Nokia Oyj’s $16.6 billion takeover of Alcatel-Lucent SA will create a leader in building networks for today’s smartphones. The companies are betting they can also get an edge connecting millions of intelligent machines that haven’t been invented yet.
The advent of mobile technology to power high-speed connections for everything from driverless cars to robotic surgeons was a key driver in the merger discussions, according to people familiar with the transaction. The companies are eager to build scale in research and development before the rollout of such fifth-generation systems, so they can avoid losing out to Asian rivals such as China’s Huawei Technologies Co.
Installing the systems will require an extensive transformation of wireless infrastructure to allow speeds about 100 times faster than the best currently available technology, at a potential cost of trillions of dollars. The GSM Association, which represents mobile carriers, estimates they’ll spend $1.7 trillion on networks between 2014 and 2020, mostly on the current fourth-generation standard; a 5G rollout won’t be cheap either.
“Alcatel doesn’t have the means to develop a competitive 5G solution” on its own, said Alexander Peterc, an analyst at Exane BNP Paribas. While Nokia could do so, “if you can leverage your 5G across a worldwide footprint, including North America, you’re going to be a lot more profitable,” he said.
Nokia agreed to buy Alcatel on Wednesday in an all-stock deal valued at $16.6 billion to create the world’s largest supplier of wireless-network equipment.
Huawei and Samsung Electronics Co. are doing their best to get a head start on their European competitors. The Chinese company is working with Russia’s OAO MegaFon to have a 5G network in place in time for soccer’s World Cup in 2018; Samsung has made a similar pledge for the 2018 Winter Olympics. In Europe, Ericsson AB is also hard at work on 5G, recently announcing a plan to study autonomous buses.
“The risk we all faced collectively is that only Chinese players drive 5G technology forward, because European players aren’t solid enough,” French Economy Minister Emmanuel Macron told reporters in Paris on Tuesday.
In addition to its speeds, 5G technology promises to transmit new kinds of information over mobile networks. Delays of less than a millisecond could allow driverless cars to respond to real-time traffic data; connections could be made responsive enough to transmit human touch across networks to power sophisticated robotics. More prosaically, homes will be stuffed with connected refrigerators and thermostats, and factories with smarter equipment.
All those new applications will mean many more network-connected devices than exist currently. Cisco Systems Inc. estimates that by the time 5G is deployed there will be 50 billion devices connected to the Internet. To handle all those demands, networks will need more antennas to carry mobile signals and companies will have to build more advanced technology across their infrastructure to reduce the distance transmissions have to travel.
To be sure, the potential of 5G isn’t the only reason behind Nokia and Alcatel’s union. The transaction combines Alcatel’s expertise in landline networks, and key accounts with the likes of AT&T Inc., and Nokia’s wireless prowess. That was an important consideration for the deal as the boundaries between networks are quickly disappearing, said one of the people familiar with the matter.
“In North America and in China, the combined company will be a really strong player,” said Bengt Nordstrom, the chief executive officer of Northstream, a mobile consultancy. The creation of an entity with the heft to compete directly with Huawei and Ericsson will lead to “a real three-horse race” in the network-equipment market, he said.
Sweden’s Ericsson is currently the largest wireless network supplier with about 26 percent market share, according to researcher IDC, just ahead of Huawei.
Nokia and Alcatel combined will also have to compete with potential new challengers rooted in the U.S. technology industry. Oracle Corp. and International Business Machines Corp. increasingly offer software and services that overlap with those from traditional vendors of network equipment.
The most exotic proposals come from Google Inc. and Facebook Inc., which are experimenting with using high-altitude balloons and solar-powered drones to offer Internet connections to huge areas.
With so much concurrent technological change, gaining the scale needed to stay ahead of developments across a wide range of products is crucial for Nokia and Alcatel, said Sylvain Fabre, an analyst at Gartner.
“The real question is, are you able to fund R&D at the levels you need to be relevant,” Fabre said. “Together they can really compete on the cutting edge, including on 5G.”