Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Nokia boss Rajeev Suri could be heard humming a tune this morning: "Work, work, work, work, work, work…" Okay, admittedly that scene's in my imagination. But Rihanna's hit would be a fitting soundtrack for Nokia's backbreaking effort to integrate the 15.6 billion euro ($17.4 billion) acquisition of Alcatel-Lucent.

The deal was the right strategic move: it vaulted Nokia to second place in mobile gear and expanded its market by adding Alcatel's strong line-up of fixed network products. But two quarters into life as a combined entity, Nokia's revenue is falling and it's posting losses because of restructuring charges associated with mass layoffs and combining two wireless product portfolios. Gross margin in the first half was 32.3 percent compared with 43.2 percent for Nokia on a standalone basis a year ago.

Nokia Knocked
The Finnish giant's shares have suffered since the Alcatel deal
Source: Bloomberg

That isn't great, but neither is it entirely unexpected. Telecoms equipment mergers are devilishly hard because combining the product line-ups is slow and costly, and customers immediately stop buying while they wait to see what will be phased out.

Yet Suri merits patience. He's upped Nokia's cost savings target from the deal to 1.2 billion euros by the end of 2018, from at least 900 million euros before. Restructuring charges will eat up 1.65 billion in the period. (Ouch.) Nokia also raised its annual Ebit margin guidance to 7-9 percent from at least 7 percent earlier. By comparison, Nokia's networks division achieved a margin of 10.9 percent last year.

Unfortunately, Suri is trying to digest Alcatel just as telecoms operators are spending less. Super-fast 4G mobile networks have largely been completed in the U.S. and China. And while R&D is already underway on so-called 5G -- where your fridge talks to your phone and orders yoghurt -- revenues from that technology are a ways off. International standards for 5G aren't expected until about 2020.

Slippery Slope
Wireless infrastructure revenue is falling since many 4G networks have been completed
Source: IHS
NB -- 2016 to 2020 are estimates

If that's not enough, he's also working in the shadow of the spectacular value destruction inflicted by the industry's last round of big mergers, when Alcatel bought Lucent and Nokia and Siemens formed a joint venture. Both unions were plagued by poor execution and a vicious price war as Ericsson and China's Huawei profited from their rivals' distraction.

That scenario probably won't be repeated though. As I've argued before, Nokia's chances are better now because new software-based network technology should make it easier to combine product portfolios.  Suri says the decisions on the product line-up have already been made, finished up in six months compared to the two years it took in the Nokia-Siemens era. And Ericsson is in no position to go on the attack: it just got rid of its CEO because of weak results.

That’s not saying the task is easy. But Suri should be left alone to get the dirty integration job done. Rihanna's lyrics are fitting: "Nobody text me in a crisis."

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net