Since venture capitalist Marc Andreesen coined the phrase "software is eating the world" four years ago, it's been a handy way to describe the pain inflicted by technological change on ageing industries from music to banks.
Yet for telecoms equipment makers, long seen as stodgy producers of commoditized hardware for the likes of Verizon and Telefonica, the shift promises to be something of a liberation. It's partly for that reason Nokia thinks it can make a success of its 15.6 billion-euro ($16.9 billion) all-share acquisition of Alcatel-Lucent.
Investors are understandably skittish about a deal that harks back to the value-obliterating merger of Alcatel and Lucent in 2006 and the equally disastrous tie-up between the network units of Nokia and Siemens. Over the past 10 years, Alcatel's total shareholder return has averaged a negative 10 percent every year, while Nokia's has been minus-4.6 percent.
But as it readies itself to take operational control over Alcatel on Thursday, Nokia has some grounds for claiming this time is different and that cost savings will be more readily extracted.
Its optimism comes from the fact that software has made the mobile networks built by Nokia and Alcatel much more flexible than in 2006. Back then, the different bits of a base station had to be made by the same company to function. This meant that even after their respective tie-ups, Alcatel-Lucent and Nokia Siemens Networks had to maintain over-lapping product lines to keep customers happy, sapping the rationale for getting together in the first place.
Worse, the companies often had to pay to swap out equipment in their customers' networks just to be able to discontinue a product.
Today, open software standards mean network products made by different manufacturers can work together, making it easier for the merging companies to get rid of competing technologies and cut expenses.
So Nokia has a decent shot at delivering the 900 million euros in operating cost savings by 2018 promised in the Alcatel-Lucent deal. Mobile gear is where the two companies' product lines overlap most, and where there's most to be gained by cutting R&D and staff.
The competitive landscape is also less daunting. Back in 2006 rivals Ericsson and Huawei went on the attack to gain share while Nokia Siemens Networks and Alcatel-Lucent were integrating. So cost savings ended up being given back to customers through lower prices.
Nokia probably won't face such a frontal attack again since the telecoms equipment market is dominated now by three big companies with more to lose in a price war, compared with the five or six suppliers back then.
That's not to say things will be easy for Nokia CEO Rajeev Suri. The potential culture clashes from combining the 150 year-old Finnish company with an equally proud French one are significant. But at least Nokia is the undisputed buyer here and has power over Alcatel, unlike the 2006 deals that were structured as a merger of equals and a joint venture.
The potential payoff is considerable -- if Suri can meet the integration challenge. Once it swallows Alcatel, Nokia will hold 27.3 percent of the $47 billion wireless equipment market, based on third-quarter figures from IHS Infonetics, surpassing Ericsson's 26.7 percent and Huawei's 23.4 percent.
It'll also have an army of engineers -- 40,000 compared to 25,700 at Ericsson -- racing to create the next generation of mobile technology known as 5G. That shift will see everything from your car to your fridge get connected to the web.
Bernstein analysts reckon the new Nokia can add 1 euro to earnings per share in 2019 and 1 euro of free cash flow. Adjusted EPS was 66 euro cents at Nokia in 2014 and 9 euro cents at Alcatel, according to data compiled by Bloomberg.
Marc Andreesen may have been referring to Silicon Valley stars like Uber and Facebook when he made his comment back in 2011, not telecoms kit-makers. But if Nokia can deliver an earnings improvement of that magnitude then his concept of software eating the world will be entirely palatable for investors.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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