Networks (Wifi / mobile broadband) and Telcordia (OSS/BSS) early 2012. Sadly also, new competition is emerging for NSN in its core product business, especially from Samsung, building up on its current successes in South Korea with LTE, as well as its impressive smart phones, chip set, brand strength, marketing power and operator relationship.

Moving forward, what kind of company does NSN want to be? (Read also Are you a product, a solution or a service company?). It looks like NSN won’t be playing the End-to-End global supplier game any longer; nor is it on the path to become a solution company à la IBM with multi-vendor skills and very strong software and service business. NSN will focus on the mobile broadband product space for now. Where it will face plenty of high-quality competition from Ericsson, Huawei, ZTE and Samsung. That’s OK in the short term, in order to save what can still be saved, and relaunch the business on a sound footing.


But in the long-term, the ‘mobile broadband’ product business can’t be the end-game for NSN. We rather see it as an intermediary step on the ‘Schumpeter creative-destructive’ journey. Our bet: either NSN will be swallowed by another player like ZTE or Samsung when the timing is right both for the buyer and the seller. Or NSN will slowly but surely become marginalised by larger and strong contenders.

A rather trivial conclusion.